Considering the discounted valuation compared with peers and prospects of strong business growth, Choice Broking has assigned the 'subscribe' rating to the IPO of Devyani International, the largest franchisee of Yum! Brands in India, senior analyst Satish Kumar said.
He said the company, which operates 284 stores of KFC, 317 stores of Pizza Hut and 44 of Costa Coffee as of June 30, 2021, had bright prospects.
"These brands are well perceived in India as well as globally. Devyani's operated cash flow (OCF) margin also remained at a healthy level at an average around 20 percent during FY19-FY21. The company has implemented strategies to boost margin and profitability," he told Moneycontrol's Sunil Shankar Matkar, in an interview.
With the likely strong boost in revenue and margin, cash flow generation is expected to remain healthy, he said. Edited Excerpts:
Do you think KFC & Pizza Hut operator Devyani International is reasonably priced? Is the pricing below Rs 100 by Devyani (like Zomato) a good strategy to attract retail public in the IPO?
Favorable quick service restaurant (QSR) industry scenario represents ample growth opportunities for Devyani International, which is amongst the largest operators of chain QSR in India. Busier lifestyles, increasing youth exposure to western foods, short service time, higher number of stores and entry of food delivery channel Zomato & Swiggy is driving strong growth for QSR.
On the valuation front, at the higher price band of Rs 90, the Devyani issue is valued at enterprise value (EV)/sales of 9.8x as compared to peer average of 11.7x. On price-to-sales (P/S) multiple basis, issue is valued at P/S at 8.4x as compared to peer average of 11x. Thereby considering the fundamental and valuation, we think the issue is reasonably priced compared to reported peers.
Also read: Devyani international IPO to open next week: 10 things to know before subscribing public issue
For IPO, retail investors apply in lot (1 lot of Rs 14,850), but yes retail participation remains high in low price share in the secondary market due to sentimental impact.
Is it better to apply for Devyani International IPO than investing in listed peers Jubilant Foodworks, Westlife Development and Burger King India? Why should investors subscribe to Devyani International?
Considering the discounted valuation to peers and likelihood of strong business growth going forward, we assign 'subscribe' rating to the issue. As of June 30, 2021, the company operates 284 stores of KFC, 317 stores of Pizza Hut and 44 of Costa Coffee. These brands are well perceived in India as well as globally. Devyani's operated cash flow (OCF) margin also remained at a healthy level at average around 20 percent during FY19-FY21. The company has implemented strategies to boost margin and profitability. With the likely strong boost in revenue and margin, cash flow generation is expected to remain healthy.
Do you expect Devyani International IPO to surpass subscription figures of Zomato’s IPO?
The company operates in QSR segment which is likely to drive the strong interest from investors. Furthermore, availability of surplus liquidity in the market and recent success in the IPOs, we feel this IPO may also have respectable subscription level. On surpassing the subscription figure of Zomato, we can't comment as subscription data are dependent on short term demand and supply dynamic.
Why are investors so interested in companies like Devyani International and Zomato, which are currently loss making?
Investors' interest is driven by the strong industry prospect in India in which these companies operate. Within the food services sector, QSR sales share is increasing at a brisk pace (34 percent in 2020) compared to full-service restaurants (15 percent) and pub, club and bar (27.1 percent). India is a younger country with a median age of 28.7 years in 2020. Increasing youth exposure to western foods, short service time of QSR, higher number of stores and entry of food delivery channel Zomato & Swiggy is driving strong growth for QSR.
Will Devyani International turn profitable after a couple of years?
The company is loss making in the last three reported years despite generating EBIDTA margin at satisfactory level of average 17.3 percent over FY19-FY21. Bottomline is impacted by high finance cost. Devyani International will utilize Rs 324 crore from the fresh proceed to repayment of debt which in turn will aid the company to improve net profit margin. With the likely strong growth in revenue and improvement in EBIDTA margin, the company will turn profitable.
How should investors evaluate Devyani International before subscribing IPO?
QSR channel is expected to lead the food services sector in terms of sales value and transactions. Investors should evaluate the strategies that the company is adopting to adequately leverage the growth opportunities that the sector is offering. The company has rationalized non-performing airport stores, shifted rental agreements to revenue sharing instead of fixed rental, doing menu re-engineering and is focusing on delivery-oriented business. We view these business strategies bode well for Devyani to expand business going forward.
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