Sapphire Foods India or Devyani International Which YUM! Brands franchise should you select for your Portfolio? | Sapphire Foods IPO- 6-Point Detailed Analysis

Sapphire Foods India, the largest franchise operator of YUM! Brands in India in terms of revenue of FY20 are coming up with its Initial Public Offering (IPO) of around Rs. 2,073 Cr. The IPO purely consists of Offer for Sale and the window will be opened between 9^th November to 11^th November 2021. The company functions in the foodservice market which is becoming highly competitive with big players like Jubilant FoodWorks, Westlife, Burger King, and the closest competitor Devyani International, which is another YUM! Brands franchise in India. So Should you apply for this IPO or should select another player from this QSR space for your portfolio. Get the answer to this question and many others by going through this article.

1) IPO Details:

• The IPO Window of Sapphire Foods is open between 9^th November 2021 to 11^th November 2021.
• The Issue Size of the IPO is Rs. 2,073 Cr. which consists of only Offer for Sale.
• The IPO consists of an Offer for Sale (OFS) worth Rs. 2,073 Cr. The OFS consist of selling 17,569,941 Equity Shares.
• The IPO is getting listed at both the stock exchange- Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
• The price band of the IPO is Rs. 1,120 to Rs. 1,180 per equity share.
• The Face Value is Rs. 10 per equity share.
• The Investor Quota of the IPO is as follows Qualified Institutional Buyers (QIB)- 75%, Non-Institutional Investors (NIIs)-15%, and Retail Investors- 10%.
• The IPO Lot consists of 12 shares in 1 lot and multiples thereof up to 14 Lots.
• The Allotment Date for Sapphire Foods IPO is 16^th November 2021 and it will get listed on the Stock Exchange on 22^nd November 2021.
• The objective of the Issue :
• To allow selling shareholders to sell up to 17,569,941 Equity Shares
• To achieve the benefit of listing in the stock exchange
• Enhancement of Company’s brand name and creation of a public market for company’s equity shares in India
• The stake of Promoter’s & Promoter’s Group in the company Pre-IPO was 60.08% which will go down to 49.97% post listing of the IPO.
• The Selling Shareholders are:

i) Promoter & Promoter’s Group:

• QSR Management Trust- Up to 8.5 Lakh Shares
• Sapphire Foods Mauritius Limited- Up to 55.69 Lakh Shares

ii) Investors (No. of Equity Shares):

• WWD Ruby Limited.- Up to 48.46 Lakh
• Amethyst Private Limited- Up to 39.61 Lakh
• AAJV Investment Trust- 80,169
• Edelweiss Crossover Opportunities Fund: 16.15 Lakh
• Edelweiss Crossover Opportunities Fund Series II- 6.46 Lakh

2) About Company:

• Sapphire Foods is one of the YUM’s franchisee operators in the Indian Subcontinent. Also, the company is the largest QSR Chain in Sri Lanka in terms of revenue.
• As of June 30, 2021, the company owned and operated 209 KFC restaurants in India and the Maldives, 239 Pizza Hut restaurants in India, Sri Lanka and the Maldives, and two Taco Bell restaurants in Sri Lanka.
• The Company aspires to be India’s best restaurant operator by serving customers with great food with great experience at a great value.
• The franchise agreement with YUM allows the company to operate, on a non-exclusive basis, under the KFC brand in several states in India, and across the Maldives, the Pizza Hut brand in several states in India and across Sri Lanka and the Maldives, and the Taco Bell brand across Sri Lanka.
• The company’s association with Yum started in 2015 and they presently have the non-exclusive rights to operate restaurants under 3 of YUM’s leading brands, namely, the KFC, Pizza Hut, and Taco Bell brands in the Territories.
• They operate warehouses across 5 cities in India to service their restaurants in India. They have also adopted YUM’s global online and digital channel solutions to enhance the customer experience in both their physical and digital restaurants and achieve operating efficiency and financial controls within their organizations.

Geographical Presence:

• The company follows a cluster strategy, and launch brands from flagship locations in high traffic and high visibility locations in key metropolitan areas and cities across India and then develop new restaurants within that cluster
• As of 30^th June 2021, Sapphire Foods is having 379 stores in India owing to 208 stores of KFC and 171 stores for Pizza Hut.
• While, in Sri Lanka, the company is having 69 outlets as of 30^th June 2021 where 67 stores account for Pizza Hut and 2 for Taco Bell.

Store Count:

• The Store Growth Rate in CAGR terms of Sapphire Food has been 7.8% between FY19 to FY21.
• The total store as of FY19 was 376, which rose to 427 in FY20, then 437 in FY21, and 482 until the quarter ended 30^th September 2021.
• The Same Store Sales Growth (SSSG) of the company is also not up to the mark and is trying to reach the pre-covid levels. The SSSG growth of KFC, Pizza Hut, and Gamma Lanka for FY19 was 13.9%, 5%, and 8% respectively. But as of FY21, the SSSG of these stores is in the negative region FY21.
• The negative SSSG is primarily due to Covid-19 related restrictions which have highly affected the operations of the company across the stores.

