Verdict: This burger is neither tasty, nor healthy!

IPO Snapshot:

Burger King is launching Rs. 810 crore IPO between Wed 2^nd Dec 2020 to Fri 4^th Dec, 55% or Rs. 450 crore of which is fresh issue and balance an offer for sale (OFS) of 6 crore equity shares, by PE Everstone-controlled promoter QSR Asia, in the price band of Rs. 59-60 per share. Total issue indicates large dilution of 35%, reserved 75:15:10 for institutions, HNIs and retail investors respectively. Listing is likely by 14^th December.

Objects of Issue: Funding New Restaurants

To fund covid stress, company has increased fresh issue size by 50% from Rs. 400 crore as per Nov 2019 DRHP, to Rs. 600 crore now, of which, Rs. 150 crore has been raised via pre-IPO placement to promoter (Rs. 58 crore rights at Rs.44/sh) and PE Amansa (Rs. 92 crore at Rs. 58.50/sh in Nov 2020). Fresh issue proceeds will re-pay Rs. 165 crore debt taken to open ~60 restaurants in FY20 and Rs. 177 crore will be used to open ~65 more, as company is required to have 700 restaurants by 31.12.26 under franchisee agreement, while it has only 260 till date, despite beginning operations 6 years ago.

Loss-making for all Reported Financial Periods:

FY20 revenue was Rs. 841 crore, on same store sales de-growth of 0.3% and barely Rs. 20 crore EBITDA (2.4% margin), with net loss widening to Rs. 72 crore from Rs. 38 crore YoY. Even in a seasonally strong Q1FY20, net loss was Rs. 2 crore on Rs. 212 crore revenue. Infact, PBT, excluding other income, has been negative for every fiscal from FY17 to FY20, H1FY20 and H1FY21 (when loss swelled to Rs. 133 crore). Since operations have reached only 70-80% of pre-covid levels (similar to Jubilant Food and Westlife), H2FY21 will also be dismal, as footfalls in food courts of malls is still sub-optimal, where a large percentage of company’s restaurants are located. Thus, few more years of negative bottomline looks real!

Weak Competitive Positioning:

• Burger King’s outlet and revenue market share is 4%/5% among QSR chains, whereas McDonalds’ 7% outlet share gives it 11% revenue share, implying company lags competition, despite 6 years of presence and similar APC of Rs. 200-250.
• Burger King’s expense structure is lop-sided in comparison to Jubilant, with 4-5% royalty against latter’s 3-4% and raw material cost at 36% of sales over 25% for Jubilant. Thus, Jubilant’s 21-23% EBITDA margin and 7-8% net margin can be wishful thinking for Burger King even few years down the line. This is supported by Westlife reporting negative PBT excluding other income, in 5 of 6 fiscals between FY15-20, raising questions on business fundamentals and sustainable profits.

No Appropriate Benchmarking:

Jubilant Food’s PE of 100+ times is unfounded, even when it is making 7% net margin! Westlife’s losses/marginal profits also don’t make it an appropriate comparative. Moreover, Burger King’s 38 crore outstanding equity shares, post IPO is too large to service against 13-16 crore for Jubilant and Westlife.

Poor Industry and Promoter Track-Record:

Except for Jubilant Food, domestic food service industry has not rewarded investors, despite tailwinds of changing eating-out habits and increasing penetration. Be it the largest café chain under Coffee Day or Speciality Restaurants whose market cap shrunk 75% in past 8 years. Everstone’s portfolio companies too have failed to create investor wealth, with Indostar’s share price halving in 2.5 years since 2018 IPO while S Chand’s correcting 90% in past 4 years.

Conclusion:

Weak company fundamentals, highly competitive industry and covid delaying recovery make this IPO a clear avoid.

Grey Market Premium (GMP) of Burger King: Grey Market Premium of Burger King is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.