By AltG Innovation Centre On Behalf Of Taponeel Mukherjee & Poornima Vardhan
What’s Going On With Barbeque Nation?
Barbeque Nation Hospitality Limited (BARBEQUE) a Casual Dining Restaurant Chain (CDR) has seen its share price decline by 31.5% in the last 1 year. Versus the broader index of listed restaurant businesses in India that has been up 2.45% on a market cap-weighted basis, that’s a whopping 34% underperformance. Versus the broader SENSEX that’s up 14.5% in the last 1 year, that’s a 46% underperformance!
Two big questions that we look to answer:
So, why does a casual dining restaurant in the fastest-growing major economy of the world with the single biggest consumer market opportunity underperform across the spectrum?
Why do Barbeque Nation’s stock decline and current valuation present an opportunity to create tremendous value through AltG’s APEXX Formula-driven value-unlocking techniques?
The Indian CDR Industry In More Detail
The Indian CDR industry is expected to have a USD 3.65 Billion revenue pool by 2025 (as per Technopak) with a 15% CAGR. Given the data we’re seeing on the ground from our Local Market Intelligence Team, we see that CAGR being even higher. Fundamentally, as the Indian middle class expands, chains such as Barbeque Nation will flourish with both volume and wallet sizes expanding. The CDR play in India is one of the most compelling to leverage the Indian Middle-Class growth.
Essentially, think of Barbeque Nation as the Olive Garden for India, and it still did just USD 149 Million in annual sales in the FY ending March 2023. Olive Garden did USD 4.87 Billion in the same period. The point isn’t for comparison, the point here is to show the potential and just how early it is for the India CDR story.
APEXX Formula Driven Levers Of Increasing Market Cap For Barbeque Nation
Asset- Light Is the Mantra And The Brand Is the Game In Town - Barbeque Nation needs to start seeing itself as a CDR Platform as opposed to a company that “sets up and manages restaurants”. This will have a telling effect on its growth, scale and, most importantly, ability to generate EBITDA and Free-Cash-Flow.
Essentially, the company needs to scale its restaurant count through an effective and aggressive franchising strategy and devote its time and resources to accelerating new store development and maintenance of high-quality customer service - Barbeque Nation needs to go from a core strategy of Company Owned Company Operated Stores to Franchise Owned Franchise Operated Stores.
Barbeque Nation’s Company Owned Company Operated stores made sense when they started in 2006 since India then lacked significant Franchisee Capital or store-running expertise. However, 2023 is a different story with plenty of Franchisee capital in the market.
What does the asset-light model do to the cash flow profile of the business? In short, A Lot! CAPEX moves off the balance sheet - Each store opening currently costs in the region of USD 350,000-450,000. The payback period is approximately 3 years at a restaurant level. A franchising strategy creates capital for Barbeque Nation to grow rapidly via partnerships with franchise owners.
Let’s illustrate the above point better by rejigging the existing business. Essentially, of the 200-odd stores let’s switch 50% of the stores or 100 stores to a Franchise Owned Franchise Operated model run by Barbeque Nation using a world-class franchising system. Assuming an 8% royalty fee, Operating Profit Margins jump from 19% to 23%. Most importantly, 100 established franchise sales can unlock USD 120 Million in capital from the business. Quite simply, given the cash flow generating capacity of each running restaurant, we see each running restaurant selling for USD 1 - 1.2 Million.
This USD 120 Million will be used to scale the high-margin business while the asset-intensive component is run by the franchise owners. Barbeque Nation needs to be in an 80% Operating Margin Business as opposed to a 20% Operating Margin Business!
The key is being able to invest the USD 120 Million that the business generates with an investment hurdle rate of 20%.
Essentially, a switch to a franchise model and a 20% earned on the capital released sees earnings of the business jump to USD 26 Million in 18 months. You compound that at 20% for 5 years gives a high quality rapidly growing USD 64 Million in earnings. A quick look at the average multiples for the listed restaurant businesses in India puts the number at 100, and even after applying a 20% haircut for a P/E of 80 gives us a USD 5 Billion valuation. That’s 15.6 times the current USD 330 Million valuation.
Increased Focus On Core Offering - The company needs to focus on its core offering of the Barbeque Nation restaurants and cut back on the Italian brand Toscano. The company has a total of 212 restaurants as of August 7 2023 of which 15 were Toscano. Given the restaurant count of QSR peers (yes, it’s a different industry but shows the market size) with Jubilant FoodWorks (Master Franchise Owner For Domino’s India) at more than 1800 stores and Devyani International (Largest Owner of the KFC Franchise in India) at almost 1100 stores, Barbeque Nation needs to focus on 5X the number of stores from their current count of 197 Barbeque Nation stores in the next 5 years and not on running an Italian chain.
Fundamentally speaking, Barbeque Nation is a great business in the most attractive market in the world. However, it’s chased revenue growth so far, and in a world of increasing cost of capital, margins and FCF are what is needed. Financial engineering combined with an effective strategy can help unlock one of the best deals in the Indian Consumer Markets.