by Vivek Ananth
Would you like to own a company that hasn’t generated a profit since its inception, but has seen a near 50% compounded annual growth in its revenues? Better still, what if it is an international fast-food brand that is intent on growing its presence across India for the next six years, and almost triple its total number of outlets. Would you invest in such a company?
The company in question is Burger King India—the master franchisee holder of Burger King, the American fast-food brand owned by 3G Capital and run by Restaurants Brand International. Burger King India is owned by Singapore-based QSR Asia, which is majority-owned (nearly 88%) by entities controlled by private equity firm Everstone.
A Rs. 810 Crore Offer
The initial public offer (IPO) of Burger King India is worth Rs 810 crore consisting of an offer for sale of 6 crore shares and fresh issue of shares worth up to Rs 450 crore. The IPO’s price band is Rs 59-60 per share, valuing the company post-issue at around Rs 2,300 crore.
The net proceeds from the fresh issue pay down debt of Rs 165 crore by the end of FY21. Then around Rs 177 crore will be used to set up new stores, with Rs 14 crore to be used in the remaining months of FY21 to increase the number of restaurants from 249 (9 restaurants are sub-franchisees) to 300. In FY22 and FY23, Rs 111 crore and Rs 52 crore will be used from the IPO proceeds to set up new stores. The balance proceeds will be used for general corporate purposes.
Financials Show Strong Growth, Losses Rising
Burger King India has grown at a fair clip since it started operations in November 2013. In FY20 the company posted revenues of Rs 841 crore, rising 33% YoY. Revenues had risen 67% in FY19 over the previous year. This shows that the company is growing rapidly. But it has not posted profits since its inception - the company had managed to more than halve its net loss in FY19 to Rs 38.2 crore, but losses have doubled in FY20 to Rs 76.6 crore.
In the six months ended September 30, 2020, Burger King India has posted revenues of Rs 135 crore, down 68% YoY as the pandemic affected dine in operations. Net loss for the period rose nearly seven times YoY to Rs 119 crore. Its EBITDA margins for the year-ended March 31, 2020 was at 12.4% compared to 12.5% a year ago. Its EBITDA was negative (-Rs 28.7 crore) in the six months ended September 30, 2020 compared to Rs 57.1 crore a year ago.
Same-store sales were down in the first six months of FY21 by 56.9% due to the pandemic and reduced customer footfalls. Before the lockdowns, the company posted decent growth in same-store sales. For the nine months ended December 31, 2020 same-store sales grew by 6.11% compared to the previous year, but the impact of the pandemic in the last quarter meant that FY20 saw a 0.3% fall in same-store sales compared to FY19.
The company has generated decent operating cash flows of Rs 113 crore, Rs 86.5 core and Rs 30.5 crore in the past three financial years. However, free cash flows continue to remain negative during the same period.
About the industry
The food services market in India has grown 8.1% on a compounded annual basis to Rs 4.24 lakh crore from 2014-15 to 2019-20, according to Technopak. Before the lockdowns, it was expected that the industry would grow at a 9% compounded basis over the next five years. Nearly 60% of India’s food services market is made up of unorganised players at the end of FY20. Quick service restaurants (QSR) like Burger King, Domino’s and KFC made up 12.7% of the total food services market.
Although the food services business was severely impacted in the early days of the national lockdown, the central and many state governments had later allowed food delivery aggregators to start operations. Many states have allowed restaurants to start dine-in operations with limited capacity. Technopak expects the food services business to return to nearly 74% of pre-COVID levels by the end of March 2021 and organised players will recover 72% of the pre-pandemic levels. And the return to growth is expected to be cornered by organised players, including QSR players like Burger King.
Is Burger King India worth it?
Before we get into whether the IPO is worth an investor’s money, let us deal with certain other details of the business. The restaurants or stores owned by Burger King India have franchisee rights for 20 years from the date of commencement of operations. For every store Burger King India opens, it has to pay a one-time non-refundable fee of $25,000 to BK AsiaPac till the end of 2022. From 2023 onwards, this amount will be $35,000 for each new restaurant.
Also, the royalty as a percentage of sales is 2%-5% of the monthly sales of the restaurants, with an upper limit of 5%. At the moment, Domino’s master franchisee holder Jubilant Foodworks pays around 3%-4% royalty on sales, and McDonald’s master franchisee holder in South and West India--Westlife Development pays around 4%-5% of revenues as royalty.
Additionally, the company has unpaid dues worth $1.46 million to BK AsiaPac, a minority shareholder in its promoter company. These dues include royalty payments, travel dues, subscription dues, among others. Due to the impact of the pandemic, the payments were rescheduled. These have to be paid in three installments in Q4 FY21.
However, Burger King India is the fastest growing QSR restaurant in India to reach 250 restaurants since launch, according to Technopak. That might enthuse investors as can be seen by its retail quota being subscribed nearly 15 times their allocated quota of shares on the first day. On the second day, the issue is already oversubscribed 6.8 times the shares on offer.