Rationale

 The long-term rating upgrade considers the healthy performance of Barbeque Nation Hospitality Limited (BNHL/ the company) in FY2022 and expected sustainability in its earnings (revenues and profitability) and cash flows, going forward. Despite the second and third waves of the pandemic, BNHL witnessed 69.7% YoY revenue growth in FY2022 (1.6% growth compared to pre-pandemic i.e., FY2020 levels) on the back of strong recovery in the dine-in business and increased contribution from the delivery business. The operating margins1 (OPM) also improved to 15.5% (from 9.2% in FY2021) backed by improved scale of operations and continued benefit of cost efficiency measures. Further, BNHL witnessed strong sequential revenue growth of 25% and consequent improved OPM levels (22.4%; adjusted OPM of 13.7%) during Q1 FY2023, on the back of healthy volumes and improvement in average realisation. ICRA also notes that the company has prepaid a major portion of its debt during FY2022 with the equity infused through proceeds from its initial public offering (IPO), including preIPO as well as preferential allotment (equity infusion of ~Rs 330 crore; excludes ~Rs 105 crore paid to selling shareholders), thereby supporting improvement in its liquidity and financial profiles. The ratings continue to favourably factor in BNHL's strong brand image in the restaurant segment with 195 outlets across India (includes 13 Toscano brand outlets and six international outlets) as of June 30, 2022. The company witnessed robust same store sales growth (SSSG) of 64.7% in FY2022 and 182% during Q1 FY2023 indicating strong recovery following the pandemic impact. Further, continuous expansion in outlets every year is expected to support higher footfalls. The company's strong brand image facilitates its entry into new markets at competitive rentals, supporting its revenues and operating margins. The rating strengths are, however, partially offset by the company's presence in a highly competitive market with large number of players both in the organised and unorganised segments restricting pricing flexibility. Further, the food service industry remains vulnerable to discretionary consumer spending, inflationary pressures, and exogenous shocks. ICRA notes that the company is expected to increase its footprint by ~35-40 stores each in FY2023 and FY2024; and expansion of RoCE will be contingent on its ability to profitably scale up the new stores while maintaining the growth momentum for the existing outlets and will remain a rating monitorable. ICRA expects the company to fund its capital expenditure (capex) through healthy cash generation and limited borrowings in the near term. Any significant debt-funded expansion/ capex would be a material event and will be evaluated on a case-to-case basis.