Verdict: Do not place an order!   

Rs. 1,838 cr IPO:

• 76% is OFS, equally by promoter Ravi Kant Jaipuria (76% to drop to 68%) and PE Temasek (14% to decline to 8%)
• 24% is fresh issue for Rs. 324 cr repayment of Rs. 400 cr debt

IPO Date: Wed 4^th Aug to Fri 6^th Aug 2021

Price band: Rs. 86-90 per share

Mcap: Rs. 10,822 cr, implying 17% dilution

75% allocation to QIBs and 10% for retail as loss making business

Listing: 16^th Aug 2021

Indian Franchisee of KFC and Pizza Hut

Of  696 stores, 284 are KFC outlets, accounting for 57% revenue and 317 are Pizza Hut outlets, contributing 26% to FY21 revenue of Rs. 1,134 cr. KFC is company’s largest brand, but its 68% gross margin is lower than Pizza Hut’s 74% and Costa Coffee’s 79%, taking overall gross margin to 70%. Due to KFC’s higher average daily store revenue of Rs. 1 lakh over Rs. 40,000 for Pizza Hut, former’s store level margin (excluding rental cost), at 18%, is higher than both Pizza Hut (13%) and Costa Coffee (16%) for FY21.

Peer Comparison

• Devyani’s 70% gross margin is higher than 65% of Westlife and Burger King, but much lower than Jubilant’s 78%.
• Devyani pays 6.3% royalty, which is the highest, as Burger King’s royalty is capped at 5% of revenue, while Jubilant and Westlife pay 3.5-4.5%.
• Devyani’s average daily sales per store of ~ Rs. 40,000 in Q4FY21 is quite low, as peers clock Rs. 80,000-1,00,000. Multiple formats in a single company lead to only Rs. 1,500 cr topline, despite a large store count of ~700. Westlife clocks this kind of revenue on just 310 stores, while Jubilant’s revenue is nearly Rs. 4,000 cr on 1,400 stores. Thus, store turnover trails peers.

Loss Making in All 3 Previous Fiscals

Being profitable at store level does not help, as corporate overheads are massive, keeping path to positive PAT uncertain. While company level EBITDA is ~20%, depreciation, interest, lease liability, aggregating Rs. 400 cr annually, lead to losses for all 3 financial years, from FY19 to FY21. Impairment worth Rs.48 crore worsened profitability in FY21, with LBT (before exceptions) doubling to Rs. 139 cr, from Rs. 71 cr in FY19. Company has availed moratorium on Rs. 17 cr borrowing, highlighting cash flow stress. Accumulated losses have eroded the reserves, with net worth (31.3.21) falling to equity and BVPS being same, as face value of Re.1, which will however rise to Rs. 4.6 post fresh issue.

Valuation

Devyani’s Rs. 10,800 cr mcap and 7x revenue multiple is quite aggressive, as Westlife is ruling at Rs. 8,400 mcap and 6x sales multiple for similar revenue, despite higher per store turnover and intermittent quarters of profit.

After sequential improvement in unit economics in both Q3 and Q4 of FY21, near term outlook for QSR chains remains cautions, as net margin for Jubilant, strongest in the pack due to digital penetration and inherent cost advantage in pizzas, slipped to 7.7% in Q1FY22 from 10.1% QoQ, implying Devyani will have to see some more red before it can hope it get into the black, which is also a long time away.

Bumper listing of Zomato and Burger King have accentuated appetite for QSR stocks, opening debate between value of making food against value of delivering food. But bottomline for investors is to not get carried away by high-recall consumer brand names and instead focus on bottomlines, which is the ultimate valuation driver.

Conclusion

Weaker competitive metrics coupled with mounting losses and no certain path to profitability make this IPO risky. Hence, we do not advise applying in the same.

Grey Market Premium (GMP) of Devyani International: Grey Market Premium of Devyani International 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.