Initial public offerings (IPOs) are coming thick and fast and being lapped up by investors quickly. Well, at least retail investors. Devyani International’s IPO saw similar euphoria with retail investors placing bids for over 11.4 times their available 10% quota for the Rs 1,800-crore IPO. This took the number of bids for shares to nearly 2.7 times the available 11.25 crore shares on offer on the first day of bidding.
With institutional and non-institutional investors also bidding for about 77% of their quota of shares, the IPO is sure to sail through. It entails a Rs 440 crore fresh issue (out of which Rs 324 crore will be used for repaying debt) and an offer for sale of up to Rs 1,838 crore. The price band of the issue is Rs 86-90.
Temasek’s affiliate Dunearn Investments and promoter RJ Corp are selling shares in the IPO. Post the share sale, the promoter will hold around 65.2% stake in the company, with the rest held by the public. This includes Yum India’s 4.57% stake in Devyani International.
The company will be valued at up to Rs 12,220 crore post the issue at the upper end of the price band. That is nearly 39 times its book value as on March 31, 2021 compared to 43.5 times for Domino’s Pizza operator Jubilant Foodworks, Burger King India’s 10.6 times and McDonald’s operator Westlife Development’s 14.3 times.
On a multiple of its FY21 revenues, Devyani International is valued at 10.8 times at the upper end of the price band (post issue), while on a TTM basis Jubilant Foodworks is valued at 10.6 times, Burger King India at 43.5 times and Westlife Development at 14.3 times.
Devyani International is a non-exclusive franchisee of Yum Brands in India. Yum Brands owns quick service restaurants (QSRs) like KFC and Pizza Hut and Taco Bell. The company is also a franchisee of the Costa Coffee chain of stores in India. Apart from this, the company also runs some of its own QSR brands like Vango and Food Street.
Whether investors are able to get any shares in this IPO or not, does it make sense for them to park their money in Devyani International? Here are some things to keep in mind.
Pandemic knocks down revenue growth and cash flows
The pandemic and the lockdowns that followed did have an impact on the company’s business as revenues fell in FY21. But higher other income and rental waivers led to a fall in loss on a year-on-year basis.
However, the company bought many Yum Brands-owned KFC stores over the past year, so it provided proforma financial statements to make the numbers more comparable.
This shows that the fall in revenues was considerable on a proforma basis in FY21. The good thing to come out of this pandemic is that the company has sharpened its focus on cost efficiency, and in FY21 nearly 71% of its revenues came from home deliveries. In FY20, the revenues from the delivery channel were 51%.
Another impact of the pandemic was lower operating cash flows. But the company’s ability to open KFC and Pizza Hut stores on a cluster model, and to tweak them to either be focussed on dine-in customers, takeaway or delivery, allows it flexibility to run its operations.
Free cash flows turned negative in FY21 as the company spent nearly Rs 230 crore on buying KFC stores from Yum Brands. The company has been doing this for the past three years, but in FY21 the pay-out was large compared to around Rs 29 crore in FY19.
Core brands make up majority of revenues
The company’s business is divided into core brands (KFC, Pizza Hut and Costa Coffee), international business (KFC and Pizza Hut stores in Nepal and Nigeria) and other businesses (own brands). At the end of FY21, its core brands and international business made up 94.2% of the company’s revenues.
The company has been adding new KFC stores and acquiring stores from Yum Brands, which has led to an increase in its store count. However, Pizza Hut faces stiff competition from Domino’s Pizza and is very much the runner-up in this space.
The company’s gross margins from core brands are pretty high. But with Costa Coffee, there have been many store closures in FY21 (down 30% YoY). The company doesn’t have exclusive franchisee rights for Costa Coffee anymore as these were terminated for not meeting targets.
The store additions and cost control in FY21 led to a rise in contribution margins of KFC stores as well as Pizza Hut. Costa Coffee’s contribution margins fell in FY21. The fact that the company can’t open more Costa Coffee stores without permission of Costa International is a dampener. It’s currently under discussions to sign a revised agreement with the franchiser with revised commitments.
On a gross basis, the company’s margins were 69.87% in FY21, while its contribution margins (sales less variable costs) were 16.65%. The EBITDA margins improved in FY21 to 20.0% from 16.85%, which seems to be due to rising operating leverage.
KFC a good play, but Pizza Hut and Costa Coffee are not
The company has been aggressive in adding KFC stores to its portfolio either by acquisitions or by setting up its own franchisee stores. Having an internationally recognisable, popular brand in its kitty bodes well. But Pizza Hut is not the go to brand that customers currently prefer for pizzas either while ordering in or dining in at restaurants.
The fact that the company isn’t the sole franchisee for KFC makes it more comparable to Westlife Development than Jubilant Foodworks. And, Costa Coffee faces stiff competition from Tata Starbucks, even if Devyani International is successful in signing a revised agreement with Costa International.
Devyani International is poised for growth considering how popular KFC is among customers. But its other core brands are not growing as fast as KFC, and are vying against popular competitors. The fact that it’s valued near Jubilant Foodworks on price-to-sales and price-to-book-value basis, makes it an expensive proposition. But it looks like there is enough demand for expensive loss-making companies in this primary market.