One of the worst-hit sectors over the last year was restaurants. But closing FY21 and in a fit of optimism, is the initial public offering (IPO) of a fine-dining restaurant chain - Barbeque-Nation Hospitality (Barbeque Nation).

With investors like Rakesh Jhunjhunwala and Domino’s Pizza’s franchise operator Jubilant Foodworks, the Barbeque Nation share sale will be met with excitement. But looking beyond its star backers and the IPO-mania we find ourselves in, the company is in a tough financial spot. With accumulating losses and mounting debt, the company’s net worth turned negative in FY21.

Valuation doubles in two months

The restaurant chain planned to go public in FY17. However, SEBI suspended its Rs 700 crore IPO due to “past violations.” According to reports, the suspension was because promoters failed to comply with minimum shareholder norms and violated insider trading regulations. In February 2020, it planned to go IPO again, this time upping the issue size to Rs 1,200 crore. But with the markets declining in 2020, Barbeque Nation delayed its share sale to 2021.

Barbeque Nation’s promoters are the Dhanani family through their controlled entities - Sayaji Hotels (SHL) and Sayaji Housekeeping Services (SHKSL). Prior to the IPO, the promoters held 47.8% of the company. 

Institutional investors hold 52.2% of the company. Private equity firm CX Partner’s investment arm Tamara (TPL) has a 17.9% stake and Xponentia Capital a 4.6% stake. Rakesh Jhunjhunwala’s investment firm Alchemy India held 5.7 lakh shares for a 1.6% stake which was purchased in 2018 for Rs 90 crore. 

Other investors include Menu Private (MPL) Pace Private (PPL), and AAJV Investment Trust (AAJVIT). In January 2021, Jubilant Foodworks invested Rs 92 crore for a 10.7% stake. This valued the company at Rs 858 crore. Post the issue, at the upper end of the Rs 498-500 price band, Barbeque Nation will be worth Rs 1,800 crore, more than double the valuation at the time of the Jubilant Foodworks’ investment.

The issue is worth Rs 452 crore, comprising an offer for sale (OFS) of 54.5 lakh shares and a fresh issue worth Rs 180 crore. The OFS will see the promoters sell 20.3 lakh shares and the institutional investors sell 34.2 lakh shares. The institutional investors cutting their stake are  TPL, MPL, and AAJVIT.

The promoter stake will drop to 37.7% after the IPO, while Jubilant Foodworks’ and Rakesh Jhunjhunwala’s stake will drop to 9.7% and 1.5% respectively.

Barbeque Nation has been making losses since FY17. The fine-dining restaurant is priced at 2 times its FY20 revenues. This is lower than the FY20 price-to-sales ratio of Jubilant Foodworks (4.8 times price to sales) and Westlife Development, the master franchisee of McDonald's in south and west India’s (3.2 times its revenues).

The company raised Rs 150 crore through a fresh issue as part of pre-IPO placements. Out of the total fundraise comprising the Rs 180 crore fresh issue and the Rs 150 crore pre-IPO placement, Barbeque Nation will use 57% (Rs 190 crore) to repay debt and 16% (Rs 54.7 crore) for capital expenditure (capex).

FY17 the last profitable year: Mounting losses pre-Covid19

Most companies’ launching an IPO in H2FY21, presented their financials for either half-year ended September 2020 or nine months ending December 2020. However, Barbeque Nation’s red herring prospectus contained financials for the eight months ended November 2020 (8MFY21).

In FY20, Barbeque Nation’s revenues were Rs 846 crore, a 15% jump YoY. Its revenues between FY 17-20 have grown at a compound annual growth rate (CAGR) of 19.5%. The 8MFY21 revenue was Rs 201 crore and other income was Rs 35 crore which was rental concessions the company received from building owners due to the pandemic. Rent in 8MFY21 was Rs 43 crore, against Rs 106 crore in FY20. Owners will resume charging rent in FY22.

Food and beverages (F&B) costs comprise 43-45% of Barbeque Nation’s total expenses. F&B cost was Rs 292 crore in FY20, a rise of 18% YoY. For 8MFY21, F&B costs were Rs 76.4 crore (34% of total expenses) due to lower occupancy levels.

EBITDA was Rs 168 crore in FY20, a 12.5% rise YoY. EBITDA for 8MFY21 was Rs 12.6 crore. Margins in FY20 were 19.5%, a drop of 470 basis points since FY17. In 8MFY21, margins were 6.3%.

