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    Emerging investment options: Four novel consumer formats looking to debut on the bourses

    Synopsis

    Fabled American investor Peter Lynch has an investing credo that can be distilled to five pithy words: invest in what you know.



    In our consumer-driven economy, there’s a dearth of listed consumer businesses. This is set to change. ET dips into the IPO pipeline to profile four novel consumer formats looking to debut or break out on the bourses

    Fabled American investor Peter Lynch has an investing credo that can be distilled to five pithy words: invest in what you know. In the universe of businesses, small investors know nothing better than those they experience in their dayto-day lives: the restaurants they dine in, the cabs they move in, the salons that do their hair... FMCG stocks have dominated consumer-oriented investment options on Indian markets. But the consumer universe is set to expand to new categories, typified by last month’s listing of India’s first fine-dining restaurant chain.

    Of the 100 companies that have applied for an initial pubic offering (IPO) since January 2011, 19 are consumer-centric (See table).

    Private equity and venture capital are feeding many more who will want to line up some day. Their experience is likely to influence subsequent IPOs and PE investments in such varied kinds of start-ups.
    All of them pivot around Indian consumers, who are growing steadlily in numbers, income and aspirations. The challenge is execution and scalability, says Ritesh Chandra, executive director, Avendus Capital. ET looks at three novel consumer formats that are looking to go public—with varied success so far—and a fourth one that is still a rarity on the bourses.

    This is neither an endorsement of these businesses as investment options nor a comment on Lynch’s credo; it’s just a glimpse of how the investment universe will come closer to the small investor.



    Chef’s Special

    “It’s a course for chefs and waiters!” snubbed an agricultural scientist when his youngest son informed him about his plans to pursue hotel management.

    Little did he know that, three decades later, his son would build a restaurant business valued by the market at Rs 1,000 crore.

    Anjan Chatterjee, who owns 61% of that company, Speciality Restaurants, feels this is just the start. Speciality has a competitive advantage: it is the first in its category to raise funds from the public: Rs 130 crore, last month.
    The 53-year-old sees that cash chest as the ingredient that will help his company and restaurants earn respect and expand faster. Size and stature will, in turn, help it slash costs and improve its operating margin, of 23% in 2010-11.

    The opportunity is there. The organised finedining segment is pegged at Rs 9,730 crore, according to a report by consultancy India Retail last year; the segment grew at 25.6% in 2011-12 and is projected to do 31% this fiscal, riding on an increasing middle-class and urbanisation. Therefore, Chatterjee claims his company can maintain its growth in the past four years—35% compounded in revenues and 49% in net profit. “My objective is to improve it further,” says the restaurateur. Some of the challenges it faces towards that end were detailed by a Crisil Research report in March: high dependence on flagship, Chinese-food brand Mainland China, rising real estate costs and shortage of skilled people.

    Chatterjee is tackling these issues. Five years ago, he says, real estate accounted for 20% of the cost of a Speciality restaurant. It’s now 15% and he is looking to prune it to 12% next year. Chatterjee sees Mainland China—the brand that currently brings in 60% of revenues—continuing to drive growth. Of the total 45 new restaurants planned by 2015, 32 are expected to be Mainland China joints, including in neighbouring Southeast Asian countries.

    Speciality runs 69 restaurants and 13 confectioneries in 21 Indian cities and two in Dhaka, Bangladesh. Its other brands are Oh! Calcutta (Bengali cuisine), Sigree (quick-service restaurant), Kibbeh (lounge bar) and Sweet Bengal (confectionery). The biggest challenge he sees is “brand consistency”. “All that matters is a strong brand; without it, I am a joker,” he quips. He’s doing two things to avoid that prophecy.

    One, he’s launched a training academy in West Bengal to maintain a steady flow of quality workers. Two, he’s trying to minimise human intervention in the kitchen to reduce the impact on operations due to the departure of key people. “Speciality is better placed than other fine-dining firms in maintaining consistency in food, services and processes,” says Vishal Sood, director of PE fund Saif Partners, which holds 11% in Speciality. Good thing that Chatterjee Sr did not stop his son from doing hotel management.



    Franchisee Barber

    Back in 1986, Jawed Habib was dishing out burgers and fries in a McDonald’s outlet in London to support himself while learning how to style hair. In the last five years, this third-generation barber has taken a leaf out of the world’s largest franchisee-run business to transform an elitist family business into India’s largest unisex chain of hair and beauty salons.

    From 37 outlets in 2006, when he incorporated his company Jawed Habib Hair & Beauty, he has used the franchisee model to expand to 302 outlets in 87 cities. The 49-year-old is currently setting up two outlets a week. His ambitions extend way beyond India, to cities like London, Paris and Singapore. “I want to be McDonald’s of the salon industry,” he announces, eyes straying around the restaurant of the JW Marriott Hotel in Mumbai where this meeting is happening.

