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Monday
Monday, 30 November 2020
CM RATING 45/100

Burger King India

On an expansion drive

The company’s revenues have recorded a CAGR of 56% between FY 2016 and FY 2020 but losses have also piled up. The covid-19 pandemic has reversed sales and increased losses, but prospects remain encouraging

Burger King India (BKI,) incorporated in 2013, is the national master franchise in India for the Burger King brand, BURGER King brand, also known as the "Homeofthe Whopper". It was founded in 1954 in the United States and is owned by Burger King Corporation, a subsidiary of Restaurant Brands International Inc.

Restaurant Brands International Inc also holds a portfolio of fast-food brands that are recognized around the world that include the Burger King, Popeyes and Tim Hortons brands. The Burger King brand is the second largest fast-food burger brand globally as measured by the total number of restaurants, with a global network of 18,675 restaurants in more than 100 countries and U.S. territories on September 30, 2020.

Since opening its first restaurant in November 2014, BKI has used its well defined restaurant roll out and development process with the aim of growing quickly, consistently and efficiently into a pan-India QSR (Quick Service Restaurant) chain and capitalising on the growing market opportunity in India for QSR restaurants. As of November 25, 2020, the company had 268 restaurants (259 company-owned Burger King Restaurants and nine Sub-Franchised Burger King Restaurants) up from 261 restaurants (including eight Sub-Franchised Burger King Restaurants) as on September 30, 2020, across 17 states and union territories and 57 cities across India. Of the 268 restaurants, about 137 restaurants or 51% are located in North; 66 restaurants or 25% are located in West; 56 restaurants or 21% are located in South and 9 restaurants or 3% are located in Eastern region of the country. About 55% of the restaurants are in shopping malls and food courts; 25% in High Street locations; 15% in Drive Thrus and 5% on transit locations such as metro stations.

BKI has exclusive rights to develop, establish, operate and franchise Burger King branded restaurants in India as national master franchise in India for Burger King Brand. Its master franchise arrangement provides it with the ability to use Burger King’s globally recognised brand name to grow its business in India, while leveraging the technical, marketing and operational expertise associated with the global Burger King brand.

Under the Master Franchise and Development Agreement, BKI is required to pay a monthly royalty fee based on percentage of sales (net of sales and goods and services tax) from its Burger King Restaurants. The monthly royalty fee ranges from 2.5% to 5% of such sales, depending on the opening date of the restaurant. BKI is also required to pay BK AsiaPac a non-refundable one-time fee upon the opening of each Burger King Restaurant. This fee of US$15,000 is increasing to US$25,000 from the calendar years 2020 to 2022 and will remain at US$35,000 for all periods thereafter while the Master Franchise and Development Agreement remains in effect. BKI is required to pay a renewal fee to BK AsiaPac (or its 24 designee) upon issuance of any renewal unit addendum of a company-owned Burger King Restaurant. However, the renewal fee will not be higher than the maximum opening fee charged for Burger King Restaurants. In addition, the company-owned Burger King Restaurants are required to contribute 5% of sales from company-owned Burger King restaurants (as calculated under the Master Franchise and Development Agreement) towards marketing and advertising.

The master franchisee arrangement provides it with flexibility to tailor its menu to Indian tastes and preferences, as well as give flexibility regarding promotions and pricing. Its customer proposition focuses on value leadership, offering its customers variety through innovative new food offerings at different day parts, catering to the local Indian palate, offering a wide range of vegetarian meal options, and its taste advantage and flame grilling expertise. The company believes that this enables it to grow its customer base by attracting customers looking for everyday value and giving them opportunities to access its brand for the first time. This also increases the frequency and occasions when customers can visit its restaurants. This has driven footfalls and same-store sales in its restaurants and enabled it to become one of the fastest growing QSR brands to reach 200 restaurants among international QSR brands in India during the first five years of its operations.

The company offers a wide variety of 18 different vegetarian and non-vegetarian burgers covering both value and premium offerings. While its core strength is burgers, the company continuously strives to enhance its customer experience by providing variety across food offerings, including burgers, wraps, rice, beverages, sides, snacks, shakes and desserts across different day parts, including breakfast, lunch and dinner, and snack times and late night. For example, Burger King now offers Boss WHOPPER® and Masala WHOPPER® and rice bowls, which are designed specifically for the customers in India. From time to time, the company also creates limited time offerings, such as its Boss WHOPPER®, which it believes drive excitement and appeal for its premium customers. The company also has recently renovated its menu to include a range of taste-based burgers, as well as introducing new and additional sauces to complement its menu offering. As it continues to expand its restaurant footprint across India, it is also launching specific regional product innovations, such as its BK® Fried Chicken in certain regions of India. This wide choice and variety in its menu help it to drive the frequency with which customers visit its restaurants.

