The initial public offering of quick service restaurant chain KFC and Pizza Hut operator Devyani International opens for subscription on August 4. Most analysts have given the issue a ‘subscribe’ rating citing reasonable valuations, portfolio of well-recognized global brands, lower debt burden, asset-light expansion business model and changing consumer behaviour.
The Rs 1,838-crore public issue comprises a fresh issue of Rs 440 crore and an offer for sale of Rs 1,398 crore. The fresh issue proceeds will be utilised for repaying debts, while the offer for sale money will go to investor Dunearn Investments & promoter RJ Corp.
The offer will close on August 6. The price band for the IPO has been fixed at Rs 86-90 per share.
Many brokerages feel that the valuations of the issue and company are reasonable when compared to other listed peers.
BP Equities has given the IPO a ‘subscribe’ rating for the long term considering the expected improvement in financial performance and visible growth drivers.
“On the valuation front, based on upper price band and diluted equity shares the company is valued at 9.54x Price/Sales which is reasonably priced when compared to its listed industry peers (i.e, Jubilant Foodworks – 12.9x, Burger King India – 14.4x and Westlife Development – 8.81x),” the brokerage said.
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Brokerages said that the issue is not only reasonably priced based on price/sales ratio, but also on the basis of EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) ratio.
“Considering the FY21 adjusted EBITDA of Rs 178.92 crore on post issue basis, the company is going to list at EV/EBITDA of 62.39 with a market cap of Rs 10,822.7 crore, while its peers namely Jubilant Foodworks and Westlife Development are trading at EV/EBITDA of 66.02 and 206.11, respectively,” said Marwadi Financial Services.
The brokerage also assigned ‘subscribe’ rating to this IPO as the company is a multi-dimensional comprehensive quick service restaurant (QSR) player with portfolio of highly recognized global brands and is available at reasonable valuation as compared to its peers.
Among others, Anand Rathi, Angel Broking, LKP Securities, KR Choksey and Prabhudas Lilladher also recommended a subscribe rating for the issue.
Canara Bank Securities and Religare Broking also recommended subscribing to the issue for listing gains.
Incorporated in 1991, Devyani International (DIL) has the largest franchisee of Yum Brands in India and is among the largest chain operators of quick service restaurants (QSRs) in India on a non-exclusive basis.
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“Its strong portfolio of globally recognized brands, business and geographical diversification, strong presence across key consumption areas and increasing digital adoption provides a strong growth runway for the company. While the overall QSR industry was hit by Covid-19 driven nationwide lockdowns, the company boosted digital orders & delivery and has shifted preference towards quality & safety, thus providing tailwinds for stronger brands,” said BP Equities.
Yum! Brands Inc. operates brands such as KFC, Pizza Hut and Taco Bell and has a presence globally with more than 50,000 restaurants in over 150 countries, as of December 31, 2020. In addition, Devyani International has a franchisee for the Costa Coffee brand and stores in India. KFC, Pizza Hut and Costa Coffee referred to as ‘Core Brands’, while stores operated outside India primarily comprise of KFC and Pizza Hut (in Nepal and Nigeria) (international business); and certain other operations in the food & beverage industry, including stores of own brands such as Vaango and Food Street (other business).
Revenue from Core Brands Business, together with international business contributed 94.19 percent to revenue from operations in FY21.
“Although the company has been loss making, but it is on a footprint expansion mode with strong industry triggers,” BP Equities added.
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Devyani International posted a loss of Rs 62.98 crore in FY21 against loss of Rs 121.42 crore in FY20. Revenue in same period declined to Rs 1,134.84 crore from Rs 1,516.4 crore. Its topline in FY21 took a hit largely due to Covid-19 lockdowns.
Devyani International, however, managed to reduce losses last year by taking cost rationalization initiatives, said KR Choksey, adding Devyani International is taking various initiatives to improve the company’s performance including rightsizing stores, paying off debt from IPO proceedings, focusing on delivery which is a structural change in the industry, negotiating lease rental costs and store expansion.
“Going ahead, factors such as rising per capita income, increasing internet penetration, urbanization, changing consumer preference and food habits, young population, business culture and western lifestyle are expected to play key role in growth of the industry,” said the brokerage.
Also read – KFC, Pizza Hut operator’s IPO reasonably priced; business prospects bright, says Satish Kumar of Choice Broking
In the last one year, Jubilant Foodworks has gained 118 percent, Westlife Development has rallied 47 percent, while Burger King India has surged 207 percent from its IPO price. Meanwhile, Zomato has given a return of 83 percent over its IPO price. Experts largely expect the momentum seen in these shares to be reflected in Devyani International, too.
“Considering the performance of competition in a pandemic year, investors should look to invest in Devyani International’s IPO for listing gains as well as for long term opportunity it presents,” said KR Choksey.
The brokerage further said recent initiatives taken by Devyani International would help in increasing revenue however the economic recovery post Covid-19 is key for the QSR industry.
It is expected that the sale value of the QSR industry will grow at a CAGR of 12.4 per cent over 2020-2025.
“This growth will definitely benefit Devyani International despite the competition. Though the company is loss-making at this moment, lower debt and improving same store sales growth can turn that around,” said Asit C Mehta which recommended to subscribe the issue from a listing gains prospective.
Reliance Securities also recommended subscribing to the IPO, saying the business model of QSR is quite impressive, as each restaurant franchise starts generating significant return on equity (RoE) at restaurant level once it reaches utilization level of more than 90 percent, which bodes well for the long-term investors. “Additionally, superior cash flow generation ability of the business offers comfort.”
Prabhudas Lilladher believes Devyani International is on the verge of a new growth phase for the company led by 1) KFC’s leadership in Chicken segment, 2) strong brand recall and growth prospects of Pizza hut with just 297 stores (1,300+ by Dominos), 3) Acquisition of 73 KFC stores of Yum over past 3 years, 4) Aggressive expansion with addition of 90 stores in the last 6 months and likely hood of sustaining trend, 5) move towards smaller delivery formats for KFC & Pizza Hut (share of delivery up from 50-70 percent between FY20/21) to achieve faster growth and higher margins and lower payback periods per store, 6) Innovations in menus straddling across various price points, cuisines and consumer preference suited to the Indian palate, and 7) scale down in concession based stores in Airports and 61 loss making stores thus reducing drag on profitability.
The KFC and Pizza Hut operator’s shares traded at a premium of Rs 50-55 in the grey market ahead of its issue, the IPO Watch and IPO Central data showed. As a result, the trading price comes to Rs 140-145, higher by 55.6-61.1 percent over upper issue price band of Rs 90.
Apart from Devyani, three other companies open their IPOs for subscription today – Windlas Biotech, Exxaro Tiles and Krsnaa Diagnostics.
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