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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.

Last week, the shares of Burger King India made a stellar debut in our stock markets. The stock hit 20% upper circuit for three consecutive days! As you may know, the newly listed stock comes under the quick service restaurant (QSR) category. As the name suggests, QSRs offer certain food items that require minimal preparation time and are delivered through quick services. All of us love to consume fast food items from McDonald’s, Domino’s Pizza, KFC, Subway, and much more.

Upon further analysis, we found that major stocks that come under the food and beverages industry have shown an impressive rally in the past few months. This primarily includes companies that operate the prominent QSR outlets in our country. Let us take a closer look at three main companies that fall under the restaurant & QSR category in India.

Jubilant Foodworks

Jubilant Foodworks Limited is a company that most of us are familiar with. It is the leading operator of popular fast-food chains in our country. The company operates popular outlets such as Domino’s Pizza, Dunkin Donuts, and Hong’s Kitchen in India. It has established an impressive supply chain network, which consists of 3 distribution hubs and over 31,500 employees. The company has also been expanding its presence in Sri Lanka, where they operate 22 restaurants. Jubilant Foodworks also has 3 restaurants in Bangladesh.

The company has been highly successful in introducing campaigns to attract more customers to its fast-food outlets. Domino’s Pizza is well known for its ‘30 minutes or free’ delivery guarantee. They operate 1,312 Domino’s Pizza outlets in India. You can now find a Domino’s outlet in almost all small towns and cities. Domino’s Pizza India has now become the brand’s largest market outside of the United States.

Performance & Expansion:

As of FY 2019-2020, the total revenue of Jubilant Foodworks was reported at Rs 3,990 crore. It has been showing a consistent increase in revenue over the past few years. The company’s management has completely focused on operational excellence. According to recent Q2 results, its consolidated net profit was up by 3.85% YoY to Rs 75.7 crore.

On December 16, Jubilant Foodworks announced the expansion of its portfolio with a new biryani brand- Ekdum! The company stated that Ekdum! will offer 20 different varieties of biryanis curated from different parts of India. Currently, it has opened three restaurants in Gurgaon and has plans to launch more in NCR over the next few months. They had also announced the launch of India’s first plant-protein based pizza from Domino’s – ‘The Unthinkable Pizza’. Thus, we can see that the company is constantly expanding and showing great financial progress over the last few years.

Over the last six months, the share price of Jubilant Foodworks has surged by more than 54%!

Westlife Development

Westlife Development Ltd is also one of India’s fastest-growing players in the QSR sector. The company’s wholly-owned subsidiary, Hardcastle Restaurants Pvt Ltd, holds the master franchisee for McDonald’s in West and South India. The company also operates the highly popular McCafé in these regions.

Westlife Development operates a total of 319 restaurants and has over 9900 employees. Apart from McDonald’s and McCafé outlets, the company also operates McBreakfast, McDelivery, everyone’s favourite McDonald’s Dessert Kiosks. All these outlets are easily accessible in popular locations including malls, shopping complexes, and residential areas. Over the years, Westlife has introduced many innovative campaigns to attract more customers. McDonald’s self-service machines/kiosks have become very popular in India. The McDelivery app enables delivery across 230+ McDonald’s restaurants across West and South India.

The company has been able to consistently outperform India’s QSR sector in terms of revenues and innovation. The company’s overall revenue in FY 2019-2020 was Rs 15,477.9 crore. Due to the effects of Covid-19, the firm’s Q2 net loss was reported at Rs 27 crore.

Over the last six months, the share price of Westlife Development Ltd has jumped by more than 42%!

Speciality Restaurants

Speciality Restaurants Ltd is one of the major restaurant companies in India that has a very diverse portfolio. It owns multiple chains of fine and casual dining restaurants in India, Bangladesh, UAE, and Tanzania. They also own confectionary stores. The company has now completed 25 years of operations and has been able to successfully launch multiple restaurant chains in these regions.

Some of the prominent casual and fine dining restaurant chains being operated by Speciality Restaurants include Mainland China, Oh! Calcutta, Gong, Sweet Bengal, Asia Kitchen, and much more. Café Mezzuna (an all-day bar and kitchen) and Hoppipola are very popular among young millennials. As of the previous financial year, the restaurants owned and operated by the firm are present in more than 25 locations across the four countries mentioned above.

Performance and Expansion:

The company has been showing a steady increase in its total revenue from operation over the last 5 years. Its revenue in FY20 was reported at Rs 367.75 crores. They have also initiated plans to expand its operations to more locations in the coming years. Speciality Restaurants has also introduced 5 new restaurant chains over the past year – Riyasat, Episode One, Urban Deccan Pub, HAY, and BARissh. Thus, we can see that this firm has stuck on to its vision and has focused on its massive expansion.

Since June 2020, the share price of Speciality Restaurants Ltd has surged by more than 37%.

Burger King India

As we know, Burger King India Ltd’s shares were listed on the stock markets on 14 December. It had received an overwhelming response for its initial public offering (IPO). Currently, Burger King is the fastest-growing quick-service restaurant chain in India. They operate 216 restaurants and 7 Sub-Franchised Burger King Restaurants. They have time and again introduced strong marketing strategies and have successfully established a loyal customer base in our country.

The company has initiated a massive expansion plan, under which 700 restaurants will be opened by December 31, 2025. Burger King India will also use the proceeds from the IPO to improve marketing and other general purposes.

marketfeed had prepared a very special article on Burger King India’s IPO earlier this month. You can learn more about it here. In fact, Burger King India has now easily surpassed the market cap of Westlife Development.

Conclusion

Now, we have a detailed understanding of each listed company in the Restaurants & QSR sector of India. There is another interesting fact to be noted here: There are recent reports which suggests that a company by the name of Sapphire Foods Pvt India Ltd is planning to launch a huge IPO in 2021. The company is one of the largest franchisees of Yum! Brands Inc, and also operates KFC, Taco Bell, and Pizza Hut outlets in India!

The food and beverages sector in India had been one of the worst-hit due to the Covid-19 pandemic. The companies mentioned above had to close down several of their units to cut down costs. They were able to survive due to sales from takeaways. In the July-September quarter (Q2), it was reported that Jubilant Foodworks had to shut down 105 stores.

Fortunately, restaurants in India are now seeing a massive revival. Since October, the government has allowed the opening of restaurants, pubs, and cafes for dine-in. The news related to the vaccine approvals has lifted our spirits and given us the courage to go out and eat. Many people who had not eaten at restaurants for more than 9 months are now rushing towards popular pubs and QSR chains.

All QSR brands mentioned above have a strong and loyal customer base. Over the years, they have launched a series of innovative offers and ad campaigns to completely transform our eating habits. The home delivery options and value-for-money offerings have made fast-food items an absolute favourite amongst all Indians. Several financial analysts have reported that the QSR market in India is projected to grow at a CAGR of 18% during 2021-2025.

Once a particular vaccine has been approved by the Indian drug regulator, we could see these stocks showing a major rally. There could also be an increase in revenue being reported by these companies in the coming quarters. This could ultimately support them to expand their portfolio and obtain a better market share. Let us look forward to seeing how these companies implement their targets.