Speciality Restaurants Limited (534425) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Speciality Restaurants Q2 FY '25 Results Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is is being recorded. I now hand the conference over to Mr. Karan Bhuwania from ICICI Securities. Thank you, and over to you, sir.

Thank you, Manav. Good afternoon, everyone. It's a pleasure at ICICI Securities to host Q2 FY '25 results conference call of Specialty Restaurants. From the management, we have Mr. Avik Chatterjee, Director; Mr. Rajesh Kumar Mohta, Executive Director of Finance and CFO. I'll now hand over the call to the management for their opening remarks. Post that, we'll open it for Q&A. Thank you. Over to you, sir.

Thank you, Mr. Karan. On behalf of the management, myself, Rajesh Mohta, CFO of the company, welcome all the participants to the investors call of the company for the quarter 2 of financial year '24-'25 after the approval of results by Board of Directors and submission to the stock exchanges as per guidelines. I now summarize for all concerned about the quarter highlights. During the quarter, the revenue remained steady on year-on-year basis, primarily because of few reasons, as a result of, which these revenues have been steady. Calcutta accounts for almost 1/3 of the revenues. And during the quarter, there were certain incidents in Calcutta where the restaurants was -- footfalls into the restaurants was very low. Second, we find the pressure on discretionary spends during the quarter, resulting from higher inflation, which is having a pinch on the guests' pocket. On the same side, inflation of food materials have been very steadily increasing and our input costs as well. But in order to maintain the total business per se, we have not been passing the increase in the inflationary trend of raw material prices in our menu prices in this current quarter, but we are very hopeful that in the current quarter, which is the October, November, December, we will be able to neutralize this inflationary increase in raw material prices by increasing our menu prices as we ourselves would all know that October, November, December happens to be one of the best quarters for the company. Second, what has happened is, as far as business is concerned, spends on aggregators platform and discounting has become a new normal for the company. This is resulting into an amount of expenditure, which is happening on marketing spend, sales promotion, discounting on aggregator's platform for delivery is always on an increasing trend. We have been trying our best to balance the same. But yes, there are headwinds on the same. Two incidents of fire in Acropolis Mall in Calcutta, because of which, our 2 restaurants had to be shut during the quarter, but we are hopeful since the properties are covered for our fire insurance as well as loss on profits. We will -- we have lodged our claim with the insurance company and expect somewhere between around INR 40 lakhs, which would -- as and when will be received and accounted for as receipt for the insurance claim. There is 1 big large restaurant, which is Mainland China at Infinity Mall in Malad, is under renovation and conversion to an Asia Kitchen, which is from the 7th of July, it is still under renovation and which is now completed, the puja of the kitchen has happened day before and we are hopeful that in the next couple of days, we would start after the trials our commercial operations. During the quarter, we opened 1 Episode One restaurant at Viviana Mall, Thane in Mumbai on the 15th of September 2024. This is the second wet-led restaurant of the company on the brand of Episode One. Though it has started on 15th September, it has started on a good note and we hope in the quarter of October, November, December, we would be able to get benefits of this new restaurant. We opened a cloud kitchen in Bangalore as well. Last, but not the least, like, say, for instance, because of the headwinds in the economy on the inflation front and cost, the new restaurants which we had opened are having a greater period of breakeven to achieve. We are very hopeful that the restaurants which were opened during the financial year '23-'24 and in the first quarter of financial year '24-'25 will soon get to break even in this quarter resulting into contribution towards the fixed cost and improvement in profitability. Thank you.

[Operator Instructions] We have our first question from the line of Zakir Mazhar, an individual investor.

Yes. Sir, congratulations on a decent set of numbers. My question will be, sir, see, the first half of this year has remained flattish for us. So would you -- what kind of growth would you put for the full year? So would you expect a single-digit growth in 7%, 8%, 10% growth at least year-over-year this year? And going forward, over the next 2 to 3 years, what is your broad outlook?

Mr. Zakir, see here, in any which ways, H2 happens to be a better half for the company, primarily because of October, November, December. And historically, we have been achieving a number of -- both on revenues and profitability, which has grown over the years and especially during the last, I would say, 13 quarters. So considering that, we expect growth on revenues to be around 5% to 7%. Considering the new year for financial year '25-'26 and '26-'27%, from a guideline perspective, since we would be opening new restaurants and with the majority of the restaurants which have opened during the financial year, we envisage that we should be growing in the early teens in my opinion.

