Comments from Madhur Rati of Counter Cyclical Investments during Q2 FY26 earnings conference call summed it up well (excerpted)
Sir, I’m trying to understand that it has been now almost 3 years since our SSG is in negative. So which is an achievement in itself that on such a low base also we are continuously clocking negative SSG. I think there is something that the management is missing because there is no point in continuously opening new restaurants when your existing SSG growth is negative for 12 quarters continuously and on top of that Now I can see that we have a net debt on our balance sheet. So so it is like there is already a fire and you go and start a new fire at some other place. So that’s what I think the the direction that the company is moving in. Please correct me if I’m wrong.
Disc: Exited this past week with 22% loss on a small position
I’ve been tracking this company for 4 years now. The management has the same excuses everytime. I don’t think if anythings going to change in future as well. This is a very competitive industry and the model is pretty replicable. The only way to grow the sales is inorganically but that would take a lot of capital.
I don’t see much hope in this stock at least for another year.
I have recently started investing in this business (took 15% position). It looks like a no brainer to me given i hold it for a 10 year period. Here is my thesis:
2 decade old brand with very high brand recall (most of my young friends remember Barbeque nation)
Rising urbanisation and rising disposable incomes (a rising tide lifts all boat)
Professional management with a decent track record (although last 3 years has been bad)
60-70 crores of free cashflow business, easily self sustainable (considering 2.5-3 crores capex per store, can keep on adding 20 stores every year without stressing balance sheet)
Just 800 crores market cap against 60-70 crore annual FCF, 230+ stores (also international presence)
Assymetric risk reward. Very limited downside but high upside.
I have been tracking Barbeque Nation for a while and haven’t taken any position in the last 1 year due to the following reasons:
• Sales have not grown for the last 3 years.
• EBITDA has been dropping for the last 3 years.
• They are focusing on opening new stores while same-store growth has slowed down and even gone into negative.
• Opening 35 new restaurants this year can lead to serious cash burn if sales growth doesn’t materialise.
Unless sales go up along with an increase in EBITDA, the risk is high, which has kept me away from it.
there’s also a trendiness/fashion issue. if you notice restos in bangalore, they do the same location but keep changing the name and theme every 3-5 years. BBQ nation is not a QSR nor a great sit down experience. they need to do large amounts of marketing to retain mindshare. which I havent seen.
They’ll make money not in the curve like a QSR or a sitdown. ultimately, it’s a chain that has to constantly market and reinvent itself. do you see that anywhere in it?
My understanding from reading concalls and management answers is that BBQ restaurants are made for family/corporate celebrations and the focus is on providing high value against price paid to mostly meat lovers. Its target customer segment is different from QSR or theme based restaurants.
My guess is that the dining market is so big (is going to become even bigger) that it can accomodate every kind of restaurants, delivery platforms, QSR and roadside stalls.
My guess is that the trend of dining out has just started now. It is only going to become higher as more and more people join the workforce, more GCCs open up and formal economy expands.
One has to be patient with this stock, considering the business has very high operating leverage (75%+ of any incremental sales is going to go straight to bottomline), even a small growth will trigger huge cashflows for them (relative to market cap).
We just have to wait for the cycle to turn.
Mr Market is creating a perception that risk is high on this business. I do not think that is the case.
I agree with you that Sales and EBITDA hasn’t grown in last three years, which has led to persistent share selling (& hence cheap valuation). Stagnant sales and EBITDA doesn’t make a business risky, however it may mean that business is facing headwinds (can be temporary or permanent).
Business becomes riskier if the business model is broken, there is high competition, bad unit economics, declining industry, regulatory restrictions, environmental concerns etc.
Let us look at the possible risks (please add more if missed):
Is business model broken?
I don’t think so. Dining will always be there, since it is a social activity and humans love to go out, meet friends or celebrate occasions with family. There will always be a segment which would want to go to “All you can eat buffet” restaurant.
Is competitive intensity increasing?
Management in the concall indicated that competition is reducing as the whole dining industry is facing headwinds. Weaker brands and over-leveraged players will face tough times. Only strong brands and strong balance sheets will survive and when the market turns will gain more market share.
Is the industry declining? Pricing power?
Not at all. It looks like a growing industry with large number of players (even haldiram’s which is a snack player are opening more restaurants). My assumption is that even buffet restaurants are going to grow as well. On the pricing power front, it looks like stronger brands are still able to pass on price hikes in this industry but that is not the case with BBQ nation. They tried discounting which spurred their sales for a while, however when they reverted back to original prices, the customers went away (a considerable risk).
Financial risks - overleveraged or operating losses?
The balance sheet till now is decent (net debt will be around 100cr by FY26 end). Average free cash had been 60-70 crore in the last 3 years (one of the worst period in company’s history), which is a decent performance. Management is professional and quick to take actions to protect margins (be it cost cutting or efficiency programs). Hence, not a major concern right now.
Stagnant sales and margins
This is an area of concern, the whole industry (as per mgment) is facing headwinds. How long the down cycle will be nobody knows. Will have to be monitored.
Request fellow investors to add any other risks if missed.
Barbeque Nation is facing challenges not only because of the macro environment. Another listed company, Speciality Restaurants Ltd. (owner of brands like Mainland China), has been doing well, with increasing revenue and stable margins over the last three years. Barbeque Nation is facing issues that are unique to it.
They are facing increased competition from new-age restaurants that are innovating faster and offering competitive prices. On top of that many local fine dining restaurants are attracting Barbeque Nation’s customers by providing unique dining experiences and constantly updating their concepts.
Even with addition of new stores the Company revenue is not growing because same-store sales have been weak or negative, cancelling out the gains from new outlets and dragging down overall financials.
Without same store growth, operating leverage is limited because fixed costs like rent, labour, and foods are high. If new stores don’t generate strong incremental revenue and mature stores remain weak, consolidated sales will stay muted, and margin will continue to decline. The operating leverage may turn into operating deleverage leading to cash burn and financial constraint in future.
Disclosure: No holdings, no buy or sell recommendation.
But Remember We might holding few thousand shares while for promoter it is everything…I Like stubborn nature (Confidence or overconfidence whatever you can say) of management even after getting this much criticism they are stick to their original plan and have confidence on their core strength is really appreciable…Management Never skipped concall till now we have seen many company started avoiding after 1 or 2 bad results…
And Regarding their business its not cash burning at all…Their International branch is super hit but still surprisingly management is much focussed on Indian expansion only ..IN India also matured restaurant is generating good amount of cash But Problem lies with mainly New restaurant in tier 2 cities that also when Economic tide turns once then that also will show better results…In last few years Economic growth is led by Services sector only once Manufacturing starts shine then Many tier 2 cities also will see good amount of Economic activity like 2004-2008 Era…That can help tier2 restaurants…
And Management also accepted that their mistake regarding restaurant size in tier 2 cities now they are going with smaller size that will help them reduce some fixed expense..
And Regarding Competition I think Due to some limited availability of scope in other area Many Dom,DIK,Herry started restaurant business but now they are facing headwinds that might led to start of consolidation and only few players may survive
And there is so much operating leverage in this business up to 50% of incremental income can go to the bottom line directly …
And Every Business cycle Near BOTTOM feels like this Only (Frustration)
This Is my Personal Views that can have so many Biases ..
Disclosure- Still tracking only, No Holding
If Brands like BBQ with professional management doesnt get good profit then very hard to believe any small group will get good returns !!
If any one opens new dine in restaurant then what could be ROI ?
If SSSG does not rise then margin doesnt improve is simple maths but why SSSG can not improve ??
In one concall management said that they have seen same situation in 2016 also but things got changed after a few quartres
