IPOs in the Hospitality Sector
The COVID-19 pandemic has been the most compelling force for start-ups and venture capital in 2020, discounting the slow movement of global business and the devastating losses incurred on the pretext of the pandemic. Despite existing challenges, the steady stream of Initial Public Offerings (IPOs) by Indian companies witnessed in 2020 is likely to continue in 2021, with a handful of unicorns planning to go public.
Technology and AI-based companies have been quick to come up with IPOs and the hospitality industry – which is beginning to clock sales – has also hopped onto the IPO bandwagon. Joining the likes of Jubilant FoodWorks, Westlife Development, Speciality Restaurants, and Burger King India; Barbeque-Nation Hospitality is yet another stock from the Hospitality sector to list on the stock exchanges this calendar year and the first in the new financial year 2021-22.
Backed by renowned investor Rakesh Jhunjhunwala’s Alchemy Capital, the IPO raised Rs 453 crores. Despite coming amid an ongoing wave of COVID-19 Pandemic, the IPO stood subscribed 5.98 times on its last day on March 26, 2021, consequently receiving bids for 2.99 crore equity shares against the offered size of 49.99 lakh equity shares.
In the past too, the IPOs of Burger King India Ltd and Mrs. Bectors Food Specialties Ltd were heavily subscribed across investor categories, especially retail. These IPOs went on to deliver stellar gains on stock debut to investors.
Regardless of how well received the IPOs from the Hospitality sectors are, one common question continues to haunt the investors from all categories: the predictability and reliability of returns from the Hospitality Sector and its impact on the economy at large.
It is no secret that the major source of revenue for the Food Based Hospitality Sector comprises dining – in-house and take away combined or standalone, as the case be. Establishments like Barbeque Nation heavily rely on in-house dining for their revenue, as compared to Burger King and McDonald’s whose major source of revenue is generated by takeaways (delivery, drive-through, and on the go).
Given the ongoing pandemic and restrictions imposed on its account, the entire dine-in industry has seen a major slump. On the contrary, the takeaway industry has seen a sharp rise in sales and revenue. Here comes the burning question of returns from a stock that heavily banks on dine-in experience for its revenue.
In view of the shifting consumer preferences, investors are likely to bet on the long-term potential of India’s food and restaurant business amid progress on COVID vaccines and rapid urbanization. Therefore, despite the fast-drying revenues seen in the hospitality industry’s balance sheet coupled with a heightened risk of further slower growth on account of the second wave, investors are bullish on the long-term potential of certain hospitality chains.
In this category, demand for the ongoing Barbeque Nation Hospitality IPO remains high and such high demand serves to redeem the industries which are on the verge of sinking.
With a meticulous balance required to be struck between benefits and risks associated with hospitality IPOs, companies have clearly elected to go public despite high financing costs in anticipation of long-term benefits.
Interestingly, the freshly raised capital does provide for a better liquidity cushion than before, however the same is at the cost of public monies. The hospitality industry is likely to follow suit to address issues such as cash shortages, large short-term liabilities, and increased major operating expenses, in light of low footfalls and sinking revenues.
While the intent and purpose for the capital are said to fund expansion and pre-payment of borrowings, the ability to remain afloat during the present times cannot be overlooked. Nevertheless, the subscription and demand for the IPO make it clear that the investors are overlooking the risks to the company’s revenue and profit. This unchecked and risky approach does quadruple the prospect of a market disaster for investors, a disaster to which the market is no longer a stranger.
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