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Bumper opening for Burger King: Should investors sell or hold?

In the long term, it is expected to pick up pace as it plans to expand its restaurant network, continue building brand recall value, managing cost efficiency to expand margins and introducing new products on a timely basis, Ajit Mishra of Religare Broking said.

December 14, 2020 / 03:19 PM IST

Burger King India, the Indian subsidiary of the US-based Burger King, has made investors' wealthier as the stock more than doubled on its market debut on December 14.

Burger King India started that day with a bumper listing gain of 87.5 percent at Rs 112.50 on the National Stock Exchange and extended gains up to 125 percent to hit an intraday high of Rs 135.

The stock was trading at Rs 134.50, up 124.2 percent with a volume of 17,74,36,531 equity shares, at the time of publishing this copy.

Given the huge growth potential and expected re-rating in coming years, experts advise long-term investors to hold the stock but say short-term investors can book profits.

"Such listing was in line with our expectation as the company issue was priced at a significant discount compared to listed peers such as Jubilant FoodWorks (Domino's Pizza) and Westlife Development (McDonald's). Short-term investors can book profit. We advise long-term investors to stay invested in the company as there is ample scope available for the company to increase its business in India," Keshav Lahoti, Associate Equity Analyst at Angel Broking told Moneycontrol.

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"Even after such bumper listing, there is no issue with the valuation of the company. In the future, we expect the company to gain market share by opening more stores compared with the competitors. As the store count will increase, operating leverage will kick in and the company will be able to report profit and it will lead re-rating of the multiple for the stock," he said.

Prashanth Tapse, AVP Research at Mehta Equities, also advised holding on to the stock, considering the long-term story in quick services restaurant (QSR) as the market always rewards a player, which has the growth potential with high returns.

"Well considering Burger King's healthy store expansion plans from current 261 restaurants to have 370 stores by the end of December 2022 and 700 stores by December 2026 looks ambitious and as an investor with risk- reward of time, it is something like private equity type which can be a multibagger story if planned expansion gets executed and it can make wonders in next two years of the investing horizon," he said.

If investors wish to add on Burger King on the listing day, they can do it only if the listing is below Rs 90 per share, Tapse said.

If Burger King witnesses strong listing then, Ajit Mishra, VP Research at Religare Broking, said the strategy would be to sell part shares and hold the rest for the long term.

The QSR chain owned by QSR Asia continued to report losses in previous financial years but there has been strong growth in revenue and stable gross margin performance.

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Burger King, which enjoys exclusive national master franchisee rights in India till December 2039 and royalty rate with capping at 5 percent of sales, reported revenue growth at a 49 percent CAGR and EBITDA at a CAGR of 258 percent during FY18-FY20, backed by strong additions in restaurants during the period.

"Burger King is well placed in the QSR chain space and it is one of the fastest-growing companies. In the long term, it is expected to pick up pace as it plans to expand its restaurant network, continue building brand recall value, managing cost efficiency to expand margins and introducing new products on a timely basis," Mishra said.

"Needless to say, it has a globally recognised brand name, wide varieties of products for its customers and a well-managed supply chain model which would augur well for its growth," he added.

Burger King is the second-largest fast-food burger brands globally as measured by the number of restaurants, with a global network of 18,675 restaurants in more than 100 countries and US territories as on September 2020.

As of November 25, it had 259 owned Burger King restaurants and nine sub-franchised Burger King restaurants, of which 249 were operational, including two sub-franchised Burger King restaurants.

It launched brands from flagship locations in high traffic and high visibility locations in key metropolitan areas and cities across India and then developed new restaurants within that cluster.

"This approach also helps us to efficiently manage our vertically managed and scalable supply chain and drive down costs, due to the proximity of our restaurants to each other and to the distribution centres of our third-party distributor," Burger King said.

"We are optimistic on Burger King's growth story considering improving organised industry growth benefiting from reduced competition from unorganized restos due to COVID-related challenges and expansion of its outlets wherein Burger King is well-positioned to expand its footprint in India," Tapse said.

Burger King raised Rs 810 crore through its public issue which was subscribed 156.65 times during December 2-4. The company would utilise net proceeds (from Rs 450 crore fresh issue) for debt repayment and store expansion.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Dec 14, 2020 01:49 pm
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