Devyani International

Franchisee of leading QSR brands

The company services a portfolio of recognized global brands catering to a range of customer preferences

Devyani International is the largest franchisee of Yum Brands in India and is among the largest operators of chain quick service restaurants (QSR) in India on a non-exclusive basis.Yum Brands Inc. operates brands such as KFC, Pizza Hut and Taco Bell and has presence globally with more than 50,000 restaurants in over 150 countries, as of December 31, 2020.

As of June 31, 2021,Devyani operate 696 stores across 166 cities in India. Company is a franchisee for the Costa Coffee, Pizza Hut and KFC brands and stores in India.Other than Pizza Hut, KFC, and Costa Coffee company operates brands such as Vaango, Taco Bell, coffee chain costa coffee, Food Street, Masala Twist, Ile Bar, Amreli, and Ckrussh Juice Bar.

The business is broadly classified into three verticals: core brands(includes stores of KFC, Pizza Hut and Costa Coffee operated in India) which contributed 81.95% of total revenue in FY2021, International business(stores operated outside India primarily comprising KFC and Pizza Hut stores operated in Nepal and Nigeria) contributing 12.23% of total revenue and other business contributing 5.81% of total revenue (includes certain other operations in the F&B industry, including stores of its own brands such as Vaango and Food Street).

The core brands and international segment together accounted for 94.19% of total revenue in FY 2021. Out of this, 70.20% is said to be earned due to delivery sales, a jump of 19% in delivery sales compared to 51.15%in FY 2020.

In FY2021 KFC, Pizza hut and costa coffee accounted for 55.37%, 24.74% and 1.83% of total revenue compared to 33.44%, 22.92% and 4.50%, respectively, in FY 2020.

The company has extensive presence in 26 states and three Union territories in India as of March 31, 2021. The company has been consistently expanding its store network over the years.As of June 30, 2021, company had 75.35% of the stores in its Core Brands Business, i.e., 486 stores were located across 40 key cities in India while 50.08% of the stores in its Core Brands Business, i.e., 323 stores were present across five regions in India, i.e., Bengaluru, Kolkata, Hyderabad, Mumbai, and Delhi NCR (comprising Faridabad, Ghaziabad, Gurgaon, Delhi, and Noida).

Quick-service restaurant (QSR) channel has been rapidly growing in popularity in India on the back of rapid urbanization, proliferation of internet and scarcity of time for meals owing to busier lifestyles. The channel is expected to witness a significant rebound in the coming years, driven by the economic recovery of the country and improvement in the purchasing power of consumers.

In the short- to medium-term, management expects in-store dining revenues as a proportion of overall revenue to continue to decline. While revenues through food delivery aggregators as a proportion of overall revenue is expected to continue to gradually increase.

Given the covid-19 pandemic, the company anticipates considerable growth in the delivery business. Revenue generated from delivery sales represented 51.15% of total revenue in core Brands Business in FY 2020, which increased to 70.20% of total revenue in FY 2021.

The company plans to invest in technology and digital capabilities, as rise in demand for home deliveries and growing reluctance to visit regular dine-in outlets is expected.         

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 440 crore and an offer for sale of Rs 1398 crore by existing shareholders- Dunearn and RJ Corp.

The price band for the IPO is Rs 86 to Rs 90 per equity share of face value Re1 each.

Objectives for the fresh issue arerepayment/prepaymentof Rs 324crore of borrowings and remaining amount to be used for general corporate purposes.

Promoters of the company are Ravi Kant Jaipuria, Varun Jaipuria and RJ Corp.Promoters holds an aggregate of 874,339,464 Equity Shares, aggregating to 75.79% of the pre-Offer issued and paid-up Equity Share capital.The post IPO shareholding for the same is expected to be around 67.99%.

The issue, through the book-building process, will open on 4 Aug 2021 and will close on 6 Aug 2021.

Strengths

Due to the pandemic, increasing internet and mobile penetration within India and the advent of food delivery apps, the dine-in habits have changed, and acceptance of takeaway has increased significantly. This will help the company to grow faster in India.

