The initial public offering (IPO) of casual dining restaurant chain Barbeque Nation Hospitality (BBQ), which opened for subscription on Wednesday, will close on Friday.
The Rs 452.87-crore IPO was fully subscribed (1.33 times) on Day 1 as investors lapped up the offer amid persisting exuberance in the primary market. However, experts caution that it could be an 'extremely risky bet' for the retail investors.
"The frenzy around the IPO of Barbeque Nation follows similar appetite for other listed food businesses, starting with Jubilant Foodworks. Over last 12 months, IPOs of stocks like Burger King and Mrs Bectors found favour despite unimpressive financials," says Tanushree Banerjee-Co-Head of Research, Equitymaster, an equity research firm.
She highlights the IPO is richly priced and does not reflect the fundamentals of the company.
"Uninformed retail investors are ignoring the fact that Barbeque Nation allotted shares on a preferential basis to Jubilant Foods (in a pre-IPO placement) at Rs 252 per share in January 2021. The IPO price band of Rs 498-500 per share, at double the pre-IPO allotment price, is not justified by any fundamental change in the business. Buying fast growing, loss making businesses at the time of IPO is an extremely risky bet for retail investors. So, while the IPO frenzy on such food stocks may last for a temporary phase, investors looking for longer term investments should be wary of such stocks."
There are some who accept the valuations are high, but justified them keeping the potential growth in view. Harshad Chetanwala, Co - Founder MyWealthGrowth.Com, a Financial and Wealth Planning Company cautions that one should not expect listing gains out of it, but may bid for it for the long-term.
"At present most of the investors think that every IPO will generate listing gains. However, investors should not invest in IPOs from listing gain perspective. When you invest in IPOs, it is important to decide how much you are willing to pay for the anticipated growth of these listing company. This growth will take time as the raised capital will be deployed over a period to further build the company. Just investing for listing gain is not the best strategy," says Harshad Chetanwala, Co - Founder MyWealthGrowth.Com, a Financial and Wealth Planning Company.
"Looking at Barbeque Nation, they have sound business model and reasonably priced IPO which do offer an opportunity for investors to look at it from investment perspective," he adds.
Here is what key brokerages recommend:
ICICI SECURITIES - UNRATED
The chain casual dining restaurant (CDR) industry is expected to grow at a faster pace over the next five years. However, we believe the bigger size restaurants and limitation in scaling up delivery sales can impact the growth for the company. Moreover, we await clarity on full recovery from Covid 19 before assigning any recommendation. The stock is priced at 2.4x FY20 EV/sales (post listing).
RELIANCE SECURITIES - SUBSCRIBE
The IPO is valued at 12.2x of FY20 EV/EBITDA and 2.4x of FY20 EV/Sales, which look to be attractive compared to peers like Jubilant FoodWorks (JFW) and Burger Kings (BKIL). Additionally, OCF yield of 10% for FY20 is far superior to 2% of JFW and 2.6% of BKIL. The CDR chain enjoys the 2nd largest share (34%) in food services chain market in India after QSR (47%). The CDR market - which was estimated at Rs 134 bn (13,400 crore) in FY20 - is expected to clock a healthy 18% CAGR to reach Rs 302 bn (Rs 30,200 crore) by FY25E. Therefore, given steady addition of new restaurants and increasing contribution from delivery business, growth outlook of BNHL looks promising. Hence, we recommend SUBSCRIBE to the issue.
YES SECURITIES - AVOID
Company is targeting a market cap of Rs 1,880 crore post-issue which equates to 12.2xFY20 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. We also note that earlier fund raises in 2018 have been done at a much higher price, but fundamentals have deteriorated since. 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.
AUM CAPITAL - UNRATED
Barbeque Nation has pioneered the format of 'over the table barbeque' concept in Indian restaurants through which it offers value a one-of-a-kind overall customer experience. Acquisition of Red Apple has enabled it to diversify its brand, cuisine and customer segment beyond flagship concept of 'over the table barbeque'.
It is very decisively placed and positioned in the Casual dining restaurant chain market in India which has been flourishing really well and it also represents the 2nd largest share in the chain food services market. Considering the risk of rising Corona Cases, lockdowns and restrictions in some parts of the country, negative bottom line and book value. We are not rating the issue.
PRABHUDAS LILLADHER -SUBSCRIBE
We assign subscribe rating to the IPO of Barbeque Nation (listing gains), one of the fastest growing Casual Dining Restaurant chain in India. The company has several growth levers such 1) Huge scope of expansion given low penetration 2) Expansion of Delivery business which has already grown from 3 per cent of Revenues pre covid to 15 per cent of Revenues in Nov20. 3) Strong value proposition with niche positioning in high growth casual dining segment.
Negative working capital and Rs 330 crore funding (including pre-IPO) bodes well for a turnaround and steady growth with an estimated 20 restaurant addition/year. However, little scalability of international operations (6 stores) and not so impressive track record of promoter group in scaling up Sayaji Hotels (loss in 5 out of last 10 years), promoter pledge (Rs 24.6 crore), insolvency proceedings and OFS by promoters in IPO (20.3 lakh shares), merit caution. We believe the company is valued cheaply at 1.4x FY23 EV/Sales however the stock at ~46xFY23EPS offers limited upside. Although we expect reasonable listing gains given IPO euphoria in the markets, the operational delivery needs to improve significantly for any serious re-rating in the long term.