Rationale

The revision in the rating reflects the deterioration in Barbeque Nation Hospitality Limited's (BNHL) financial profile with a contraction in the operating margins, write off of inorganic investments, and the debt-funded buyout of Red Apple Kitchen Consultancy Private Limited (Toscano Restaurant). The company's standalone operating margins contracted to 13.9% in FY2019 from 15.0% in FY2018 owing to the loss of the GST input tax credit (ITC) availed by the company earlier as well as its inability to raise the prices of its offerings adequately due to intense competition and the general slowdown in the economy. BNHL's profitability in FY2019 was impacted on account of GST payments made by the company on its consumables and services availed whereas it was unable to claim the ITC on the same following the change in the GST regime for restaurants. The company is taking certain steps to counter the impact like renegotiating with landowners to reduce the rentals and by conducting some of the activities inhouse. On a consolidated basis, the operating margins fell to 10.0% in FY2019 from 13.4% in FY2018 due to weaker operations in India and losses from the international operations. The disposal of BNHL's investment in Prime Gourmet Private Limited (PGPL), which owned and operated the fast food franchisees of Johnny Rockets, resulted in a net loss of Rs.18.9 crore for the company in FY2019, significantly impacting the company's net margins. BNHL expanded its store count to seven in the international market (one in Malaysia and six in the UAE) as of December 2019 from five as of March 2019. While the international operations incurred an EBITDA loss of ~Rs. 23.3 crore in FY2019, ICRA understands that the company has been able to turn around the operations in H1 FY2020 and expects the same to post an EBITDA profit in FY2020. Going forward, BNHL is likely to go slow on expansion and focus on profitability in the international market. The ratings continue to favourably factor in BNHL's strong brand image in the restaurant segment along with its healthy revenue growth of 26% in FY2019. While the company witnessed healthy same store sales growth (India operations) in FY2019, the increase in the number of outlets to 126 in FY2019 from 102 in FY2018 also supported the higher footfall. The company's strong brand image facilitates its entry in new markets at competitive rentals, supporting its revenues and operating margins. BNHL is in the process of filing documents for its initial public offering (IPO) and is expected to go public in H1 FY2021. The company is planning to repay its entire debt with the funds raised from the IPO and use the remaining amount as growth capital.