IPO Spot: Burger King India Ltd.

IPO Details

Kick-starting its IPO process, Burger King India Ltd. (BKIL) is set to open its ₹810 crore offer for subscription on December 2, 2020, for three days. Set at a price band of ₹59-60 per share, the offer comprises a fresh issue of ₹450 crore and an offer for sale by the promoter entity, QSR Asia Pte Ltd., of 6 crore shares worth ₹360 crore at the upper end of the band. The initial share-sale is being managed by Kotak Mahindra Capital Company, CLSA India, Edelweiss Financial Services, and JM Financial.

While the company was earlier looking to raise ₹600 crore through a fresh issue, it undertook a pre-IPO placement via a rights issue of 1,32,00,000 equity shares to its promoter at a price of ₹44 per share, aggregating to ₹58.08 crore. It also made a preferential allotment of 15,712,820 shares to AIL for cash at a price of ₹58.50 per share, aggregating to ₹91.92 crore. The size of the fresh issue of up to ₹600 crore was thus reduced by ₹150 crore, while the Offer for sale size at up to 6 crore shares remained the same.

The IPO proceeds will be used to prepay a portion of its existing debt, meet the general corporate purpose, and expand its restaurant network.

Business Overview

BKIL is the national master franchisee of the Burger King® brand in the country. It holds the rights to develop, establish, operate, and franchise Burger King-branded restaurants in India, while also holding the ability to use the brand’s name to grow its business in India and leverage the technical, marketing, and operational expertise associated with the global brand. The company currently has 268 restaurants, including 9 Sub-Franchised Burger King Restaurants, across 17 states & union territories, and 57 cities across India. Post the COVID-imposed lockdown, only 59 stores were operational. As of today, 249 stores have resumed operations.

Financials

The company recorded ₹846.8 crore in FY2020 revenues, rising at an average rate of 48% from ₹388.7 crore in FY2018. Gross profit grew at a healthy average rate of 30.5% to ₹545.3 crore in the same year, up from ₹244.9 crore in FY2018, maintaining a stable gross margin at 64%. Nevertheless, healthy top-line growth does not convert to positive earnings. While the company has incurred accounting losses, its cash flow from operations has continued to grow, aided by the heavy depreciation and negative working capital.

On a half-yearly basis, the company recorded poor performance on account of COVID-19 - the revenue has fallen by 64% to ₹151.7 crore against ₹425.4 crore recorded in 1HFY2019, while the loss has expanded to ₹118.9 crore compared to ₹17.4 crore in 1HFY2019.

Market Distribution

The rapidly developing culture of eating out among Indians has aided the growth of several international brands in the country. The number of outlets by established international brands has grown at a rate of 1.1x to 1.5x between FY2015 and FY2020. However, Burger King recorded an exponential growth of 21.6x in the same period, making it the fastest Indian QSR player to reach 250 restaurants among international QSR brands in India during the first five years of operation.

Peer Comparison

Valuation

Note: It is a post-issue valuation based on FY2020 numbers.

The onslaught of COVID-19 has negatively impacted the outlook for the business. The primary factor that had driven sales in the past has now taken a back seat. Adapting lifestyle to this new normal has driven lots of consumers towards safe eating habits which are going to weigh in on the company’s performance in the near term. While the overall eatery industry is recovering at a snail pace, the QSR segment has staged a quicker recovery thanks to home delivery services. BKIL has also relied on delivery aggregators over the past months, and now, they are launching their own app with a loyalty program to further boost home delivery sales. This is likely to soften the blow of falling footfall at its restaurants.

Due to losses and a short track record, the company has placed the IPO at a discount to its peers. While the P/E of the company cannot be calculated due to negative earnings, other metrics like P/B, P/S, and EV/Sales indicate that the issue is priced at discount compared to its peers. However, the pandemic has prolonged the gestation period, and with the company's plan to open 700 restaurants by 2026; the path to profitability looks blurry. Therefore, investors looking to make listing gains could subscribe to the issue, while risk-averse investors should avoid the issue and wait for more clarity to emerge.

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