Rating Rationale
September 29, 2020 | Mumbai
Speciality Restaurants Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.10 Crore (Reduced from Rs.60 Crore)
Long Term Rating CRISIL BBB+/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long term bank facilities of Speciality Restaurants Limited (SRL) to 'Negative' from 'Stable' and reaffirmed its rating at 'CRISIL BBB+'. The short term rating has been reaffirmed at 'CRISIL A2'. CRISIL has also withdrawn its rating on the Rs.50 crore proposed long term bank loan facility of SRL at the request of the company. The withdrawal is in line with CRISIL's policy of withdrawal for bank loan ratings.

The revision in outlook reflects expected weakening of SRL's business risk profile over the medium term on account of revenue and profitability likely to be significantly lower than CRISIL's earlier expectations due to drop in overall demand amidst lockdown and other measures taken by various central and state governments towards containment of COVID-19. Revenue in first quarter of fiscal 2021 declined by around 87.8% (year-on-year) leading to net losses of Rs.19.6 crores. Scale of operations and profitability continues to remain subdued currently due to closure of restaurants and considerably lower footfalls.

Further, management's earlier strategy to revamp its operations with an aim to improve the profitability is also expected to take longer than earlier estimated. Operating margins were below expectations in fiscal 2020 at 2.1% (post adjusting for lease rentals) and net losses were Rs.37.88 crores (including Rs.27.38 crore of exceptional expenses on account of impairment of plant, property and equipment of Rs.25.45 crore and net impairment of right to use assets of Rs.1.93 crores). Scale up in revenue and profitability shall remain a key rating sensitivity factor. The overall credit risk profile however is supported by healthy financial risk profile and liquidity position.

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 healthy 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 117 restaurants and 28 confectionaries, as of March 2020. 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.
 
* Healthy financial risk profile: Capital structure and debt protection metrics should remain healthy over the medium term. Despite significant losses in fiscal 2020, networth is comfortable at Rs 164.4 crore as on March 31 2020 (Rs 222 crore as on March 31, 2019), and is likely to sustain at Rs 120-130 crore over the medium term. Total outside liabilities to adjusted networth ratio were at 1.1 times as on March 31 2020 compared to 0.3 time as on March 31 2019. The increase in liability is on account of adoption of IndAS 116 on leases. The company continues to remain debt free and leverage levels are likely to remain low over the medium term.

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. Operating margins remained subdued over the past three fiscals in the range of 2.1-4.9% through fiscal 2020. SRL has adopted multiple cost saving strategies amidst the pandemic related disruption, including salary reduction, renegotiation of leases, control on overheads etc... These efforts are likely to cushion the losses in fiscal 2021, however operating margins and overall profitability is likely to remain subdued in current fiscal.
 
* 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 61 crore as on March 31 2020. SRL is likely to incur net cash losses in fiscal 2021, however there are no outstanding debt. There are no significant capital expenditure planned over medium term. Bank limit continues to remain unutilised. Substantial liquid investments and unavailed bank lines should help maintain adequate liquidity over the medium term. However, significantly higher than expected cash losses over the medium term could result in significant reduction in liquid assets and deterioration in credit profile of the company and would remain a key monitorable.

Outlook: Negative

CRISIL believes that SSML's business risk profile is likely to weaken over the medium term due to sluggish demand amidst impact of pandemic on the restaurant industry

Rating Sensitivity Factors
Upward factors
* Sustained improvement in revenue and operating margins, strengthening net cash accruals to above Rs.22 crore over medium term
* Sustained financial risk profile with low leverage levels and ample liquidity

Downward factors:
* Decline in revenue and subdued operating margins, leading to net cash accrual of less than Rs 15 crore over the medium term
* 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 2020 2019
Reported revenue Rs.Crore 367.75 355.8
Profit After Tax (PAT) Rs.Crore -38.2 -6.3
PAT Margin % -10.4 -1.8
Adjusted debt/adjusted networth Times 0.0 0.0
Interest coverage Times - -

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)
Complexity Levels Maturity Date Issue
Size
(Rs.Cr)
Rating Assigned with Outlook
NA Letter of credit & Bank Guarantee NA NA NA NA 0.5 CRISIL A2
NA Overdraft NA NA NA NA 9.5 CRISIL BBB+/Negative
NA Proposed Long Term Bank Loan Facility NA NA NA NA 50 Withdrawn
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  9.50  CRISIL BBB+/Negative  08-05-20  CRISIL BBB+/Stable  30-07-19  CRISIL A-/Negative  03-04-18  CRISIL A-/Negative  21-02-17  CRISIL A/Negative  CRISIL A/Stable 
        26-03-20  CRISIL BBB+/Stable               
Non Fund-based Bank Facilities  LT/ST  0.50  CRISIL A2  08-05-20  CRISIL A2  30-07-19  CRISIL A2+  03-04-18  CRISIL A2+  21-02-17  CRISIL A1  CRISIL A1 
        26-03-20  CRISIL A2               
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
Letter of credit & Bank Guarantee .5 CRISIL A2 Letter of credit & Bank Guarantee .5 CRISIL A2
Overdraft 9.5 CRISIL BBB+/Negative Overdraft 9.5 CRISIL BBB+/Stable
Proposed Long Term Bank Loan Facility 50 Withdrawn Proposed Long Term Bank Loan Facility 50 CRISIL BBB+/Stable
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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