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The Barbeque Nation (BBQ) stock which listed today is currently trading at an 18 per cent premium over the offer price of ₹498-500. Those who got allotment can book profits and exit, as the company’s fundamentals don’t support long-term investment in this stock. On an EV/Sales basis, BBQ is valued at about 2.8 times on FY20 revenues now (FY21 not considered due to Covid-19 impact), compared to 2.4 times at the IPO price.
Financials under pressure
With a surge in Covid cases and restrictions already beginning to be imposed by different states, the restaurant industry may be in the doldrums once again. It has been tough for BBQ even before the first wave of Covid.
Even if one sets aside losses in the 8 months-ended November 2020, the company has been in the red in the previous three fiscals. Following a capital intensive model of running owned and operated outlets ( on leased premises), high interest costs on borrowings for expansion and high depreciation costs have been eating into the profits.
The EBITDA margin has been on a declining trend from 23.8 per cent in FY18 to 19.8 per cent in FY20, though the lockdown towards the end of FY20 may have dented the number a bit. Rising rent-to-revenue ratio is one reason for this trend. It stood at 12.46 per cent for FY20, up from 10.5 per cent in FY18.
Another is the aggressive addition of new outlets in the last three fiscals, where initial margins tend to be lower. A third reason is the slowing same store sales growth (SSSG) – it was 7.2 per cent in FY18, 5.6 per cent in FY19 and minus 2.8 per cent in FY20.
This apart, the popularity of deliveries could continue to stay due to its sheer convenience, even assuming the Covid-19 situation is normalised. BBQ has seen its delivery-based business scale up to bring 15 per cent of revenues by November 2020, as against 3 per cent earlier.
Lower footfalls at restaurants could upset the unit economics for BBQ and prolong the break-even and store level margin achievement for new stores. Currently, a new unit takes 2-4 months to break even and 2-3 years to achieve store level margins.
BBQ aims to expand its stores further using ₹54.6 crore from the IPO proceeds for capital expenditure. Investors need to have an eye on this as well on the SSSG metrics, to see if the business is sustainable.
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