Industry

The Chain Casual Dining market in India has been thriving over the last few years. The Chain CDR segment represents the 2^nd largest share in the chain food services market in India after QSR. Exhaustive menus, quality food, high focus on presentation and the presence of specific cuisines are all features of the CDR segment. In FY20, the size of the Chain Casual Dining market is estimated at Rs. 134 billion. Further, the segment is expected grow at a healthy CAGR of 18% to reach Rs. 302 billion by FY25.

North Indian cuisine contributes highest share of 26.6% to the Indian organised food services market followed by Chinese at 19% and South Indian of 7.7% cuisines. North Indian restaurants brands are fuelling the growth of casual dine space. Due to their regularity among different restaurants formats, these cuisines have broad appealing among consumers. Also, factors such as young population, increase in working women, rise in disposable income are aiding the growth of Indian Food Services market.

Currently, the chain CDR segment has ~4,700-5,200 outlets in FY20 across India compared to ~1800-2000 in FY14. With the diminishing lines between each format type, some players from the QSR and FDR segment have started venturing into the chain CDR segment. These transitions between various players within the chain CDR market have only added to its burgeoning growth.

Mega Metros have the highest presence of chain CDR outlets at 31% while Mini-metros are next with a share of 24%. The remaining 45% market share is accounted for by Tier I and Tier II cities. However, with existing higher penetration in Metros and Tier I cities, most of the chain CDR formats have taken cue from the QSR players like Domino’ s and McDonald’s and have ventured into Tier I & II cities.

Chain Casual Dining Market: Key Trends
Varied Offerings and Shifting Consumer Need to Drive CDR Market

• The Chain CDR segment based on its varied cuisine offerings along with higher APC, has more chances of a faster growth as compared to other food services segments. QSRs have a price and volume advantage over CDRs. However, the same is anticipated to undergo changes in the coming years based on shifting consumer habits, higher disposable income, increasing experimentation and urge to try new & different things.
• The Indian consumer is becoming demanding and gets bored with one type of restaurant food very fast and is continually looking for different options and newer concepts. This nature has reduced the life of a restaurant to 7-8 years from 10-12 years a decade back. To cater to this changing ecosystem, the brands have to continuously offer something different.

Multiple Brands vs. Single Brand
The brands operating in the Chain CDR segment are continuously introducing newer concepts based on ambience and food offerings. These brands are just not limiting to a single brand or format and are venturing into different formats. Companies like Massive Restaurants, Impresario Hospitality and Specialty Restaurants not only have different brands in the same formats but are also venturing into different formats.

Streamlined Standard Operating Procedures
With high focus on craftsmanship and fresh produce, the format of Chain CDR with limited usage of standardized products in the ready to cook, restricts the fast scalability of this format along with expansion in smaller cities. CDR brands can also expand at a faster pace without the backing of centralised commissary and supply chain.

Efficiency Staff Development Initiatives
It would be important for the brands to communicate the same to its staff through regular training programme. Most of the home-grown brands have started investing in various training programmes for their staff at regular intervals. These training programmes by brands are also helping in reducing the attrition rate and attracting new talent.

The Digital Connect
Food services are increasingly using options like website, social media platforms, apps etc. for continuously communicating with consumers. The instant turnaround time is one of the biggest advantages of digital media over traditional media. The offers, incentives, product information, and promotions can be communicated in real time and the responses are also received quickly. Brands are also able to see feedback and reviews generated by consumers instantly and are able to take immediate corrective actions and carry out recoveries.

Peer comparison

Risks

• In spite of an increasing number of Barbeque Nation Restaurants and growth in consolidated revenues, the company has incurred losses in some of the recent fiscal years. As per financial data the company has posted a cumulated loss of Rs. 154.78 crores for the last 32 months.
• The company faces competition from the restaurant industry in general and particularly from the CDR market (organised as well as unorganised) and potential new entrants to the CDR market.
• The company’s Same Store Sales Growth (SSSG) on a standalone basis has been declining from 7.2% in FY18 to -2.8% in F20. If the company is unable to maintain consistent in same restaurant sales growth, its operational results could be adversely impacted.
• The company’s revenue is subject to seasonal variation as it typically receives higher revenues between September to March.
• The company has undertaken a Pre-IPO Placement of 5,951,132 Equity Shares at a price of Rs. 252 per share, aggregating to ~150 crores. Current IPO is at Rs 500
• The company has a leveraged balance sheet. As of November 2020, the company has a total borrowing of Rs. 173.34 crores. Though, the company has proposed to prepay/repay Rs 75 cr in FY22 out of proceeds of the IPO issue, the total debt of the company will still remain elevated. As of September 2020, BBQN has a negative net worth of Rs. 11.62 crores.
• The company generates substantial amount of revenue from three cities (Delhi NCR, Mumbai and Bengaluru).  As of 8MFY21, it generated 30% of revenues from these three cities. The concentration of revenues generated from these areas enhances its exposure to developments related to competition as well as economic, political, demographic and other changes in these 3 cities.
• One of the company’s Promoters and Directors, Raoof Dhanani, is involved in a criminal proceeding and in an insolvency proceeding. Any adverse decision in these matters could have an indirect impact on the reputation and business of the company.

Company Description

Barbeque-Nation Hospitality Limited (BBQN) owns and operates Barbeque Nation Restaurants and International Barbeque Nation Restaurants. Also, it owns and operates Toscano Restaurants and UBQ by Barbeque Nation Restaurant. Steadily, the company has grown its owned and operated Barbeque Nation Restaurant network from a single restaurant in 2008 to 147 restaurants across 77 cities in India and six international restaurants in three countries as of December, 2020. Further, the company’s subsidiary, Red Apple, owns and operates nine restaurants under the brand name, Toscano, a casual dining Italian restaurant chain and operates one restaurant each under the brand names La Terrace and Collage respectively. The acquisition of Red Apple has enabled BBQN to diversify its brand, cuisine and customer segment beyond its flagship concept of ‘over the table barbeque’. Also, it periodically run food festivals at its restaurants, offering its guests a range of Indian, international and fusion cuisines.

Valuation

Barbeque Nation Hospitality Limited is India’s one of the fastest growing and well-recognised restaurant brands. However, we believe there are several risks involved in the business. The company has a high leveraged balance sheet and its net worth as of November 2020 is negative. Though the company has proposed to repay/prepay certain borrowings from the proceeds of the fresh issue, the debt will still remain elevated. The company has been continuously raising capital which signals that it needs to keep raising cash, investing/burning it to stay relevant and clock growth.

Further, the company has been making losses despite an increase in number of restaurants and revenue growth on a consolidated basis. It operates in a competitive business environment and its business model does not have any moat. Therefore, intense competition could result into market share loss, loss of revenue due to pricing pressure and decrease in demand. It has made a pre-IPO placement at Rs. 252/share two months before the issue and is now bringing the IPO at Rs. 500. At the upper price band of Rs. 500, the issue is valued at 2.2x of Mcap/Sales of FY20. We recommend to ‘Avoid’ the issue.

Key Information

Use of Proceeds:
The company has proposed to utilise the proceeds from the fresh issue for capital expenditure for expansion and opening of the new restaurants, prepayment or repayment of all or a portion of certain outstanding borrowings availed by the Company on a consolidated basis and general corporate purposes.

Book running lead managers:
IIFL Securities Limited, Axis Capital Limited, Ambit Capital Private Limited and SBI Capital Markets Limited.

Management:
T Narayanan Unni (Chairman, Non-Executive Director and Independent Director), Kayum Dhanani (Managing Director), Rahul Agrawal (Whole-time Director and CEO) and Amit V. Betala (CFO).