Barbeque Nation IPO appetising, but avoid, say analysts

Barbeque Nation IPO: The promoters hold 60.24 per cent stake, CX Partners owns 33.79 per cent and Rakesh Jhunjhunwala's investment firm Alchemy Capital holds 2.05 per cent in the company

The Rs 453-crore initial public offering (IPO) of casual dining chain Barbeque Nation Hospitality opened for subscription on Wednesday. The IPO comprises fresh equity worth Rs 180 crore and secondary share sale worth Rs 273 crore. The price band for the IPO is set at Rs 498-Rs 500 per share. The issue will close on March 26.

Proceeds of the fresh issue will be utilised to fund the company's capital expenditure for expansion, besides prepayment or repayment of certain borrowings and expenses related to general corporate purposes.

About the company

Barbeque Nation Hospitality owns and operates Barbeque Nation Restaurants. It also operates Toscano restaurants and UBQ by Barbeque Nation Restaurant. In FY20, the company reported revenue of Rs 851 crore and a loss of Rs 33 crore. The company's CAGR from FY17 to FY20 was at 19.5 per cent. As of December 2020, Barbeque Nation Hospitality operated 147 outlets across India and six outlets across three countries -- UAE, Oman and Malaysia.

The promoters hold 60.24 per cent stake, CX Partners owns 33.79 per cent and Rakesh Jhunjhunwala's investment firm Alchemy Capital holds 2.05 per cent in the company.

Here's what leading brokerages say about the issue.

Nirmal Bang -- Subscribe

The company is consistently earning margins in the range of 22-24 per cent. We believe the company has a robust engine and would be back on track soon. We believe the more accurate method is to analyse Operating Cash Flows (OCF) which has been positive for the past four years after paying lease liabilities and interest cost. The company has around Rs 173 crore loans on the books which would be reduced from the IPO proceeds, thereby reducing the interest liability in future. On comparing EV/Cash generation, the valuations of Barbeque Nation look attractive.

With a healthy balance sheet, robust revenue growth, and strong cash flow generations, we believe the company can be looked at from a long term investment perspective. Hence, we recommend "Subscribe for long term".

Reliance Securities -- Subscribe

The IPO is valued at 12.2x of FY20 EV/EBITDA and 2.4x of FY20 EV/Sales, which looks attractive when compared to peers like Jubilant FoodWorks and Burger King India. Additionally, OCF yield of 10 per cent for FY20 is far superior to 2 per cent of Jubilant Foods and 2.6 per cent of BKIL. The casual dining restaurant chain enjoys the second largest share (34 per cent) in the food services chain market in India after QSR (47 per cent). The CDR market – which was estimated at Rs 13,400 crore in FY20 – is expected to clock a healthy 18 per cent CAGR to reach Rs 30,200 crore by FY25. Therefore, given steady addition of new restaurants and increasing contribution from delivery business, the growth outlook of BNHL looks promising. Hence, we recommend 'SUBSCRIBE' to the issue.

Angel Broking -- Neutral

While the company has posted revenue growth of 20 per cent CAGR between FY18-FY20, it has been continuously incurring losses at PAT level despite topline growth. The Covid-19 pandemic too has had an adverse impact on the operations of the company. Hence we expect profits will remain under pressure over the medium-term. At the higher end of the price band, the company is asking for a valuation of 2.4x FY20 EV/Sales which, we believe, is expensive given the current environment and hence we recommend a "NEUTRAL" rating to the IPO.

YES Securities -- Avoid

The company is targeting a market cap of Rs 1,880 crore post-issue which equates to 12.2x FY20 EV/EBITDA and 2.2x P/S, which is significantly lesser than QSR peers like Westlife and Burger King. But given the highly capital intensive and more volatile dine-in business model, we believe the discount is justified. Moreover, given the recent pre-IPO allotment in December and January was done at 50 per cent less than IPO price and Covid concerns have again come back, which would be a near-term headwind for the space, the pricing looks on the higher side with not a lot left on the table for investors.

Despite a strong growth outlook for the space (18 per cent expected industry CAGR) and strong brand equity for the company which should help market share gains, we would advise avoiding the IPO and awaiting better entry opportunities post listing.

Choice Broking -- Avoid

At a higher price band of Rs 500, the company is demanding an EV/Sales multiple of 3x (to its FY20 sales of Rs 847 crore), which is at discount to the peer average of 3.9x (excluding Jubilant Foodworks Ltd.). Against the backdrop of a smart recovery from the pandemic-led lockdown, along with pan-India vaccination drive, the business outlook appears to be improving. However, the emergence of the second wave of the Covid-19 infections could delay the business normalcy speed. Also, without any meaningful change in the business fundamentals, the issue price is almost double the pre-IPO placement price. Thus, considering the above observations, we assign an “AVOID” rating for the issue.