The KFC brand has been a star performer in terms of store growth, with its store network growing from 134 in FY2019to 264 in FY2021. It grew at a CAGR of about 40% from FY2019 to FY2021.

The company is among the largest QSR companies in India that is listed on the Swiggy platform and is among the largest QSR companies in India listed on the Zomato platform in the CYs 2019 and 2020.

In the last six months, despite covid-19, the company opened 109 stores across its core brand business.The company has plans to further increase its reach by opening more stores in locations with high potential.

The company has a portfolio of highly recognized global brands catering to a range of customer preferences.

Cross brand synergies create cost efficiencies, as sourcing, warehousing and distribution of key raw materials is centralized for certain regions and across core brands business. This reduces the storage space required at stores, thereby enabling the company to minimize operating costs.

Weaknesses

Growing awareness/consciousness of Healthy Eating and its benefits could impact the public’s perception of the QSR industry, which could adversely affect the business of the company. There is growing concern among consumers, public health professionals and government agencies about the long-term health problems associated with certain conditions, such as obesity and in particular child obesity, diabetes, tooth decay, cardiovascular disease, high cholesterol, high sodium, high trans-fat, high sugar, and hypertension in adults, which have been linked to fast food products such as those sold in the company’s restaurants.

The company relies on arrangements with Yum for KFC and Pizza Hut stores and Costa for Costa Coffee stores, that comprise a significant majority of its business, and a termination of or inability to renew these arrangements, will have a material adverse effect on the company’s prospects.

The prospects of the company, to a large extent are related to the success of the KFC, Pizza Hut and Costa Coffee brands globally, including the financial condition, advertising programs, new product development, overall reputation ofKFC, Pizza Hut and Costa Coffee restaurants outside India and its other franchisees in other countries.

The company had incurred losses in FY2019, 2020 and 2021, these sustained losses have resulted from high corporate level overhead costs and towards funding certain loss-making businesses, such as operations at airports in India.These losses can continue in the foreseeable future.

Statutory auditors of the company have included a material uncertainty related to going concern on consolidated financial statements for FY 2019. It further mentioned that the Group and its Joint Venture’s current liabilities exceed its current assets as of March 31, 2019.

The QSR industry in India is highly competitive. The company competes primarily with international QSR chains operating in India, such as McDonalds, Burger King, Domino’s Pizza, Starbucks, and Subway, as well as local restaurants and chains in the QSR segment such as Café Coffee Day and Chai Point.

Some of the Group Companies and Subsidiaries have incurred losses in the past three financial years, which may have an adverse effect on reputation and the business.

Due to the nature of the QSR business, the stores generally need to be in high visibility and high traffic locations.Rising real estate prices may restrict company’s ability to lease new desirable locations.

Historically,one of the key drivers of company’s financial results has been the growth of the number of stores both organically and inorganically. However, covid-19 related regional restrictions in India has already slowed and can continue to slow the growth of stores thus negatively impacting performance.

Valuation

For FY 2021, proforma consolidated sales fell by 36.11% to Rs 1163.54 crore compared to FY 2020 due to a substantial reduction in in-store dining volumes. OPM fell by 231 bps to 14.93% which led to 44.65% decrease in operating profit to Rs 173.73 crore. Other income increased 233.57% to Rs 64.24 crore while interest cost fell 10.18% to Rs 155.65 crore and depreciation decreased 6.46% to Rs 239.87 crore. Tax credit for FY21 was of Rs 18.34 crore compared to tax expense of Rs 42.67 crore in FY20. Net loss decreased 23.71% to Rs 81.27 crore.

At the higher price band of Rs 90, the offer is made at Post-issue EV/Sales of 10.06 times for the period ended March 31, 2021, on a post-issue equity share capital of Rs 120.25 crore of face value of Re 1 each. Listed industry peers of the company are Jubilant FoodWorks,which trades at 15.26 times its FY21 EV/Sales, Burger King trades at 15.04 times and Westlife Development at 9.91 times.