Prabhudas Lilladher - Bhagwati Banquets

Prabhudas Lilladher report on Bhagwati Banquets:

Investment Highlights

Just now, it monopolises premium catering in Ahmedabad and Surat and commands a high (about 35%) operating margin from this business. The company wants to expand catering business to other major cities.

It plans to branch out to other cities like Mumbai, Jaipur, Jodhpur, etc., to become a national player. From October '07, it will commence catering services in Mumbai. The entry into other cities is likely to improve the sales and profitability of the company.

BBHL has plans to enter into tie-ups with clubs for providing F & B services, resulting in additional revenue and profits.

In FY07, it has undertaken the F&B management of the revolving restaurant, Patang, in Ahmedabad. The company is exploring similar F & B management opportunities.

It plans to serve companies and MNCs, BPO centres, shopping malls, theatres, etc. catering for them and providing food packs. This business is likely to generate additional revenues and profits.

BBHL expects a good response for the Surat hotel as well as for club membership at its Surat Club, adjoining the hotel. It expects Rs 500 million in revenue and Rs 150 million in operating profit from the Surat hotel in the first year of operation.

The catering business generates free cash, as it receives payments in cash and obtains credit from its suppliers. Hence, the working capital required is low.

Major risks

The company had a negative cash flow in FY04 and FY06 due to continuous expansion of the business.

Delay in implementing the Surat project might affect profitability.

Revenue arises from catering contracts at various hotels/ clubs and party plots. On expiry, these contracts might not be renewed; or might even be terminated before expiry, resulting in loss of revenue and profits.

BBHL's business is seasonal, with greater revenue arising in the October-March period. Any disturbances/ disruptions during this period might result in loss of revenue and profits.

Management Vision

In the long run, BBHL plans to set up 5-star hotels in Ahmedabad (2nd hotel in 2008), Jaipur (2011), Hyderabad (2014), Lucknow (2017) and Mumbai (2020). It is evaluating several proposals to acquire property for its new hotel at Ahmedabad.

Business Development

BBHL expects a good response to the 5-star hotel now being set up at Surat. This hotel will have 100 rooms (deluxe, suites and a presidential suite). It will have two large banquet halls, which can be partitioned as required. The hotel will also have a business center, with a boardroom, conference rooms, a world-class spa, a pub, a discotheque, etc. The company plans to develop a separate club adjoining the hotel. BBHL is likely to enroll members for the club and expects a good response for membership. The company has 1,000 people, consisting of 10 master chefs and a catering staff of 650 for Ahmedabad and 45 for Surat.

Competitive Environment

At present, there is no organized player in the catering business in Ahmedabad and Surat and hence the company enjoys a "healthy" market share (a monopoly) in the premium segment. There are other cooks in the unorganized sector who undertake contracts for wedding and other functions. However, unorganized players do not have a centralized kitchen; hence, the cooking is done at the wedding site, resulting in hindrances and disturbances. Since the business of catering is unorganized, most transactions are conducted in cash. Hence, the unorganized players are at an advantage, as they do not pay tax. The company pays 6.4% service tax and 4% VAT. This renders it less competitive than those in the unorganized sector. With the rise in corporate clients, it does not envisage a problem on this front.

Financials and Valuations

In April '07, Bhagwati came out with a public issue of 23 million shares at Rs 40 each, aggregating Rs 920 million. Its equity capital then rose–-from Rs 62.9 million to Rs 292.9 million. The catering service has done well in the past five years. The number of meals supplied per day has jumped from 200/300 in FY03 to 1,500/2,000 in FY07. The company derives over 66% of its revenue from F&B and the other 34% from its hotels business. It charges from Rs 350 to Rs 900 a meal and provides personalized service. A minimum order has to be for 300 people (off-season) and 500 in season, resulting in revenue ranging from Rs 0.1million--0.45million on each order. The typical room rate in Ahmedabad is Rs 5,000 per day and average occupancy is 75-80%. BBHL is likely to commence catering services in Mumbai and is likely to generate sales of Rs 29 million-35 million in FY08 and Rs 135 million-150 million in FY09, with an EBIDTA margin of about 35%.

Valuations

At the CMP of Rs 37,the stock trades at 9.7x FY08E EPS of Rs 3.8 and at 7.3x FY09E EPS of Rs 5.1. With its unique business model of catering services as well as monopoly in premium catering, we are upbeat about the company's long-term prospects.