Sapphire Foods, the operator of KFC and Pizza Hut, is floating its initial public offering for subscription today. Experts are upbeat about the issue, thanks to its reasonable valuations compared to peers, improving operating performance, and substantial market presence.
The company aims to mobilise Rs 2,073 crore through its public issue at the upper end of a price band of Rs 1,120-1,180 per share. It is entirely an offer-for-sale by promoters QSR Management Trust and Sapphire Foods Mauritius, and investors WWD Ruby, Amethyst, AAJV Investment Trust and Edelweiss Crossover Opportunities Fund.
Sapphire is the second public issue to open for subscription this week after the Paytm IPO that was launched on November 8.
“In terms of valuations, the post-issue FY21 enterprises value-to-sales works out 7.4x (at the upper end of the issue price band), which is low compared to its peers Devyani International (FY21 EV/Sales -16.3x). Further, Sapphire Foods India has a better revenue per store compared to Devyani International," said Angel One, adding that on the EBITDA (earnings before interest, tax, depreciation and amortisation) front, the company shows sustained improvement.
Considering all the positive factors, the brokerage believes this valuation is at reasonable levels. Thus, it recommended a subscribe rating on the issue.
Incorporated in November 2009, Sapphire Foods is YUM's largest franchisee operator in the Indian subcontinent with revenue from operations of Rs 1,020 crore for FY21 that declined from Rs 1,340 crore in FY20 because of the pandemic. Loss for the year FY21 narrowed to Rs 99.89 crore from Rs 159.25 crore a year ago.
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In the June 2021 quarter, losses reduced to Rs 26.4 crore from Rs 75.17 crore in Q1FY21 and revenue in the same period increased significantly to Rs 303.05 crore from Rs 110.99 crore on a low base last year.
The issue is reasonably valued even on the basis of market cap-to-sales ratio. The reason to make the IPO price attractive is the impact of COVID on the company’s performance, experts feel.
“Quick service restaurant (QSR) companies are currently trading at a market-cap-to-sales ratio ranging from 8.9x for Westlife Development to 15.5x for Devyani International, the average sector multiple is 13.1x. The Sapphire Foods IPO is decently priced, it’s offered at a market-cap-to-sales ratio of 6.78x to its FY21 sales. Pricing becomes more lucrative considering the fact that during FY21, sales got impacted due to the COVID-related lockdowns and protocols,” said KRChoksey Research.
The brokerage recommended subscribe to the issue for both listing gains as well as long term wealth creation.
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Marwadi Financial Services also assigned the subscribe rating to this IPO as the company is a leading QSR brand with a substantial market presence and has scalable new restaurant economic model for expansion. Also, “it is available at a reasonable valuation as compared to its peers”.
Sapphire Foods' association with Yum started in 2015 and they presently have the non-exclusive rights to operate restaurants under three of YUM's leading brands, namely, the KFC, Pizza Hut and Taco Bell brands in the Territories. As of June 30, 2021, they 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. Total number of restaurants stood at 450 in June 2021.
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These brands are well known globally. In 2020, YUM brands KFC, Pizza Hut and Taco Bell recorded worldwide sales of $26.2 billion, $11.9 billion and $11.7 billion, respectively. Collectively, their worldwide sales are highest in the QSR segment.
“This particular edge gives it an upper hand over other competing options that consumers have. We believe that with the opening up of the economy, there will be a natural traction in footfalls to the store on account of brands the company offers. The company is offering these brands on non-exclusive basis in India and is the only franchise in Sri Lanka and Maldives,” said KRChoksey Research.
Risks and Concerns
Slowdown in the economy or COVID-like crisis, consistently posting losses, food inflation, consumers shying away with the “junk food” perception are some of key risks highlighted by analysts.
Angel One pointed out two risks: (a) Sapphire Foods is making continuous losses on the bottomline, hence profit concerns remain unresolved; and (b) slowdown in the economy could impact the overall revenue of the company (discretionary in nature).
KRChoksey highlighted some more risks. (a) Changes or slowdown in the pace of consumer food habits or any negative perception about QSR industry will have impact the company’s business and reputation. (b) The company is dependent on its agreements with YUM for its business, inability to renew these agreements or termination of the same will have a material adverse impact on company's financials, operations and business. (c) Any further outbreak of COVID-19 pandemic is not completely ruled out, which may have unfavourable impact on the business. (d) Higher food inflation may put pressure on margins.
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Marwadi Financial Services said a failure or deterioration in the quality control systems for the supply chain or restaurants could lead to the termination of the Franchisee Arrangement, and have an adverse effect on the business, reputation, results of operations and financial condition. “The company have had negative cash flows for the three months ended June 2021 and 2020 and the financial years 2021, 2020 and 2019, and may have negative cash flows in the future,” it said.
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