Singapore based QSR Asia Pte holds 94.34% stake of the company. F&B Asia Ventures (Singapore) holds 87.64% in QSR Asia Pte and 10.38% is held by BK AsiapacPte. F&B Singapore is 100% owned (ordinary shares) by F&B Asia Ventures Ltd (Mauritius) and Ajay Kaul holds 100% of the class A preference shares in F&B Singapore. Further, while Everstone Capital Partners II LLC holds 45.70% of the overall shareholding of F&B Asia Ventures Ltd (Mauritius), it holds 97.26% of the class A shares (having voting rights) of F&B Asia Ventures Ltd (Mauritius).

Objects of the issue

The issue comprises offer for sale by promoters as well as fresh issue. Of the net proceeds from the fresh issue amounting to Rs 450 crore, about Rs 165 crore is to be used for repayment or prepayment of outstanding borrowings of the company obtained for setting up of new company owned Burger King Restaurants; Rs 177.00 crore towards capital expenditure to be incurred for setting up of new company owned Burger King Restaurants and balance for General Corporate purposes. Of the capex of Rs 177 crore towards setting up new company owned BK restaurants about Rs 14 crore is planned to be incurred in FY21, Rs 111 crore in FY22 and RS 52 crore in FY23.

Strengths

As national master franchise in India for Burger King brand, the company has exclusive pan-India rights to develop, establish, operate and franchise globally well recognised/popular Burger King branded restaurants in India. In comparison Westlife Development (WDL) is master franchise for McDonalds only for South and Western region of the country.

The company’s master franchise rights are long-term in nature running till December 31, 2039.

The company builds its restaurant network using a cluster approach and penetration strategy with the objective to provide greater convenience and accessibility for its customers across relevant geographies. This approach helps it to efficiently manage its supply chain and drive down costs, due to the proximity of its restaurants to each other and to the distribution centres of its third-party distributor.

Per capita spend on food services by urban population in India was just USD 122 in CY2020 compared to USD 181 in turkey and USD 253 in Indonesia, USD 684 in China and USD 707 in Brazil. This shows strong potential for growth for QSR industry in India as well as for the company considering favourable demographic factors in India.

Within the chain QSR sub-segment, the burgers and sandwiches format grew at a CAGR of 19% between FY 2015 and FY 2020. McDonald’s is the category leader in Burger & Sandwiches with close to 42% market share in the category and the revenue of McDonald’s has grown at a CAGR of 17% between 2016 and 2020. The category has outpaced the growth of the market leader due to entry of newer players such as Burger King (revenues of Burger King has grown at a CAGR of 56.3% between FY 2016 and FY 2020), Wat-a-burger. The other QSR sub-segment, the pizza format, grew at a CAGR of 13% during FY 2015-FY 2020 period, the chicken format grew at a CAGR of 12% during the same period, and the Indian ethnic format grew at a CAGR of 48% during the same period. In the Pizza category in the chain QSR segment, the growth is driven by Domino’s, with a market share of approximately 80%. Domino’s has outpaced the growth of category by filling in the void created by exit of other pizza brands such as Papa John’s.

Weaknesses

BK AsiaPac may terminate the company’s Development Rights or the Master Franchise and Development Agreement, if the company fails to meet the obligations such as open atleast 700 restaurants by December 31, 2026, with additional condition of the company owned BK restaurants representing 60% of total restaurants opened as end of each development year.

About 51% of its restaurants are based in the Northern region of the country with East accounting for as little as 9%. Similarly, WDL also gets about 50% of its sales from its outlets in the state of Maharashtra.

Same store sales growth (SSSG) of the company in FY2020 was negative 0.3% compared to 29.2% growth in FY19 and 12.2% growth registered in FY2018. Degrowth in SSSG for FY20 is largely due to muted performance in Q4FY20 due to the impact of the COVID pandemic as the SSSG for 9mFY20 stood higher at 6.11%. The SSSG for H1 of FY21 was down by 56.9% primarily due to COVID 19 crisis. Though majority of its restaurants have opened for dine-in guests and to support food delivery services. However, the capacity for dine-in guests is limited, based on local regulations. Of its 268 restaurants about 249 were operational on November 25, 2020, including two Sub-Franchised Burger King Restaurant compared to 226 restaurants operational out of 261 restaurants as of September 30, 2020. The resurgence of second/third wave of pandemic and night shutdowns in certain cities/states in the country especially in the north and the west will have impact on the sales and profitability of the company in the immediate term. Moreover, as per the QSR industry, during COVID pandemic there is higher dip in consumption of western fast-food compared to Indian fast food.

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. These health concerns may prompt governments in India to introduce new or increase existing taxes on fast food products, such as implementing a sugar tax on soft drinks, sodium content of food or on foods that are linked with obesity, which may increase the prices of, and consequently reduce demand for the products that the company’s outlets sell.

