Barbeque Nation IPO: Don’t dine yet

Dine-in restaurants have not yet fully recovered from the impact of lockdown across the country and other Covid- related restrictions. With a second wave threatening an encore, Barbeque Nation (BBQ) is coming out with its IPO at a dicey time. It has been tough for BBQ even before 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, high interest costs on borrowings for expansion and high depreciation costs have been eating into the profits. BBQ went aggressive, opening 20-25 outlets in each of the last three fiscals.

Nevertheless, BBQ wants to expand further and through the IPO, it is looking to raise ₹54.6 crore for capital expenditure. It will also repay debt of ₹75 crore from the IPO proceeds. In all, a fresh issue amounting to ₹180 crore and an offer for sale of ₹272 crore by promoters and PE players are on the cards.

On an EV/Sales basis, BBQ is valued at about 2.4 times on FY20 revenues (FY21 not considered due to Covid impact). The closest listed comparable is Speciality Restaurants (Mainland China, Oh! Calcutta, Sigree, etc.) which is into fine dining, whose EV/Sales is at 0.6 times. BBQ’s market cap at the IPO price band of ₹498-500 is at about ₹1,870 crore, compared with Specialty Restaurants’ ₹211 crore. BBQ’s FY20 revenues are 2-3 times higher.

While the company’s partial debt repayment may provide some relief on interest costs, slowing same store sales growth (SSSG) over FY18-20 is a concern. Investors can wait and watch for the company to demonstrate profitability before entering the stock.

How it fares

As of December 31, 2020, BBQ owns and operates 147 restaurants across 77 cities and six restaurants abroad. Its subsidiary Red Apple, owns and operates nine Italian restaurants under the brand name ‘Toscano’. The company’s consolidated revenues have grown at a CAGR of 20 per cent over FY18-20. Over these years, the covers (number of customers serviced) have grown from 68.6 lakh to 99.2 lakh, and the average bill size (excluding taxes) from ₹3,026 to ₹3,249. The company offers fixed price dining at its restaurants (varying between ₹349 for kids and ₹1,409 per customer, excluding taxes in FY20). The fixed pricing in a way offers a cross-subsidising advantage as the consumption quantity may vary from person to person. This gives the company some elbow room to hold prices even when food inflation inches up.

However, 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 SSSG. This has led to a situation where mature outlets ( > two years in operation as at fiscal end) are seeing a declining trend in margins while, newer ones are ramping up, though the absolute margin for mature stores is still higher. SSSG was at 7.2 per cent in FY18, 5.6 per cent in FY19 and minus 2.8 per cent in FY20.

Other concerns

The business is quite capital intensive with BBQ requiring a capex of ₹2.5 to ₹2.7 crore to set up an outlet initially. Then come the improvement costs at periodic intervals. For BBQ, a new unit takes 2-4 months to break even and 2-3 years to achieve store level margins.

While the restaurants are owned and operated, the premises are leased. If the company decides to close down an outlet due to not getting the desired returns /due to expiration of lease, etc. then part of the capex or the improvement cost could remain unrecovered. BBQ plans to open another 20 outlets in FY22 and 6 in FY23 as of now, much of which is expected to be funded from the IPO proceeds. In FY21 so far (until November), it has closed 3 restaurants.

Secondly, post-Covid, the popularity of deliveries could continue to stay due to its sheer convenience. 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.

It is noteworthy that due to tight liquidity conditions, the company has raised several rounds of funds from various investors since December 2020 at ₹252 per share. Jubilant FoodWorks (Domino’s Pizza ) is one of them and the entity will hold about 9.7 per cent post issue.

There is a criminal as well as insolvency proceeding against promoter Raoof Dhanani. Another promoter and MD , Kayum Dhanani has secured personal and promoter group debt through a pledge on his holdings.

COMMENT NOW