Gaurav Garg, head of research at CapitalVia Global Research, says Devyani International is not better than rival Jubilant FoodWorks, which is profitable and has a proven and consistent track record.
The Rs 1,838 crore initial public offering by Devyani International, a franchisee of KFC and Pizza Hut stores in India, closes on August 6. The issue is priced at Rs 86 to Rs 90 a share.
Still, Devyani International commands a grey market premium of about 60 percent and indications are it is headed for a bumper listing, Gard said in an interview to Moneycontrol’s Sunil Shankar Matkar. Edited excerpts:
Q: Do you think the Devyani International IPO is reasonably priced? Is pricing an IPO below Rs 100 a share by Devyani (like Zomato) a good strategy to attract the retail public?
Yes, I believe this strategy helps issuers to attract retailers, as previously companies like Zomato and Burger King did the same and became successful. However, a small ticket price does not indicate whether the stock is undervalued or not – investors should do their own research before investing.
Now Devyani International is about to get listed and the grey market premium is about 60 percent, indicating that this stock will also have a bumper listing.
Q: Is it better to apply for the Devyani International IPO than invest in listed peers Jubilant FoodWorks, Westlife Development and Burger King India? Why should investors subscribe to Devyani International?
I don’t believe Devyani International is a better choice… as Jubilant FoodWorks has a lot better financials in terms of profitability and a proven track record with consistency. If one is about the potential of the quick service restaurant (QSR) space in India, then this IPO is also a good option for investors. Investors should consider buying any IPO based on growth prospects and upcoming demand.
Q: Do you expect the Devyani International IPO to surpass subscription figures of the Zomato IPO?
One factor that might help the Devyani International IPO is the fear of missing out as many retail investors missed allotment in Zomato. On day 2, Devyani has achieved a total IPO subscription of more than 6.73x and I believe subscription will cross 50x as compared to 38.25x for Zomato.
Q: Why are investors so interested in companies like Devyani International and Zomato, which are loss making?
2021 is the year when many QSR businesses have launched IPOs and remain in flavour, especially during these times, and better cashflows along with a lower price/sales ratio than other QSRs are factors attracting investors. Future growth, along with better expected cashflows in FY22-25, is another lure.
Also read - Devyani International, KFC and Pizza Hut operator, opens IPO today: Should you grab a bite?
Q: Devyani International has made losses in the three years to FY21, as reported in the prospectus. Will it turn profitable after a couple of years?
It is difficult to comment on profitability, but I believe cashflows are likely to increase significantly in the coming financial years. Sustainability in cashflows, along with lifestyle changes, especially in urban areas, might boost the balance sheet.
Q: How should investors evaluate Devyani International before subscribing to the IPO?
The company has a lower price/sales ratio compared with other QSRs, which is one of the major advantages… However, the EPS is negative and might take at least a few years to improve…
Other issues had given better gains, which include Barbeque Nation, Burger King and Jubilant FoodWorks.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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