Barbeque Nation: After falling 64% from record high; Nuvama sees massive 82% upside

Shares of Barbeque Nation Hospitality (BHNL) have massively eroded investor wealth in just a little over 1 year. The stock has tanked 64 percent since hitting its all-time high of ₹1,950 in November 2021.

Just in the last 1 year, the stock is down 46 percent. Meanwhile, in 2023 YTD, it has cracked nearly 30 percent.

The restaurant chain has shed 21 percent just in February so far, extending losses for the 7th straight month. Since August 2022, it has lost 40 percent till date.

Despite such weak performance in recent times, brokerage house Nuvama now sees recovery in the stock. It has initiated coverage with a buy call with a target price of ₹1,275, implying a potential upside of nearly 82 percent.

With aggressive restaurant expansion, improvement in table turns and maturity of existing restaurants, the brokerage expects the company to continue the growth momentum.

In the December quarter, the company reported a 53.6 percent decline in its net profit at ₹6.5 crore versus ₹14 crore in the year-ago period. Its revenue, however, rose 13 percent to ₹329 crore as against ₹291 crore in the same quarter last year.

Barbeque Nation Hospitality is India’s most successful casual-dining-restaurant (CDR) brand, as it quadrupled its overall restaurant count (22 percent CAGR over FY15–22) to 205 restaurants (as on Q2FY23). BNHL’s restaurant chain is dominated by the flagship Barbeque Nation (BBQN) restaurants by store network and revenue pie (90 percent). The company also operates 13 Italian cuisine fine-dine restaurants (FDRs) under the brand Toscano. During the pandemic, the company ventured into the online delivery segment (23 percent revenue contribution in FY22) under UBQ and Barbeque-in-a-Box brands.

Investment Rationale

Strong execution led by a highly scalable business model: The CDR market is tough to scale due to a high number of stock-keeping units (SKUs) compared with a quick-service restaurant (QSR), which makes standardisation difficult in this industry. However, BNHL is an outlier in this segment, as it scaled up its restaurant network relatively faster compared with peers, and a majority of its restaurants are profitable with superior store-level economics, noted the brokerage.

Nuvama further pointed out that BNHL’s growth is also supported by developing standardised food packets for its dishes and maintaining long-term contracts with dedicated vendors for sourcing raw materials. Most importantly, BNHL focuses on only two brands – BBQN (UBQ and Barbeque-in-a-Box revolve around the core brand BBQN) and Toscano, which makes developing and maintaining SOPs relatively easier, it added.

Restaurant additions to remain aggressive: BNHL increased its restaurant count at 22 percent CAGR over FY15–22 and currently has 205 restaurants (including. 186 BBQN restaurants in 84 cities in India), informed the brokerage. BNHL has been successful as it pioneered the concept of ‘over the table barbeque’ live grills embedded in dining tables – allowing guests to grill their own barbecues right at their tables and an ‘all-you-can-eat dining option’ at a fixed price.

Nuvama expects the company to spearhead its restaurant addition momentum, as it targets 500 BBQN and 100 Toscano restaurants over the medium-to-long term. It forecasts the company to add 40 restaurants annually over FY22–25E to reach 300+ restaurants.

Most efficient player in the CDR segment: As per the brokerage, CDRs register high weekend sales (70–80 percent) and high dinner sales (60 percent), which implies low utilisation for the industry over the week, thereby resulting in low asset turns. However, BNHL enjoys almost equal proportion of the total revenues from weekday and weekend sales and a 45:55 mix between lunch versus dinner covers, as its buffet spread is a popular choice for corporate lunches during weekdays and families during weekends, it pointed out.

This results in high-capacity utilisation throughout the week for the company, moreover, most BNHL restaurants are strategically located near corporate offices, which results in large gatherings during weekdays and lunchtime and this enables BNHL to register high table turns, which stands at 1.8–1.9x, much higher than the industry average of ~1.3x, highlighted the brokerage.

Outlook

"We are optimistic about the ~INR17,000cr chain CDR industry, given its huge market size, changing consumer eating habits and expansion plans of restaurant operators in big cities, where the appetite for dining out is accelerating.

Though competition has further intensified in this sector after the pandemic, we believe this industry is still in the early growth phase and restaurant penetration levels continue to be low, providing immense growth opportunities for all industry participants over the long term," said Nuvama.

Barbeque Nation is one of the largest players in the chain CDR market, and it is the sole operator in the industry that has been able to scale up profitably and is way ahead of its peers in terms of restaurant count and store-level economics.

The brokerage is positive on Barbeque Nation because of its (a) ability to operate under strong SOPs across all its restaurants; (b) sharp focus on store expansion along with maintaining superior store economics; (c) focus on the delivery vertical, which would aid revenue growth; (d) better table turns, resulting into a high fixed-asset turnover; and (e) better cost structure, resulting in better margins and higher return ratios.

Estimates

Nuvama believes the company would grow at a revenue CAGR of 30 percent over FY22–25E, outperforming the CDR industry, supported by a store expansion CAGR of 19 percent and strong same-store sales growth. BNHL’s operational profitability would also improve in FY23E on a strong recovery in dine-in sales after COVID-19 and operating leverage kicking in.

It forecasts Barbeque’s operating margins to reach 20 percent in FY23E with significant margin expansion (~600 bps) over FY22–25E, supported by a strong recovery in the dine-in business (after COVID-19), cost-saving initiatives and operating leverage kicking in.

It also expects Barbeque to turn profitable in FY23E and record 74 percent PAT CAGR over FY23–25E and sees Barbeque improving table turns, enhancing RoCE and RoE to 20 percent each by FY25E.

"With BNHL’s best-in-class business model, growth opportunities, execution capabilities, lean balance sheet and management quality, we initiate our coverage on the company with a target price of ₹1,275 based on 15x FY24E EV/EBITDA," said Nuvama.

The brokerage also believes that BNHL would trade at a 25–30 percent discount to the average QSR industry multiple.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.