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Devyani International IPO :Can it deliver a Listing Gain?

by tavaga

Gurugram Based, Devyani International, a food and beverage major and the largest franchisee of Yum Brands in India which operates KFC, Taco Bell, Pizza Hut, and Costa Coffee, is all set to take off its IPO. After the successful listings of Barbeque Nation and Burger King, this will be the third restaurant chain to raise funds through an IPO in 2020-2021.

IPO Snapshot

Shareholding Pattern 

The Promoters include Ravi Kanth Jaipura, his son Varun Jaipura and RJ Corp. RJ Corp is also run under the leadership of Ravi Kanth. Ravi Kanth is also the chairperson of a listed company called Varun Beverages. RJ Corp has the highest shareholding percentage of 69.76% and they are offloading 7.8% of their stake in the IPO. 

Dunearn is offloading almost 40% of its stake.

The objective of the Issue

The proceeds from the Offer for Sale will be deposited directly into the selling shareholders’ bank accounts.

Rs. 3578 million raised from the fresh issue will be used to make repayment of the debt.

The amount left over from the fresh issue proceeds will be used to meet general corporate purposes.

Industry Overview

Quick Service Restaurants (QSR) channel grew at the fastest rate of all foodservice channels, with a CAGR of 5.5%. Their ability to provide affordable meals with quick service helped them grow significantly. 

KFC, McDonald’s, and Burger King have been investing to increase their market share. Because take away accounts for a substantial amount of the channel’s sales, it was able to survive the pandemic in 2020. The channel is projected to continue to grow at a significant rate in the future years.

Company Overview

Yum Brands largest franchisee in India is Devyani International. In 1997, they started working with Yum Brands and opened their first Pizza Hut location in Jaipur.

Their business has three divisions:-

1- Stores of Pizza Hut, KFC, and Costa Coffee operated in India (Core Brand Business).

2- Stores of Pizza Hut and KFC operated outside India in Nepal and Nigeria (International Business).

3- Operations in the food and beverages industry, including stores of brands Food Street and Vaango (Other Business).

Revenue from Operations of their Core Brand Business and International Business has done well. 

Brand Arrangements with Parent Company YUM Brands

KFC and Pizza hut have to provide Continuing fee of 6.3% of revenues for each KFC and Pizza Hut store as consideration for the right to use the restaurant operating systems.

They are also required to pay YUM Brands a non-refundable one-time fee upon the opening of each store and a renewal fee each time they renew the Technology license agreement (TLA)/ Trademark license agreement (TMA) for a particular store.

They must also pay YUM Brands 6% of gross revenues (excluding taxes) for each KFC and Pizza Hut store towards marketing and advertising costs.

Key Operating Metrics

Same-Store Sales Growth (SSSG) of Devyani International is pretty bad and it has been negative for Pizza Hut and Costa Coffee. 

The Revenue from Operations has increased only for KFC but decreased for Pizza Hut and Costa Coffee. The increase in revenue of KFC could be due to the increase in the number of stores. This indicates the restaurants are operationally inefficient.

The Gross Margin of all three brands is pretty good but their fixed cost or operational cost is very high due to which the company is incurring losses.

Financials 

Revenue from Operations has dropped drastically from FY 20 to FY 21. There is almost a 25% drop in revenue. 

It has incurred losses for 3 continuous years. The loss increased by 29% from FY 19 to FY 20 and decreased by 49% from FY 20 to FY 21 which indicates that it is not stable.

Their cash flows have remained positive which is a good sign. 

Some of their group companies of the Promoters have been loss-making.

Peer Comparison

The major competitors for the company are Jubilant Food Works (Dominos), Westlife Development (McDonald’s), and Burger King.

Jubilant Food Works is far ahead of most of the other competitors in most of the comparison metrics.

CompanyTotal Income (in Rs. Million)EPS (Earnings per share)Return on Net Worth (RoNW)P/E (Price Earnings)Industry P/ESSSG for FY20Store EBITDA
Devyani International11,988.95-0.50-48.52131-1.63%16-18%
Jubilant Food Works39,968.9021.2224.951321313.2%21-23%
Westlife Development10,303.32-6.3820.661314%13-15%
Burger King 8468.29-2.8727.80131-0.3%12-14%
Source: RHP, Tavaga Research

The Balancing Act 

Positives

Negatives

Grey Market Premium 

The grey market premium for the IPO stood a premium of Rs 59 to Rs 62. The shares were trading at a range of Rs 145 to Rs 149 per share on the grey market.

What can investors expect?

The QSR industry is growing and expanding, the future of the QSR industry also seems bright but Devyani’s stores are not keeping pace with the SSSG numbers. Also, there are a lot of competitors in the QSR field along with other competitors like Full Service Restaurants (FSR), Ice-cream parlours, Coffee Cafes. 

Disclaimer: This write up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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