Verdict: An Unpalatable Grill!

Rs. 453 cr IPO: 60% OFS by promoter and investors, 40% fresh issue

IPO dates: Wed 24^th Mar to Fri 26^th Mar 2021

Price band: Rs. 498-500 per share

Only 10% issue reserved for retail, since loss making for all 3 fiscals- FY18 to FY20.

Irrational Pricing: 2x in 2 months!

In Jan 2021, company raised Rs. 150 cr at Rs. 252 per share via pre-IPO placement to Jubilant Food, PE Xponentia and few individuals. After 2 months, shares are being issued to public at twice that price. If Rs.252 was the fair price two months ago, how can 100% rise be justified now, when (i) pandemic has worsened (ii) neither peers nor broader markets doubled in 2 months. Alternatively, if Rs. 500 is the fair price for the business, why were pre-IPO investors favoured? This gap can not be justified by any parameter, reflecting poorly on company’s promoters and management.

Lack of Corporate Governance Continues

1. Past SEBI non-compliance of listed promoter Sayaji Hotels, such as failure to report trades under insider trading regulations, open offer disclosures etc.
2. Rs. 27 cr impairment in FY20 on Rs. 67 cr acquisition of an Italian restaurant chain from promoter group company in the same fiscal.
3. A promoter director involved in a Rs. 16 cr criminal proceeding and Rs. 60 lakh insolvency proceeding, matter currently pending. Pending income tax proceedings for Rs. 15 cr against company and for Rs. 2 cr against individual promoter for concealment and misreporting of income.

Promoter Debt makes matters Worse

• Listed promoter Sayaji Hotels’ balance sheet highly leveraged with 1.3:1 net debt equity ratio, thanks to Rs. 70 cr debt on net worth of Rs. 52 cr.
• Nearly half of promoter holding in Sayaji Hotels is pledged, with institutional holding of barely 0.02%.
• Promoter Kayum Dhanani, who has Rs. 25 cr personal loan as of 31.1.21, plans additional Rs. 40 cr loan by pledging substantially all his holding in the company. 3.3 lakh shares owned by him are already under pledge for securing Rs. 29 cr loan for group companies.

Loss making chain of 164 Restaurants

Between FY18-FY20, revenue grew at 20% CAGR to Rs. 846 cr, but PAT was negative throughout, including for H1FY20, which did not have covid impact. Food service is a difficult business from profit point of view, similar to airlines, due to high costs. Only Jubilant Food has consistently been profitable, due to pricing power in pizza, given lower material cost at 25% of salesover 35% for Barbeque, BurgerKing, Westlife and other casual dining restaurant chain Speciality Restaurants’ 32%. This also implies Jubilant is not an apple-to-apple comparison due to its inherent cost advantage. 

High Depreciation to Continue

FY20 depreciation of Rs. 134 cr will rise, as 26 new restaurants are opened from Rs. 55 cr of IPO proceeds, while sales ramp up will be gradual. Also, what urgency to expand when (i) recovery is slow - festive month of Nov 2020 at only 84% of pre-covid level (ii) low operating leverage, due to high cost structure (iii) industry moving towards cloud kitchens where cost structure lower (iv) peers ramping up delivery over company essentially dine-in (only 15% delivery). Instead, company must de-leverage Rs. 80 cr loan from balance sheet, which remains after Rs. 75 cr repayment from IPO proceeds.

Valuation:

At Rs. 500, company’s market cap will be Rs. 1,880 cr with EV of Rs. 1,960 cr, leading to FY20 EV/sales multiple of 2.3x. Restaurant chain peer Specialty, loss making despite cash surplus balance sheet, is ruling at EV/sales multiple of 0.4x with share price down 75% in past 9 years since its IPO. Discounting 2 year forward estimates in current uncertain scenario is futile for the worst affected restaurant sector. Besides, IPO market fancy is waning with recent record-subscription of 150x for Easy Trip Planners slipping below IPO price within 3 days from listing.

Conclusion:

Weak corporate governance, promoter level debt, negative PAT pre-covid and in near future make the issue weak. Hence, we recommend an ‘avoid’ on the IPO.   

Grey Market Premium (GMP) of Barbeque Nation: Grey Market Premium of Barbeque Nation is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.