Early teens, you would say next year, that is '26 over '25, sir?

Correct, sir.

And in terms of your brand sector, are you trying to consolidate a few brands? And what are you trying to do with Sweet Bengal? And what is the percentage of your cloud kitchen in your overall top line, sir?

See here, what happens is, if I may, sir, you have -- I would answer your question in 2 parts. One is with respect to Sweet Bengal. Sweet Bengal is a brand which has primarily in Bombay and Pune. At this point of time, we continue with Sweet Bengal in these 2 cities with a limited scope of expansion in stores with respect to Bombay and Pune primarily because it is a-hub-and-spoke model. It is a factory which is one center and capacity of the factory to service 35, 36 stores is big in number for us. As far as contribution in the business is concerned, the total revenues of around 9.5% to 10% of our total revenues are contributed by Sweet Bengal. And we are exploring opportunities of taking it to other cities, but those are at a nascent stage and we would update you as and when certain decisions are materialized after the approval of the Board on CapEx and the plan. Coming to the answer of your cloud kitchen, sir, we continue -- as on date, we are running 12 cloud kitchens. But with the focus more on oriental cuisine and our Mainland China and Asia Kitchen brand. We continue to focus on opening new restaurants. But from -- with an object of kitchen within kitchen, which would mean the dining numbers increasing and delivery also continues of our multiple brands like Mainland China, Asia Kitchen, Haka and Oh! Calcutta from the dining restaurant itself.

And what would be the percentage of takeaway versus dine in, sir, broadly?

We are currently running at around 25% of our total business as delivery and takeaway. When I say delivery and takeaway, including the aggregators.

Best wishes for the remainder of the year and next year.

Thank you, Mr. Zakir.

[Operator Instructions] We have a next question from the line of Viraj Mahadevia from MoneyGrow.

Congratulations on steady results. Given the food inflation that is clearly meeting into some of your profitability, have you all now commenced taking price increases across the various formats?

See, sir, we are facing wall. We are left with no choices. Now with the season coming in, we have contemplated and we have taken strategic uses at formats. And if required, we may have to neutralize the increase in the month of December as well.

Right. And any progress on any of your overseas franchisee conversations you have? In the past, you mentioned, Vietnam, Middle East, other such markets for Asia Kitchen, Mainland China. How has that progressed? And any sign-ups there?

See, we have a master franchise for our Middle East, Dubai primarily who have opened one in Muscat, which opened in February 2024 of this year. They are into talks of opening another restaurant in Dubai as well as Abu Dhabi going forward. But at appropriate time, once they open, we will update you ourselves.

And how about other geographies beyond Middle East?

We are yet to get into a good franchise to open in other parts of the world.

Right. And what are the planned use of proceeds of the cash that sits on the books? I think last, it was INR 170 crores odd.

Yes, to put it on record, let's say, for instance, we are continuing to have around INR 153 crores, but the capital expenditure has begun in last year, which was absolutely not there earlier, post COVID, when we had to shut restaurants rather than open restaurants. Now going forward, the company is planning to open restaurants in oriental brands, primarily Mainland China, Asia Kitchen in malls, converting few of the, let's say, new brand, GONG, which is already there in Pune; and opportunistically Episode One, which is the wet-led brand of the company.

So the CapEx will go towards that in the next 12, 24 months?

Yes. So the plan is to have renovation of the restaurant as well as the CapEx of the restaurant.

How much would that cost over the next 1.5 years?

See, if we contemplate last year, let's say, for instance, we expect another INR 50 crores to INR 60 crores gets utilized in a financial year.

Okay. So about INR 100 crores over the next 2 years.

[Operator Instructions] We have a next question from the line of Siddharth Trikumar from ithought.

What would be the capital expenditure to open one Mainland China?

Mr. Siddarth, what happens is it depends upon the size of the restaurant. Currently, we explore of taking 2,500 to 3,000 square feet carpet area. And on 2,500 to 3,000 carpet area, we spend somewhere between INR 3.5-odd crores to INR 4 crores, including the GST because GST is an input cost to us and we don't get any benefit out of it.

Sorry, how much amount?