As the exclusive national master franchisee of the Burger King brand in India, the success of BKI is to a large extent directly related to the success of the Burger King brand globally, including the financial condition, advertising programs, new product development, overall quality of operations of Burger King Corporation and its subsidiaries and the successful and consistent operation of Burger King restaurants outside India and its other franchisees in other countries.

The company relies on a single third-party distributor, Coldex, which provides it with logistics services in each of the regions the company is located in across India, including the procurement of ingredients and packaging materials, primary logistics from supplier facilities to distribution centres, warehousing and inventory management and secondary logistics to its restaurants.

Operating in a highly competitive space, the company competes with international QSR chains such as McDonalds, KFC, Domino’s Pizza, Subway and Pizza Hut, as well as local restaurants in the QSR segment. The company generally competes on product and service quality, price and location.

The company has made losses in each of the financial period reported in prospectus. The losses have worsened due to the Covid pandemic. Moreover,till the company remains in fast expansion mode, which it has to as per its commitments under the Master franchise agreement, the company may continue to be in losses.

Valuation

Revenues were up by 33% to Rs 841.24 crore in FY 2020. With the OPM nearly staying flat (down marginal 10 bps to 12.4%) the operating profit was up by 32% to Rs 104.01 crore. However, unable to cover the higher interest cost and depreciation, PBT was a loss of Rs 72.22 crore compared to a loss of Rs 38.28 crore in the corresponding previous period. Eventually, the PAT was a loss of Rs 76.57 crore compared to a loss of Rs 38.28 crore in the corresponding previous period. For H1 of FY 2021 the sales were down by 68% to Rs 135.21 crore and the PAT was a loss of Rs 118.95 crore compared to a loss of Rs 17.43 crore in the corresponding previous period.

The company, in pursuant to the resolution of the Board dated May 23, 2020, has allotted 1,32,00,000 equity shares through rights issue to its promoters at a price of Rs 44 per equity share aggregating to Rs 58.08 crore. However earlier in February 28, 2020 the company has converted certain CCPS (compulsorily convertible preference shares) to 1,11,11,111 equity shares at a price of Rs 90, thus leading to the average cost of acquisition of equity shares by promoters in last 12 months to about Rs 65 per equity share. The company also made preferential allotment of 15,712,820 Equity Shares to Amansa Investments for cash at a price of Rs 58.50 per Equity Share aggregating to Rs 92 crore, pursuant to the resolution of the Board dated November 18, 2020.

At the upper band of offer price of Rs 60, the EV/sales of the company stands at 2.9 times and EV/EBITDA at 23.7 times its FY20 sales and EBITDA. In comparison the EV/Sales and EV/EBITDA of its nearest listed competitor i.e. Westlife Development is 4.5 times and 48.4 times. BKI, because being late entrant and of smaller size, it has and is likely to continue to grow faster than Westlife Development in the near term. The EV/Sales and EV/EBITDA of Jubilant Foodworks (much larger and more established player) is 8.4 times and 37.6 times.

Burger King India: Issue Highlights

Sector Hotels & Restaurants
Fresh Issue (in Rs. Crore) 450
Offer for sale (in Rs. Crore)  
in Upper price band 360.0
in Lower Price Band 354.0
Price band (Rs.)  
Upper 60
Lower 59
Post-issue equity (Rs crore)  
in Upper price band 381.65
in Lower Price Band 382.93
Post-issue promoter (including promoter group) stake (%)  
in Upper price band 60.08
in Lower Price Band 59.88
Minimum Bid (in nos.) 250
Issue Open Date 02-12-2020
Issue Close Date 04-12-2020
Listing BSE, NSE
Rating  45/100

 

Burger King India: Financials

  2009 (6) 1909 (6) 2003 (12) 1903 (12) 1803 (12)
Sales 135.21 422.33 841.24 632.74 378.12
OPM (%) -21.2 13.5 12.4 12.5 2.1
OP -28.73 57.04 104.01 78.99 8.13
Other income 16.44 3.04 5.59 11.40 10.62
PBIDT -12.29 60.08 109.60 90.38 18.74
Interest 42.39 27.78 65.45 46.45 36.94
PBDT -54.67 32.30 44.15 43.93 -18.20
Depreciation 62.14 49.73 116.37 82.21 64.04
PBT -116.82 -17.43 -72.22 -38.28 -82.23
EO Exp 2.13 0.00 4.35 0.00 0.00
PBT after EO -118.95 -17.43 -76.57 -38.28 -82.23
Tax 0.00 0.00 0.00 0.00 0.00
PAT -118.95 -17.43 -76.57 -38.28 -82.23
EPS (Rs)** -6.1 -0.9 -1.9 -1.0 -2.2
** on post issue equity on Upper price band of Rs 381.65 crore. Face Value: Rs 10
EPS is calculated after excluding EO and relevant tax
# EPS can not be annualised due to seasonality in operations
Figures in Rs crore
Source: Capitaline Corporate database