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Sapphire Foods India Ltd., a company that operates some of our favourite fast-food brands, has launched its initial public offering (IPO) today— Nov 9. The IPO comes at a time when quick-service restaurant (QSR) players are witnessing a strong recovery. In this article, we shall dive into important details surrounding the company and its IPO.

Company Profile – Sapphire Foods India Ltd

Sapphire Foods India Ltd (SFIL) is one of the largest franchisee operators of popular fast-food chains such as KFC and Pizza Hut in the Indian subcontinent. Its franchisee agreement with US-based Yum! Brands allow the company to operate the KFC, Pizza Hut, and Taco Bell brands across India, Sri Lanka, and the Maldives.

As of June 30, 2021 (Q1 FY22), SFIL owns and operates:

209 KFC restaurants in India and the Maldives
239 Pizza Hut restaurants in India, Sri Lanka, and the Maldives
2 Taco Bell restaurants in Sri Lanka

Sapphire Foods India was Sri Lanka’s largest international QSR chain in terms of total revenue (Rs 190 crore— representing 35% of the total market revenue) in FY21. It operates 68 restaurants in the country, representing 39% of the total number of outlets in the market.

SFIL operates quick-service restaurants (QSRs) in high-traffic and high-visibility locations in key metropolitan areas and cities across these regions. They also develop new restaurants in new cities as part of their brand and food category expansion. The company has a well-defined new-restaurant roll-out process that enables it to identify new locations, build out restaurants quickly, and efficiently operate with optimally trained manpower. This process helps them achieve the targeted level of sales for restaurants.

SFIL also has an in-house supply chain function and works with vendor partners for food processing, packaging, warehousing, and logistics. The company has an experienced management team with robust governance practices.

About the IPO

On Oct 26, Sapphire Foods India received approval from the Securities and Exchange Board of India (SEBI) to raise funds via an IPO. The public issue opens on November 9 and closes on November 17. The company has fixed Rs 1,120-1,180 per share as the price band for the IPO.

The offer for sale (OFS) of 1.75 crore shares by existing shareholders aggregates to Rs 2,073.25 crore. Individual investors can bid for a minimum of 12 equity shares (1 lot) and in multiples of 12 shares thereafter. You will need a minimum of Rs 14,160 (at the cut-off price) to apply for this IPO. The maximum number of shares that can be applied by a retail investor is 168 equity shares (14 lots).

The main objective of the IPO is to provide an exit strategy (or liquidity) to SFIL’s shareholders and early investors. It aims to achieve the benefits of listing the equity shares on NSE and BSE. The total promoter holding in the company will decline from 60.08% to 49.97% post the IPO. SFIL also aims to enhance its brand name amongst existing and potential customers and create a public market for its equity shares in India.

Financial Performance

From the table shown above, it is clear that Sapphire Foods India has posted losses over the past three financial years. It can be attributed to high operating costs incurred towards the expansion of their store network. Moreover, the strict lockdowns imposed across the globe due to the Covid-19 pandemic had caused severe disruptions to all QSR companies. Interestingly, SFIL has a better revenue per store compared to Devyani International Ltd. In FY21, the income from takeaway and delivery services stood at Rs 551.88 crore or 68.8% of its total restaurant sales. SFIL is currently focusing on this segment to derive efficiency for long-term sustainable growth.

Cash flow is a key indicator of a company’s overall financial health. SFIL posted negative cash flows (or cash outflow) across FY19 to FY21. In the RHP, the company states that it may see negative cash flows in the future that could adversely affect its operations and implementation of its growth plans.

The company plans to continue to grow its business by opening a specific number of new stores every year. Thus, it expects to report losses until these new restaurants mature. However, SFIL will consider smaller formats for new restaurants to reduce rental expenses.

Risk Factors

Sapphire Foods India has reported restated losses in the last three financial years and anticipates additional losses in the future.
The company may suffer uninsured losses or experience losses that exceed the insured limits. Moreover, they may have to make extra payments to cover all uninsured losses.
They are dependent on the Franchisee Agreement with Yum! Brands for continuous operations. The imposition of certain restrictions or the termination of agreements with YUM could adversely affect SFIL’s business and financial condition.
SFIL has incurred substantial debts and may incur more debts in the future. It could affect the company’s ability to obtain funds or pursue its growth strategy.
There are outstanding legal proceedings involving the company, its subsidiaries, and its directors.
The failure or deterioration of its quality control systems and protocols for supply chain or restaurants could lead to the termination of the Franchisee Agreement.
The inability to recognize and respond to changes in consumer preferences and food habits could adversely impact SFIL’s overall operations.