    The beauty and hair styling business in India has barely begun its transition from unorganised to organised, a place where can build scale and charge a brand premium. In India, Habib is the biggest brand, with something of a celebrity status. “That’s the real kick,” says Habib, relishing the looks coming his way. “I am not a sportsperson, not a political leader. Still, people recognise me.”
    In 2011-12, his company recorded revenues of Rs 35 crore. Profitability, though, was poor, with profit before tax being a mere Rs 1 crore, the low margin being partly because of the franchisee model. That did not stop a Mauritius-based PE fund Greenfield Investments from picking up 44% in December 2010; the remaining 56% is with Habib. In February 2011, Jawed Habib Hair & Beauty filed a prospectus with Sebi to go public.

    In the backdrop of that filing, a Crisil Research note in August 2011 noted that rising disposable income, demand for branded services and a first-mover advantage will drive growth for Jawed Habib’s company. Rohit Arora, executive director of the company, pegs the hair and beauty salon market at Rs 9,000 crore, growing at a compounded annual rate of 35%.

    The Crisil report warns a failure to standardise the quality of services across salons could dilute the brand. The challenges for a hair and beauty service company, it adds, are greater as this service cannot be mechanised. It’s an issue that Habib is investing money and time in. The company’s 47 training academies across India churn out 1,000 hairdressers a year. It serves as an alternative revenue stream—people pay for training—and also ensures a captive supply of staff.

    Habib does not consider competition as a threat, saying there’s space for all. ‘After all, 1.2 billion people need a haircut,” he says, adding other countries are also a market. And coming soon in this McDonald’s-modelled drive to build a global brand is where it all began: a salon in London.



    Offline to Online

    On the cusp of its 50th year, Shemaroo Entertainment made a radical decision: to go public. India’s largest distributor of films wants to raise money primarily to increase its 2,500-strong library of Hindi films, and lease them out to TV channels, rip them into physical media like DVDs and stream them on Internet websites. “We have to now scale up the business and that needs adequate funding,” says director Hiren Gada. In 2011-12, the company registered revenues of Rs 155 crore by distributing and producing films.

    There have been other years pivotal to Shemaroo from the time it was set up in 1962 by three Maroo brothers— Buddhichand, Raman and Atul. Three in particular, when the company responded to events and trends shaping its business indelibly.

    There was 1985, when the Copyright Act was expanded, giving legitimacy to the sale of films on video-tapes, and aided Shemaroo’s ambition to become a national distributor. There was 1992, when cable TV burst into Indian households, and a plethora of 24x7 movie and generalentertainment channels sought films to broadcast. Today, according to Gada, 50% of Shemaroo’s revenues come from selling broadcast rights to TV channels, a space where it competes with the likes of UTV, Eros and Viacom 18.
    The upside of those two events has largely been milked, and any further gains will largely be incremental. Now, for Shemaroo, the urgency is about finding an upside in its third decision: to tackle the brave, and largely free, world of online viewing. In 2010-11, the company entered film distribution over digital media like the Internet and the mobile. So, for example, it has tied up to broadcast films on YouTube and mobile telephony platforms.

    Even as it steps into new areas, it faces old issues that any family-run business would face, especially one that goes back 50 years and is seeking to go public: promoter involvement and how it effects a company’s professional functioning.

    Two of the three original promoters are still involved and seven of their progeny have joined in various roles. Gada says the promoters are conscious about not coming across as a family business.

    “Family members will be considered purely on merit if they want to be part of management,” claims Gada. “Otherwise, they can be just shareholders.”




    Public Washing

    In 2010, on assignment in the US for his then-employer PricewaterhouseCoopers, Anshul Gupta found his business idea: laundromats. The 25-year-old roped in elder brother Ankur, an electronics engineer, to handle the equipment, while he took charge of finance and marketing. “It was really the fun of working on a novel business idea,” says Gupta, promoter and director of Quick Clean.

    Fun, in this case, started by studying the laundry preferences of urban India, which had easy and cheap access to household help, washing machines and dry cleaners. The duo targeted consumer profiles without such access: college students and young executives living on rent and in campuses. “We are tapping communities where the concept can be used—for instance, college campus and the army,” says Gupta.

    Today, in association with consumer durables major Electrolux, it is present in 16 locations in Bangalore, Chennai and New Delhi. These are equipped with free wi-fi, TVs, music and magazines, and also have a drop-off service for those hard-pressed for time. “For `200, you can you can wash 5 kg load (dry weight),” says Gupta.
    Quick Clean is exploring new areas. It has been approaching municipal corporations for space to set laundromats—for instance, in Delhi, it offered to set up 250 laundromats. Its selling point is that a laundromat servicing 500 families in one year saves 20 million litres of water. Further, Quick Clean offers to recycle the water to be used for gardening.

    The laundromat business is capital-intensive and it’s important to use the machines efficiently. “It is easier to explain concepts to individuals; commercial sales pose a bigger challenge,” says Gupta. He adds that Quick Clean is in talks with a few PE funds players and, once the business scales up, may even go public. “The focus presently is on scaling up,” says Gupta.
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