3) Industry Overview:

• The food services market in India has shown consistent growth since FY15 and its revenue was estimated at Rs. 4.23 Lakh Cr. in FY20. The food services market in India is projected to grow at a CAGR of 8.0% from FY20 to FY25 and is expected to reach Rs. 6.2 Lakh Cr. by FY25.
• The organized Food Service Market has been consistently growing at a notable pace and is expected to continue the same trend. While Unorganized Food Service Market is witnessing a reversal trend.
• Key Growth Drivers:
• Young Population- Median Age- 28.1 Years
•  Increasing Urbanization
• Growing Middle Class
• Growing Number of Large Cities
• Nuclearization

Chain QSR Sub-Segment:

• In India, the International QSR players dominate the market in both terms- Outlet & Revenue.
• In terms of Outlet, 57% of the market share is held by International QSR players, while only 42% market share is owned by Domestic Players.
• Further, moving to market share in revenue terms, then here again International QSR players owns 78% market share while Domestic player only holds 22% market share.
• As of FY21, Domino’s owns leading 18% market share in terms of outlet and 23% in terms of revenue. Other leading QSR players in the country are McDonald’s, KFC, Pizza Hut, Burger King, and others.
• Key Growth Drivers of QSR Segment
• India-centric offerings and shifting consumer needs to drive the QSR market.
• Younger demographics fueling the growth of the international chain.
• Technology developments

4) Financials:

i) Revenue & EBITDA:

• The Revenue of the company has shown a de-growth of 8.6% on a CAGR basis between FY19 to FY21.
• The Revenue of the company stood at Rs. 1,194 Cr. in FY19, which rose to Rs. 1,340 Cr. in FY20, but then dipped to Rs. 1,020 Cr. and Rs. 303 Cr. in FY21 and Q1FY22 respectively.
• The EBITDA of the company has also shown a similar trend like Revenue, where EBITDA has increased from Rs. 149 Cr. in FY19 to Rs. 186 Cr. in FY20, but again fallen to Rs. 179 Cr. in FY21, and Rs. 43 Cr. in Q1FY22.
• The EBITDA margin has shown an upward trend from 12.5% in FY19 to 13.9% in FY20, and finally to 17.5% in FY21.
• The company in terms of profitability has not turned profitable yet and has reported losses continuously for the last 3 years which are: FY19 (-69.4 Cr.), FY20 (-159.3 Cr.), and FY21 (-99.9 Cr.).

ii) Restaurant-wise Revenue & EBITDA:

The restaurant-wise from revenue and EBITDA are as follows:

Peer Comparison:

Sapphire Foods India Limited Vs. Devyani International Limited

i) Quick Comparison:

ii) Quick Comparison- Yum! Brands:

a) KFC:

Devyani International

Sapphire Foods:

b) Pizza Hut:

Devyani International

Sapphire Foods:

5) Key Strengths & Risks:

Key Strengths:

i) Leading QSR brands with a substantial market presence and scale:

• Sapphire Foods is an omnichannel player, leveraging brick-and-mortar restaurants and digital stores to provide dine-in, delivery, and takeaway services

ii) Strong relationship with YUM:

• The association of Sapphire Foods with YUM started in 2015 and presently company has the non-exclusive rights to operate restaurants under three of YUM’s leading brands, namely, the KFC, Pizza Hut, and Taco Bell brands.
• The company also enjoys access to YUM’s system and system property and expertise in building and establishing brands and operating large-scale restaurants chains gained through over 50,000 KFC, Pizza Hut, and Taco Bell restaurants operated by YUM and its franchisees worldwide as of December 31, 2020.

iii) Continuous focus on delivering a great customer experience

• The company strive to create a best-in-class experience for customers by developing the right work culture and environment at the restaurant level

iv) Operational Excellence

v) Scalable new restaurant economic model for expansion

vi) 60 Great place to work led by the experienced management team and backed by institutional capital

Key Risks:

i) The Company is not able to generate profit yet:

• The company has reported a loss for continuous 3 years of FY19, FY20, and FY21. Also, in the first quarter of FY22, the loss of the company stood at Rs. 26.4 Cr.

ii) The company may suffer uninsured losses exceeding limits

iii) The company is having negative cash flows in the past.

iv) The Company have incurred indebtedness and may incur additional indebtedness in the future

• As of June 30, 2021, we had Rs. 95 Cr. of aggregate outstanding term loan from banks (secured) and bank overdraft (unsecured), comprising Rs. 93 Cr. of term loans from banks and other financial institutions (secured), and Rs. 1.8 Cr. of bank overdraft (unsecured).

v) There are material outstanding legal proceedings involving Company, Subsidiaries, and Directors

vi) Increased competition in the QSR chain sub-segment may adversely affect business, results of operation, and financial condition

vii) Reliance on the third party for warehousing and logistic services

6) Valuations:

• Sapphire Foods India Limited is having negative EPS and hence its Price-to-Earnings Ratio (P/E) cannot be calculated.
• The Expected market cap of the company at the time of listing is around Rs. 7,500 Cr.
• The Company’s Market Cap to Sales Ratio stands at 7x.
• The other listed players in the market include big names like Jubilant Foodworks, Westlife Development, Burger King, and Devyani International Limited, which is another franchise of YUM! Brands in India

Should you Invest?

The foodservice market or specifically the QSR market has huge growth potential in India and strong brand names like Domino’s, KFC, Pizza Hut, etc. will surely lead the game. Sapphire Foods and Devyani International are the franchise of YUM! Brands that own KFC, Pizza Hut, etc Devyani International has recently listed in the stock market on August 2021 and now it’s the time for Sapphire Foods. Currently, the Grey Market Premium of Sapphire Foods IPO is trading at around Rs. 120 per share, and hence individuals seeking listing gains can enjoy some benefit of it. But for investors with a long-term horizon, needs to assess the industry, key players as well as the closest player- Devyani International as well. Do proper research and study before investing in the IPO or do consult a financial advisor before making any investing decisions.