IPO Details in a Nutshell

The book-running lead managers to the public issue are BofA Securities India, ICICI Securities, IIFL Securities, and JM Financial Consultants. Sapphire Foods India Ltd had filed the Red Herring Prospectus (RHP) for its IPO on October 27. You can read it here.

Ahead of the IPO, SFIL was able to raise Rs 932.96 crore from anchor investors. The marquee investors include Government of Singapore, Fidelity Funds, Abu Dhabi Investment Authority (ADIA), HSBC, ICICI Prudential, and Societe Generale.

Conclusion

As mentioned earlier, SFIL has announced ambitious plans to open new stores every year. This strategy will lead to a further increase in operating costs and other expenses in the upcoming quarters. Thus, the company may continue to report losses until these new stores mature. Moreover, another severe wave of the Covid-19 pandemic could affect its overall sales and expansion plans. If they are unable to open new stores and ensure store profitability, Yum! Brands could terminate their current arrangements with SFIL. Since a significant portion of their revenues comes from KFC and Pizza Hut stores, the company will have to focus on strategies to control the Covid-19 impact.

SFIL will be directly competing with prominent listed QSR companies such as Jubilant Foodworks, Barbeque Nation, Burger King India, Devyani International, and Westlife Development after it gets listed. [To learn more about these QSR firms, click here]. The continuing impact of the Covid-19 pandemic and increased competition among global QSR chains may continue to affect cash flows and the overall financial performance of the company.

It seems that the company has received some interest in the grey market. The Grey Market Premium (GMP) of SFIL’s IPO shares stands at ~Rs 120. It means that shares are being traded in the unofficial market at Rs 120 more than the issue price. Before applying, make sure you carefully weigh out the pros and cons of the company and come to your own conclusion.

What are your views on this IPO? Will you be applying for it? Let us know in the comments section of the marketfeed app.

A truly exciting week in the stock market! Four companies are launching their IPOs on a single day (August 4)! Out of the four, Devyani International has caught our attention. It is the largest franchisee of some of our favourite fast-food chains! In this article, we take a closer look into the company and learn more about its IPO.

Company Profile – Devyani International Limited

Devyani International Ltd (DIL) is one of the fastest-growing players in the quick-service restaurant (QSR) sector. It is the largest franchisee (or operator) of popular fast-food chains such as Pizza Hut, KFC, and Costa Coffee in India. The company also operates Vaango, a restaurant chain that offers South Indian food. In 2017, DIL acquired the retail and distribution rights in the Indian and UK markets for TWG Tea, one of the world’s largest luxury tea chains. They also operate a food courts, restaurants, and bars (FRB) segment, which can be found at airports and malls.

As of March 31, 2021, DIL operates 297 Pizza Hut stores, 264 KFC stores, and 44 Costa Coffee stores across India. The company’s core brands (Pizza Hut & KFC) saw a CAGR growth of 13.58% from 469 to 605 stores over the last three years. The revenue from these core brands contributes up to 92.28% of DIL’s total revenue. They are also the largest franchisee of US-based Yum! Brands Inc. in India. Yum! is the master franchisee of KFC, Pizza Hut. On a consolidated basis, DIL operates 696 stores across 166 cities in India (as of June 30, 2021).

Devyani International is an associate company of RJ Corp Group— the largest bottling partner of PepsiCo in India. The group has established a strong presence in the beverages, healthcare, real estate, and education sectors. DIL is backed by a strong management team, led by Virag Joshi (the former CEO of Jubilant Foodworks).

About the IPO

Devyani International aims to raise Rs 1,838 crore through its initial public offering (IPO). The public issue opens on August 4 and closes on August 6. The price band for the IPO has been fixed at Rs 86-90 per share.

The fresh issue of shares (of the face value of Rs 1 each) aggregates to Rs 440 crore. It also consists of an offer for sale (OFS), which aggregates to Rs 1,398 crore. Individual investors can bid for a minimum of 165 equity shares (1 lot) and in multiples of 165 shares thereafter. You will need a minimum of Rs 14,190 to apply for this IPO. A retail investor can bid for a maximum of 2,145 equity shares (or 13 lots).

