IPO Size: Rs. 2,073 cr – Entirely OFS

• Full exit to PE fund CX Partners’ 6.5% stake and part exit to Goldman Sachs (18% stake to reduce to 11%) and Edelweiss Fund (9% to reduce to 6%)
• Promoter Sapphire Foods Mauritius (promoted by Samara Capital) to reduce holding from 51% to 41%

Price band: Rs. 1,120-1,180 per share

Mcap: Rs. 7,500 cr, implying 28% dilution

IPO Date: Tue 9^th Nov to Thu 11^th Nov 2021, Listing: 18th Nov 2021

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Strengths:

1. Near Term Positive: Franchise operator for 483 QSR (quick service restaurants) KFC, Pizza Hut, Taco Bell in India, Sri Lanka. Sister franchisee Devyani International and peer Barbeque Nation reported turnaround in Q2FY22 net profit, which led to sharp run-up in their share price last week. This may have a positive rub-off on Sapphire IPO.
2. Valuation Discount to Peers: Enterprise value (EV) per restaurant of Rs. 15.6 cr is lower than Devyani’s Rs. 22 cr, Burger King’s Rs. 22 cr (despite lower margin) and Barbeque’s Rs. 40 cr. EV/EBITDA multiple of about 40x is lower than 50-70x for peers.

However, such high multiples are unsustainable over long term, given slim net margins of most players in the sector on high corporate overheads. Thus, Sapphire also reported net losses for all the fiscals from FY19 to FY21, with FY21’s net loss of Rs. 100 cr touching Rs. 75 cr loss in Q1FY22.   

Concerns:

1. Comparison with Devyani: Sapphire is smaller with 482 restaurants over 803 for Devyani, with historic new restaurant addition since FY19, also slower at 28% vis-à-vis 71% for Devyani. Despite 30% higher revenue per store, EBITDA margin 300-400 bps lower for Sapphire.
2. Higher Royalty Payout of 6-6.3% of revenue (same as Devyani) over 5% for Burger King and 3.5-4.5% for Jubilant and Westlife.
3. Promoter Pocketing at Company’s Expense: On 5^th Aug 2021, company issued shares at Rs. 505 per share and Rs. 544 per share to promoters Sapphire Food Mauritius and Edelweiss Fund respectively, both of which are among the selling shareholders in OFS.

Company gains nothing as IPO is pure OFS, but outgoing investors benefit at the cost of company and incoming investor.

Shares may have been allotted for whatever reason, but present OFS price of 2x last transaction price, barely 3 months ago is unjustified.