Rating Rationale
March 26, 2020 | Mumbai
Speciality Restaurants Limited
Ratings downgraded to 'CRISIL BBB+/Stable/CRISIL A2'
 
Rating Action
Total Bank Loan Facilities Rated Rs.60 Crore
Long Term Rating CRISIL BBB+/Stable (Downgraded from 'CRISIL A-/Negative')
Short Term Rating CRISIL A2 (Downgraded from 'CRISIL A2+')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank loan facilities of Speciality Restaurants Ltd (SRL) to 'CRISIL BBB+/Stable/CRISIL A2' from 'CRISIL A-/Negative/CRISIL A2+'.

The downgrade reflects deterioration in business risk profile as reflected in lower than expected revenue growth and subdued profitability. Management's revamp strategy is taking longer than expected to revive the operating performance. Operating margins were below expectations at 4% in fiscal 2019 and continues to remain subdued at around 5.6% during 9 months of fiscal 2020 ended in December 31 2019. Subdued margins are on account of sluggish economic conditions, high gestation period for new restaurants, and high fixed costs. Operating margins are expected to remain below earlier expectations over the medium term.

The rating action also follows measures taken by various state governments towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings. These measures are likely to further impact the business profile of the company as the restaurants are expected to remain temporarily shut. While, most of the state government's measures are applicable till March 31, 2020, revocation of the measures will be contingent upon directive from the Central government and extent of spread of COVID-19. A sustained long period of closures can result in significant deterioration in credit profile of the company. On the other hand, a faster reversal to normalcy may contain the extent of deterioration likely in credit quality of the company. That said, the ability of the business to revert back to operational stability with improvement in operating margin and any relief measures given by the government will be a key monitorable, and CRISIL will continue monitoring these events.

The ratings continue to reflect SRL's established market position with strong brands and wide geographic reach, extensive experience of the promoter in the restaurant industry, and its robust financial risk profile. These strengths are partially offset by susceptibility to economic cycles and exposure to intense competition, leading to subdued profitability.

Key Rating Drivers & Detailed Description
Strengths:
* Established position with strong brands and wide geographical reach: SRL's flagship brand, Mainland China, is one of the most recognised home-grown restaurant brands in India. The other brands, Asia Kitchen, Hoppipola, Oh! Calcutta, and Sweet Bengal have also a strong market position in the respective categories. The company is present in major metros and large cities, with 112 restaurants and 23 confectionaries, as of June 2019. The two-and-half-decade-long experience of the promoters in the restaurant business and the established market presence will help the company maintain its strong competitive position in its target segments.
 
* Robust financial risk profile: Capital structure and debt protection metrics should remain strong over the medium term. Networth was healthy at Rs 222 crore as on March 31, 2019, and is likely to sustain at Rs 210-220 crore, despite expected losses over the medium term. Total outside liabilities to adjusted networth ratio remained low at 0.3 time as on March 31 2019, likely to remain at similar level over the medium term. Bank debt remains negligible, leading to strong debt protection metrics.
 
Weaknesses:
* High fixed cost structure and susceptibility to economic cycles: Any economic downturn adversely affects the restaurant industry. Typically, fine-dining premium restaurants are more affected during a slowdown than quick-service restaurants or fast-food chains, as indicated by SRL's subdued revenue growth in the past, and modest operating margin. While operating margin improved to 4% in fiscal 2019 (0.5% and 0.3% in fiscals 2018 and 2017, respectively), it remained constrained by the large fixed cost associated with fine dining restaurants. Net losses may persist due to significant depreciation expenses.
 
* Exposure to intense competition: The restaurant industry in India is highly fragmented, with unorganised players having significant market share. Thus, SRL faces intense competition and needs to continuously innovate in terms of menu and decor, to match the fast-changing customer preferences.
Liquidity Adequate

Liquidity remains adequate, marked by a surplus liquid investment of around Rs 63.2 crore as on March 31 2019. Net cash accrual stood at Rs 22.4 crore in fiscal 2019, against no maturing debt. Capital expenditure, if any, will be funded from internal accruals. Low working capital requirement, typical in the restaurant business, ensures negligible reliance on external debt. Bank limit continues to largely remain unutilised. Moderate cash accrual and substantial liquid investments should help maintain adequate liquidity over the medium term. However, a sustained long period of closures on account of COVID-19 could result in significant reduction in liquid assets and deterioration in credit profile of the company and remain a key monitorable

Outlook: Stable

CRISIL believes that the experience of the promoters and established market position should support the business risk profile.

Rating Sensitivity factors
Upward Factors:
* Sustained improvement in operating margins to above 12% and revenue growth of over 10% per fiscal over the medium term
* Sustained financial risk profile with low leverage levels and ample liquidity
 
Downward Factors:
* Decline in revenue by over 15% per fiscal over the medium term and subdued operating margins, weakens the net cash accruals
* Higher than expected losses, debt funded capex or significant reduction in liquid assets weakens the financial risk profile
About the Company

SRL was promoted by Mr Anjan Chatterjee in 1999. The promoter entered the restaurant business by setting up Only Fish in 1992, followed by Main Land China, in Mumbai. SRL is now one of the largest fine-dining restaurant chains in India. Its brands, Mainland China, Asia Kitchen, Oh! Calcutta, Machaan, Sigree/Sigree Global Grill, Haka, Flame & Grill, Kix, Shack, Kibbeh, Cafe Mezzuna, and Hoppipola offer a variety of cuisines and dining formats. Sweet Bengal is the company's confectionary brand.

Key Financial Indicators
Particulars Unit 2019 2018
Reported revenue Rs crore 355.8 304.7
Profit after tax Rs crore -6.3 -53.4
PAT margin % -1.8 -17.5
Adjusted debt/adjusted networth Times 0.0 0.0
Interest coverage Times - 1195

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)
Maturity Date Issue Size
(Rs Cr)
Rating Assigned with Outlook
NA Overdraft NA NA NA 9.5 CRISIL BBB+/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 50.0 CRISIL BBB+/Stable
NA Bank Guarantee NA NA NA 0.5 CRISIL A2
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  59.50  CRISIL BBB+/Stable      30-07-19  CRISIL A-/Negative  03-04-18  CRISIL A-/Negative  21-02-17  CRISIL A/Negative  CRISIL A/Stable 
Non Fund-based Bank Facilities  LT/ST  0.50  CRISIL A2      30-07-19  CRISIL A2+  03-04-18  CRISIL A2+  21-02-17  CRISIL A1  CRISIL A1 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee .5 CRISIL A2 Bank Guarantee .5 CRISIL A2+
Overdraft 9.5 CRISIL BBB+/Stable Overdraft 16.5 CRISIL A-/Negative
Proposed Long Term Bank Loan Facility 50 CRISIL BBB+/Stable Proposed Long Term Bank Loan Facility 43 CRISIL A-/Negative
Total 60 -- Total 60 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt
Understanding CRISILs Ratings and Rating Scales

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