Devyani International will utilise the net proceeds from the IPO for two main purposes:

For repayment and/or prepayment of the company’s debt fully or partially.
The remaining amount will be used for general corporate purposes

The total promoter holding in the company will decline from 75.59% to 67.99% post the IPO. It will provide a partial exit to RJ Corp and Singapore-based investment company Temasek.

Financial Performance

Unfortunately, DIL has posted losses over the past three financial years. The losses reported over FY19-FY21 have been primarily due to the high operating costs incurred towards the expansion of their store network. Amidst the Covid-19 pandemic, the company continued to expand and opened 109 stores over six months. However, DIL has not been successful in recovering these costs.

The strict lockdowns imposed during the first and second waves of the Covid-19 pandemic had caused major disruptions to all QSR companies. DIL’s FRB segment, which operates through malls and airports, took a severe hit. Revenues from its in-store dining also fell sharply. Interestingly, Devyani is the single largest QSR company in India that operates through food delivery apps such as Swiggy and Zomato. Also, KFC and Pizza Hut were amongst the earliest to roll out contactless delivery in May-June 2020. The company also cut costs by closing down 61 non-performing stores under its core brands. These factors have more or less helped them to post sufficient revenues and narrow their losses in FY21.

Cash flow is a key indicator of a company’s overall financial health. Devyani International has posted negative cash flows (cash outflow) of Rs 17.29 crore and 13.47 crore in FY19 and FY20, respectively. DIL had a cash inflow of Rs 26.73 crore in FY21. In the RHP, the company states that it may see negative cash flows in the future that could adversely affect its operations and implementation of its growth plans.

Risk Factors

The Covid-19 pandemic has severely impacted the company’s business and operations. If the situation prevails and further lockdowns are imposed, DIL’s business prospects, strategies, and future financial performance would be adversely affected.
As mentioned earlier, Devyani International has incurred losses in the last three financial years.
Around 92.28% of the company’s overall revenue is derived from its KFC and Pizza Hut stores. They heavily depend on trademark license and technology license arrangements with Yum! Brands. The inability to maintain and renew these arrangements will have a negative impact on its financial results.
DIL relies on the global success and reputation of its core brands. The failure to protect intellectual property rights and proprietary information may harm the company’s overall performance.
The inability to identify suitable store locations could impact its growth strategies.
Any delay in the supply of quality ingredients, packaging materials, and other necessary equipment may impact DIL’s operations.
Real and perceived health concerns arising from food-borne illnesses and epidemics can impact its business and financial conditions.

IPO Details in a Nutshell

The book-running lead managers to the public issue are Kotak Mahindra Capital, CLSA India, Edelweiss Financial Services, and Motilal Oswal Investment Advisors. Devyani International Ltd had filed a Red Herring Prospectus (RHP) for its IPO in July 2021. You can read it here.

Conclusion

Devyani International has announced ambitious plans to open new stores every year, especially for its core brands. This strategy will lead to a further increase in operating costs and other expenses in the upcoming quarters. Thus, DIL may continue to report losses until these new stores mature. Moreover, another severe wave of the Covid-19 pandemic would affect its overall sales and expansion plans. If they are unable to open new stores and ensure store profitability, Yum! Brands could terminate their current arrangements with DIL. Since a significant portion of their revenues comes from KFC and Pizza Hut stores, DIL will have to focus on strategies to control the Covid-19 impact.

The company aims to use the net proceeds from the IPO to repay a large portion of its debt. This would help them to utilise their internal accruals (or operating income) specifically for investments in business growth and expansion. Let us look forward to seeing how they execute these plans.

Once DIL gets listed, it will be directly competing with prominent listed QSR companies such as Burger King, Barbeque Nation, Jubilant Foodworks, and Westlife Development. It is a highly competitive space.

The Grey Market Premium (GMP) of Devyani International’s IPO shares stood at Rs 55-65 as of today morning. It means that shares are being traded in the unofficial market at Rs 65 more than the issue price. It seems that the company has received some interest in the grey market, although not very significant when compared to previous IPOs. What are your opinions on this public issue? Will you be applying for it? Let us know in the comments section of the marketfeed app.