The last time Barbeque Nation recorded a net profit was in FY17 (Rs 4 crore). In FY20, its net loss was Rs 33 crore, compared to a net loss of Rs 38 crore in FY19. In 8MFY21, the net loss was Rs 100.6 crore.

Even at a store level, growth is declining. An important metric to measure recurring demand for restaurants is same-store sales growth (SSSG). Barbeque Nation’s SSSG is not only lower than the listed operator’s SSSG but declining consistently.

Growing cash flows despite high capex

While Barbeque Nation has not been profitable in two years, its cash flows have been growing. In FY20, cash from operations was Rs 181 crore, a 48% rise YoY. For 8MFY21, the company had operating cash flows of Rs 32 crore as the net loss reached Rs 100 crore. 

Growing operating cash flows was due to higher revenue (between FY 17-20) and an increase in trade payables (a 2.5X YoY jump in FY20). This allowed the company to spend on capital expenditure (FY20). In FY20, capex was Rs 84 crore, a 25% drop YoY. For 8MFY21, capex was Rs 3.6 crore.

Besides FY19, the company has been generating free cash flows every year. For 8MFY21, capex was Rs 3.6 crore. From the proceeds of the fresh issue, Rs 55 crore is allocated for capex.

Sky-high debt and alarming debt-to-equity

Barbeque Nation’s debt is sky-high and rising. In FY20, total borrowings were Rs 206 crore, a 65% YoY growth. Between FY 17-20, Barbeque Nation’s debt has grown 2.3x. However, by November 2020, the company managed to reduce its debt by 16% to Rs 173 crore. 

In FY20, Barbeque Nation’s total debt-to-equity ratio was 41.4, compared to a debt-to-equity of 1.2 in the previous year. In FY21, the pandemic hit the restaurant operator when losses were mounting and debt was increasing. For the 8MFY21, the company’s reserves were short of the net loss for the period by Rs 29 crore. This resulted in total liabilities exceeding total assets by Rs 11.6 crore, giving the company a negative net worth. No wonder Barbeque Nation is planning to use Rs 190 crore from the fresh issue and pre-IPO placement proceeds to pay off debt.

As of January 2021, Barbeque Nation had Rs 179.2 crore in total borrowings, of which Rs 113 crore is due. Out of these outstanding loan payments, the company has availed a moratorium on interest payments for 62% of the outstanding loan amount of Rs 70.1 crore.

Diversification gone right and wrong

Barbeque Nation was set up in 2006 as a casual fine dining restaurant specializing in live grills and barbeques. In the 15 years of operations, the company has established 147 outlets including three international locations - United Arab Emirates, Oman, and Malaysia. Between  FY17-20, the total number of Barbeque Nation restaurants has increased by 86%.

It has diversified beyond its fine-dining restaurants in two ways. In 2019, Barbeque Nation acquired Red Apple, the operator of Italian fine-dining restaurants Toscano and Cafe Toscano for Rs 67.3 crore. In 2018, it launched UBQ by Barbeque Nation, a delivery-only subsidiary. 

Barbeque Nation’s unsuccessful diversification was the 2017 acquisition of Prime Gourmet (PGPL), a franchise for American casual-dining restaurant Johnny Rockets, for Rs 13 crore. Due to poor performances between FY 17-19, the parent company terminated the agreement. As a result, Barbeque Nation’s loss from discontinued operations of Johnny Rockets was Rs 35 crore in FY 18-19. Johnny Rockets returned to India in FY20 with a new franchise operator and will compete with Barbeque Nation.

Delivery preferred over dine-in

The Indian food services market is expected to grow at a CAGR of 9% between FY 20-25. The organized market (38% of the total market) will capture this growth and is pegged to grow at a 15% CAGR. But due to Covid-19, the food services market shrunk by 83%, and only in Q3FY22 will it reach pre-Covid levels.

Companies with a strong delivery channel have pivoted away from dine-in and towards delivery. Even new entrants like Wendy’s are opting for cloud kitchens. Premium dine-in companies like Barbeque Nation will take time to get accustomed to the new normal.

Barbeque Nation’s revenue will be aided by UBQ, its delivery subsidiary, but this is unlikely to push the revenue to pre-Covid growth (19.5% CAGR between FY 17-20). Even with the top-line expansion, the bottom-line is still weak. Considering these factors, Barbeque Nation is better for a meal than an investment.