INR 3.5 crores to INR 4 crores on an area of 2,500 to 3,000 square feet.

Understand. So like going forward for the next 5 years, you said that you wanted to expand on the oriental cuisine. Is it with Mainland China, Asia Kitchen? Or do you have any other strategy for Haka?

Mr. Avik is responding to your query.

So what we've understood is that cannibalization had become an issue for us in the past. We would not want to expand with one brand left right center. In fact, what our new strategy is to break up our Asian dominance into various brands, namely Asia Kitchen by Mainland China, which is mainly a high footfall, mall-oriented brand. We have Mainland China, of course, which is a fine dine neighborhood restaurant. Apart from that, we have a brand called GONG, which has been successfully running in the city of Pune. And we're scheduled to do a second one in this coming quarter after this one. GONG is more youth-oriented, higher revenues with liquor and a younger audience. Haka is our delivery format, which also does have a store in Calcutta. Haka is going to be, for us, one of the key expandable brands in the next year for Tier 2 cities as well. There's an extensive research that we have run for Tier 2 expansions and because of the lower costs and high potential to grab market share there, Haka would be one of our pure go-to low-cost, low entry-level Chinese brand.

Yes. The reason why I asked is because in the -- if you look at the Tier 2 and Tier 3 market, the oriental cuisine is like very unorganized. There is no quality provider. And I asked specifically about Haka if you are planning to capture that part of the market.

Yes, absolutely. And like you rightly said, it's unorganized market, and we can definitely come in to win from this current situation because of our past. Another thing, just to understand, is Haka is a Chinese brand. So what happens is when you have a pure Chinese format, your cost to operate your menu becomes a little more economical because you don't have specialized skill in Japanese, Thai, Mongolian, Malaysian and so on and so forth. Hence, we think Haka is going to be the best in terms of cost, even manpower cost, and to gain from the better rental scenarios in the Tier 2 cities. I think it is going to be a brand that we will expand from next year onwards.

One more question is that, are you actually looking at any acquisition in the oriental cuisine space? Any brand that you want to potentially acquire?

So there is talks with someone on a later stage at the moment. As soon as that is through, we should be announcing that.

[Operator Instructions] We have our next question from the line of Swamin Gujarati, a shareholder.

Sir, my question is regarding the shareholders who forfeited the issue. Can you throw the light on this, sir?

Sorry, come again, I could not hear you properly.

The shareholders who have forfeited the tax, can you throw the light, sir, regarding why they forfeited the tax?

If I may, sir, as per guidelines, whatever was required to be done, we had done and the amount has been forfeited and taken into reserve for meeting the capital expenditure.

Sir, what is the amount forfeited?

INR 25.03 crores.

So around INR 127 crores, only INR 25 crores still received?

We -- out of that INR 127 crores, we received INR 50.23 crores. And out of which INR 25.3 crores was forfeited, sir. INR 27 crores was allotted as shares.

[Operator Instructions] The next question is from the line of Saaksha Mantoo from Old Bridge Capital.

I have just 2 questions. Firstly, are there any store additions or closures during the quarter? And secondly, what is the typical life cycle of a store look like for you? Like how much time does it take for a store to mature? And what is that progress really in terms of, I suppose, 3 years maturity, how -- like what is the potential year 1, 2 and then 3? So those are my 2 questions.

See, answering your first question, if I heard yourself, what number of stores we opened in the quarter. I will just repeat once again, we opened a cloud kitchen in the previous quarter and an Episode One wet-led brand in Viviana Mall, Thane, Mumbai in September '24. Now as far as maturity of our store is concerned, what we see is the -- let's say, for instance, the throughput or the breakeven is happening between 4 to 8 months, but it all depends upon the location and the throughput of the restaurant. So once in -- let's say, in 1 particular year, we get to ensure that the restaurant becomes cash profitable for us with a stable revenue from second and third year onwards.

And sir, a follow-up there. Does this breakeven look different for your own stores versus franchisee store? I'm sure it will be looked at in the future, but it just help me understand how does that work.

