Devyani International IPO: Date, Price Band & Review

Devyani International IPO: Date, Price Band & Review

Devyani International IPO opens for subscription on 4th August. The company is looking to raise Rs 1,838 crore through the public issue. Here are the details:

About the issue

Devyani International IPO Date: 4th August – 6th August 2021

Devyani International IPO Price band: Rs 86 – 90 per share

Issue Size: Rs 1,838 crore (Fresh equity shares worth Rs 440 crore and offer for sale by promoters and shareholders worth Rs 1,398 crore.)

Post Issue Implied Market Cap: Rs 10,361 – 10,823 Cr

Reservation: QIB 75%, Retail – 10%, NII 15%.

Employee Reservation: NA

Bid lot: 165 shares, and in multiples of 165 shares

Issue Objective

The money raised from the IPO will be used for:

  • Prepayment of the company’s borrowing partially or fully
  • General corporate purposes

About Devyani International

  • The company was incorporated in 1991, and it is the largest franchisee of Yum Brands.  As of 30 June 2021, the company operates 696 stores across 166 cities.
  • Yum Brands Inc operates many fast-food brands. The most popular brands are KFC, Pizza Hut, and Taco Bell brands. It operates 284 KFC stores, 44 Costa Coffee stores, and 317 Pizza Hut Stores.
  • For KFC and Pizza hut, The company collaborates with Yum! across various aspects of their operations for the franchisor’s brand protection and management, including product innovation and development, brand strategy and technology initiatives.
  • For Costa Coffee, they have the flexibility over their operations and are supported by Costa in determining their menu, ingredients, suppliers and distributors

Business Vertical

The company operates in 3 verticals as below –

Core Brands – These include stores of KFC, Costa Coffee, and Pizza Hut operated in India.

International Business – Pizza Hut and KFC Stores outside India (Nepal and Nigeria).

Other Business – Includes operations in the F&B industry and includes stores of their own brands such as Food Street and Vaango. They typically operate these in the form of outlets within larger food courts in malls and airports.

Financials

  • The company is loss-making and has reported a loss for the last three financial years. However, it was able to reduce its losses from Rs 121 crore in FY20 to Rs 63 crore in FY21.
  • Revenue from Core business and International business increased 83.01%, 82.94%, and 94.19% of total revenue from operations in FY19, FY20, FY21, respectively.
  • The share of “other business” which involves their own brands like Vaango have fallen from 16% in FY19 to 5.2% in FY21. This can be attributed to lower footfalls in malls due to Covid 19 which lead to low exposure to their own brands which are mostly located in food courts.
  • The company earned 84% of its revenue from India business and 10% from International business.
  • In the last six months (ended 31 March 2021), despite the Covid situation, the company has opened 109 stores in their Core Brands Business.
  • The pre pandemic ratio of dine in to delivery ratio used to be 50-50, which has now become 30-70. To adapt to this shift, all the new stores are downsized by about 30-50%.

Key Metrics

Peer Analysis

Devyani International competes within the food service industry and the QSR sector. The company has a number of competitors in the food category in India like McDonald’s, Domino’s Pizza, Subway, and Burger King. In the beverages category, the main competitors are Starbucks, Cafe Coffee Day and Chai Point. The listed peers are Jubilant FoodWorks Ltd, Westlife Development Ltd, and recently listed Burger King India Ltd.

  • The market leader in terms of revenue is Jubilant FoodWorks. Devyani International holds the second position with a revenue of Rs 1,198 crore.
  • The Earning Per Share is (0.50) as the company is loss-making, only Jubilant has positive EPS among listed peers.
  • The RoNW is the lowest and stands at (48.52)%, much lower than most other competitors.

USP

Highly recognized brands: Devyani International operates franchises of several highly recognized global QSR brands and is the largest franchise partner for Yum in India.

Digital adoption: Devyani International has actively adopted tech-enabled enhancements to provide their customers with a personalized and enriched dining experience and to increase their operational efficiency. 

Focus on delivery: In order to reduce risk of disease transmission while ensuring increase in delivery sales, they have introduced ‘kerb-side delivery’ where they deliver customers’ orders directly to where they are parked within designated regions near their stores.

Wide range of brands: They offer a range of full and limited-service dining experiences in terms of cuisine, that includes a variety of offerings such as pizza, burgers, south-Indian food, and street food.

Experienced management: The management has decades of experience in the foods and beverages industry. The promoters and the management are also the promoters and managers of Varun Beverages (2nd largest Pepsi bottling company) which has an established track record as a listed company.

Growth Potential

Strategic expansion of store network – The company intends to increase its store network by implementing the defined new-store rollout process. They will aim to achieve an optimal mix across their different types of restaurant formats in order to compete effectively and drive footfalls.

Improve unit-level performance – The growth of stores will allow the company to apportion fixed overheads costs such as brand building and administrative expenses across their store network. They also plan to switch from frozen supplies to chilled supplies, which will reduce transportation and storage costs.

Delivery channel for core brands – With pandemic, the company expects considerable growth in the delivery business. The company plans to open additional stores for Pizza Hut and KFC that will primarily focus on delivery.

Growth by investing in technology – The company will continue to invest in technology to maintain its competitive advantage. It will support their sustainable growth, ensure quality and improve their operational efficiency.

Key Risks

The Covid risk – The impact of the pandemic on the company’s operations in the future, including its effect on the ability or desire of customers to dine in stores, is uncertain. Although the KFC brand is proving resilient, Pizza Hut struggled and Costa Coffee was affected extremely adversely. 

Heavily dependent on Yum – The company has an arrangement with Yum for KFC and Pizza Hut stores that comprise a significant majority of their business. A termination in contract or inability to renew these arrangements, will have a material adverse effect on the business and impact the financial condition of the company.

Legal issues: The company’s statutory auditors have included certain adverse remarks/ qualifications/ matters of emphasis in the company’s audited consolidated financial statements. Also, there are outstanding litigation proceedings against the company, subsidiaries, directors, and promoters. An adverse outcome in such proceedings may have an adverse impact on their reputation, business, financial condition, results of operations and cash flows.

Negative cash flow: The company had negative cash flows in the past and may have negative cash flows in future. Negative cash flows could adversely affect their cash flow requirements, their ability to operate business and implement their growth plans, thereby affecting its financial performance.

Devyani International IPO: Review for education purpose only. You should take advice from your financial advisor before investing

While the company has reported losses over the past three years, the losses have halved over the past year, due to various steps such as downsizing its stores, to cater to rising deliveries, rather than dine-ins amid the pandemic. The company has also been able to grow its topline as well as margins over the last three years. 

Devyani International has seen robust growth in terms of store additions and revenues.  Between FY19 -21, the core brand stores saw a CAGR (Compound annual growth rate) growth of 13.58% from 469 stores to 605 stores. 

Given its negative earnings, comparison with listed peers on the basis of P/E is not possible. At the higher end of the price band, Devyani International IPO is priced at a Price/ Sales ratio of 9.54 times on a post-issue fully diluted basis (based on FY21 sales). This is lower compared to its listed peers Jubilant Foodworks (12.88 times)Burger King (14.92 times) and Westlife Development (9.81 times). However, as Jubilant Foodworks has superior profitability and return ratios, it is expected to command a premium valuation. 

Given lower profitability, reasonable valuations, and poorer return ratios as compared to its peers, we remain ‘Neutral’on the long-term prospects of the issue. Given a fancy for IPOs in the ongoing season, the company may still see strong subscription numbers. Hence, investors looking for listing gains can subscribe to the issue.

 

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