Have you decided to visit Pune?
Well, the first stop – Vohuman cafe. Start your day off with a delicious cheese omelet. If you aren’t fond of eggs another alternative is to visit Vaishali and enjoy a Dosa ( I find it a tad overrated but the vibe is real). As the day goes on, travel to Camp and get your hands on the Garden Vada Pav. The combination of spicy potato filling and chutney is an experience like no other. Craving some North Indian? 1000 Oaks warrants a visit. When the sun sets, the spirit of young Pune comes alive at High Spirits Cafe. Order the Chicken Samsosas.
Now, I mentioned some super popular joints and there are probably another 20, that I will leave for later. For now, though, I want to talk about a small restaurant that you can come across at the end of Ferguson College Road. Its name - Shravan.
This unassuming gem possesses a loyal following that swears by its food! The Paneer Tikka and the Babycorn Hotpan are to die for. And once you have moved on from the appetizers, try the Garlic Naan with Cheese Butter Masala(Yes, it’s a thing) and some Yellow Daal. Finish the meal off with some Kulfi. Absolute bliss!
Chances are, if you visit the restaurant, you will enjoy your meal, but you might not fully grasp the hype that I'm raving about. I can't quite explain why this place stands out above the rest to me. It's a magical connection that's grown over the years. Call it destiny, fate, or just a damn good meal! We all have one such restaurant, don’t we?
Anyways, the purpose of this write-up, apart from giving Pune food reviews and professing my love for Shravan, is to actually try to value the business.
Previously when I tried to value the South Indian restaurant, Vaishali, I spent most of my time trying to predict their revenue. I estimated their occupancy by visiting the restaurant and used Zomato to get an idea about their average order value. I looked at their menu to get an idea about gross margins but still so much was left to random assumptions. I basically spent all my time on the numbers. An exercise in futility if you ask me now.
For Shravan, I will not make wild assumptions to get incorrect financials and rather focus on the business and the multiple that it may warrant.
Okay, let’s get to it!
Surviving the test of time?
My father remembers going to Shravan when he was in college. I’m 25 now, so it’s fair to say the restaurant has survived more than three decades. You can’t sustain that unless you have been generating some profits. (or have private equity backing). As Nassim Taleb touched on in his book Antifragile, things that survive the test of time often have some innate robustness to them, that may not always be visible.
Excellent Location?
As I said above, the restaurant is located at the end of FC Road, in close proximity to Shivajinagar and Model Colony. That helps!
Having enjoyed this advantageous spot for more than 30 years suggests a strong and positive relationship with the lessor, which might involve either profit sharing or rent payments. They could even own the land. I don’t know, but nevertheless, it is a great location.
Furthermore, the ongoing real estate redevelopment projects in Model Colony are going to lead to an increased population density. That means more traffic, which sucks. However it also hints at the possibility of more people visiting the restaurant.
Not a lot of re-investment?
I don’t recall Shravan doing major re-investments in their business. Especially in terms of size, it has been the same for as long as I can remember. That basically means constant capacity and hence is a major growth constraint.
They did do an interior overhaul sometime in the past 10-20 years. Furthermore, they have introduced valet parking in the past decade. The menu has expanded over time, but as I said, capacity has been the same.
The Food Delivery Impact?
Shravan can probably seat 80 people at a time. Operating for around 8 hours during the day, let’s assume a table on average is occupied for 45 minutes. Around 10.67 sessions per day. The maximum capacity for a day would then be around 853 people. That is when each seat on every table, is occupied. Assuming they run at 50% on average, we arrive at 427 people per day. If the spend per head is around 450 then the annual revenue is close to 7.01 Cr.
I personally saw around 3 food delivery pick-ups in a 15-minute duration at 9 pm on a Thursday, while I was waiting for a table. Yep, crazy stuff for a weekday. Let’s just assume 70 or so orders per day. With a spend of 400, we get to 1.02 Crore of revenue for a year. Yep, that’s a lot!
(I am simply guestimating numbers above, but I do hope it gives you an idea about the Zomato Impact here)
What type of business are we looking at?
Why would one want to buy Shravan? What’s the moat here? To me, it’s something that is probably not on the balance sheet. The brand name. Sure a part of it shows up in their sales and their margins indirectly, but the brand name represents trust. Good food and good service, are what you assume when you decide to go grab a bite at Shravan. Something it has built over a period of 30 years. (Also the location helps)
As mentioned earlier, for a restaurant, to grow it can either increase the prices in its menu or it needs to increase the size of the restaurant. Shravan has not increased its size and it is unlikely that we will see any additional outlets or franchises. Prices are moving with inflation (or slightly higher) but nothing absurd. Food delivery apps are stimulating growth.
Don’t think underpaying employees while taking major price hikes is a long-term strategy for success and comprising on quality is going to lead to the loss of loyal customers, so not a lot of wiggle room for margins.
Overall, I assume the restaurant gets a lot of customers and does well enough to get a good margin for the owner. With very little “capital expenditure”, most of the earnings are directly paid. So we are looking at a very high dividend payout business, with loyal customers, and limited growth.
So, a valuation multiple?
Valuations are determined by projecting a company's future free cash flows and discounting them to the present using a suitable rate that reflects the business's risk
I am going to estimate the Price to Earnings multiple the business should trade at, using a one-stage dividend discount model. (It’s usable given the stable growth I am assuming)
I am assuming a 90% payout and a 5% growth rate. (2.5% of that growth comes from net price hikes, and the remainder from organic growth through food delivery platforms, along with higher population density.)
Now what is the discount rate I want to give to this business? If you asked me 5 years ago, I would get India’s risk-free rate, calculate the equity risk premium, and country risk premium, estimate a Beta, and arrive at a number. Now, I’m just going to go with 16%. Why you ask? A mutual fund is expected to deliver anywhere from 12-15% and that’s a pool of stocks. This is an idiosyncratic bet on a single restaurant with a high level of promoter risk. At the same time, it has survived for more than 30 years and still looks in good shape. Not a lot of restaurants or businesses can boast the same. So I guess, 16% seems alright. (Yes you might arrive at a different number)
Plugging, in the numbers, we arrive at a PE multiple close to 8.6.
So to those of you who aren’t into valuation, an 8.6 PE ratio means that you would pay 860 for a restaurant whose net profit for the year is 100.
I realize this is based on tons of assumptions. It assumes the restaurant pays rent and does not flat-out own the land. (This will dramatically change valuations). Maybe there are plans to franchise or renovate or spend aggressively through food delivery platforms. Maybe a cloud kitchen is in the pipeline to further bolster delivery? Who knows?
This is just a bit of fun, for a restaurant that I wish, nothing but the absolute best! Thanks for reading and do subscribe if you have not yet!