See, here, when we are talking in terms of mostly company-owned company-operated restaurants, and for us, franchisee and the company-operated store does not make much of a difference from a financial parameters point of view, except that the investments which happened in a franchise restaurant is by the franchisee. So the typical metrics for both the restaurants, whether it is a FOCO, which is franchisee-owned company operated, or a COCO, which is company-owned company-operated, remains the same. Excepting in case of a franchisee restaurant, there is an additional cost to the extent of between 5% to 7% off the top line as revenue and royalty and management fees to us from the franchise restaurant.

Sure. Very clear. And if I may ask 1 more. So you highlighted that there are some inflationary impact on the market right now. So what could be -- like what could be the levers that could bring in some cost efficiencies here? So are there any efforts being put in that direction? And if at all, they can be?

Very valid question, madam, if I may, that's a very continuous exercise which happened in the company and all chefs and the team works towards rationalizing, let's say, improving in case of a wastage. So the processes have been streamlined. On a daily basis, those are being monitored to save on any penny which is getting wasted. But yes, when you have a price increase, et cetera, like, say, for instance, if I may, like in case of edible oil, government increased the customs duty, resulting into a 22% to 24% price increase. Such cases, we are left with no choice but to explore with other suppliers, improve efficiencies, et cetera. And so that's a very continuous process, which happens in the organization.

[Operator Instructions] We have a follow-up question from the line of Swamin Gujarati, a shareholder.

Sir, can you throw a light on specialty catering business of yours?

Sir, your voice is not very audible. I'm not able to hear your question.

Sir, can you throw light on specialty catering business of yours?

Yes, specialty experience and catering business, correct?

Yes, yes, yes.

See, here, what happens is these are the 2 formats like -- we call it specialty experience, which does niche catering in Mumbai. And then we have a catering division in Calcutta, which has been growing over the years, but that does not form a significant. Let's say, for instance, if we're to give you a number like in the month of November itself, we have our catering business almost to the extent of INR 1 crore rupees. So we have a target to do in Calcutta business between INR 6 crores to INR 7 crores in this financial year.

And in Mumbai, sir?

Sorry, sir?

In Mumbai?

In Mumbai, it does a very niche market, let's say, experiences. We should be doing between INR 2 crores to INR 2.5-odd crores in this financial year.

[Operator Instructions] We have a follow-up question from the line of Siddharth Trikumar from ithought PMS.

Like what would be the store-level EBITDA in Mainland China and Asia Kitchen? And what would be the same for Haka at the restaurant level?

As far as Mainland China and Asia Kitchen is concerned, we run between 20% to 22% of EBITDA in Mainland China. And Haka is primarily a delivery brand, which forms part of the kitchen within kitchen and it becomes part of the restaurant itself.

This 20 percentage is like pre-Ind AS, right?

Yes, sir.

Understood. How much CapEx would be required for, let's say, if you have the strategy of expanding Haka into Tier 2 cities? For one store, how much CapEx would be required?

See, Mr. Siddharth, the CapEx, in my opinion, is more related to the square feet. And now if we may say, let's say, for instance, if we take an area of 2,000 to 2,200, we could be able to do that restaurants in INR 2-odd crores.

Understand, understand. One more question I have is that like how do you manage the quality of -- I mean the consistency in your food products? Like what would be the attrition among the chefs?

Siddharth, God has been very kind. And if I may, our CMD considers himself to be a Chief Human Resource Officer rather than the Chairman and Managing Director, the kind of relationship, et cetera, with the chefs and when all -- most of the chefs are ex 5 stars. So what has happened, in my opinion, if I may, the attrition at the senior level chef is minimal. And those who have continued have been given full authority, et cetera, to, let's say, to look into their creativity. Now as far as consistency of the product is concerned, we have our chef, Chef Dubey, who is a director, who's the Chief Culinary Officer for us. The processes have been streamlined and then it is based on the city chefs who look into those processes on a systematic basis, and there are audit procedures by the chefs who keep on traveling between the cities, train the chef in-charges of the restaurants so that the consistency levels are maintained.

[Operator Instructions] As there are no further questions, I will now hand the conference over to the management for closing comments.

Thank you. We are extremely thankful to all the participants who have spared their valuable time in joining the investors call of Speciality Restaurants for the second quarter of the financial year '24-'25. We look forward for your support in months to come. And we are extremely thankful to have raised pertinent questions, and we hope we have been able to answer those. In case any further queries are there, you may get in touch with us directly. Thank you once again.

Thank you. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.