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Saturday, 6 November 2021
CM RATING43/100
 

Sapphire Foods

Franchisee of leading QSR brands

The company is actively exploring opportunities to acquire more QSR food brands

Sapphire foods is one of YUM’s franchisee operators in the Indian subcontinent. Company is also Sri Lanka’s largest international QSR chain in terms of revenue for the financial year 2021as also number of restaurants operated as of March 31, 2021.

As of June 30, 2021, company owned and operated 209 KFC restaurants in India and the Maldives, 239 Pizza Hut restaurants in India, Sri Lanka, and the Maldives, and two Taco Bell restaurants in Sri Lanka.

Company’s franchisee arrangement with YUM allows it to operate, on a non-exclusive basis, under the KFC brand in several states in India and across the Maldives, the Pizza Hut brand in several states in India and across Sri Lanka and the Maldives, and the Taco Bell brand across Sri Lanka.

Company intends to actively explore opportunities to acquire high quality and scalable QSR and food brands in complementary categories in existing or new geographies.

Factors such as increase in the quality of education, rising income levels of the younger demographic groups, rising urbanization, and growing working age population are expected to boost the growth of the food services sector in India. Company believes that KFC and Pizza Hut are well-placed to capitalize on this opportunity.

As per Technopak Report, Within the organized food services market in India, the QSR chain sub-segment is the fastest growing sub-segment, with its value growing at a CAGR of approximately 19% from Rs 7800 crore in financial year 2015 to Rs 18800 crore in financial 2020. From financial year 2020, it is expected to grow at a CAGR of approximately 23% to Rs 53400 crore in financial year 2025.

The key pillars of company’s customer proposition include value offerings at entry and premium price points, wide variety of menu offerings with both meal and snack options for multiple parts of the day and easy access through omni-channel platform consisting of dine-in, take-away and delivery aggregators.

Given restrictions on dine-in services due to Covid-19, company witnessed increase in its delivery and takeaway sales. In the three months ended June 30, 2021 and 2020, and FYs 2021, 2020 and 2019, Company’s income from take-away and delivery services was Rs 215.77 crore, Rs 69.65 crore, Rs 551.87 crore, Rs 468.15 crore and Rs 409.46 crore, representing 89.0%, 96.4%, 68.8%, 42.8% and 43.2%, respectively, of total restaurant sales.

In the three months ended June 30, 2021, Company derived Rs 26.78 crore, Rs 56.25 crore and Rs 159.52 crore from dine-in, take-away and delivery services respectively, representing 11.0%, 23.2% and 65.8%, respectively, of Company’s total restaurant sales. While in the financial year 2021, Company derived Rs 250.61 crore, Rs 215.46 crore and Rs 336.41 crore from dine-in, take-away and delivery services respectively, representing 31.2%, 26.9% and 41.9%, respectively, of Company’s total restaurant sales.

Company believes it is well-positioned to capture further opportunities in the Territories in which it operates, as restaurants serving pizzas, burgers and chicken are expected to continue to drive the growth of the QSR chain sub-segment in India.

As of September 2021, Company’s KFC India, Pizza hut India and Sri Lanka business store count stood at 219, 188 and 73 respectively compared to 203, 162 and 70 in March 2021 respectively.

According to the Technopak Report, restaurant chains have a low penetration rate in India, especially in lower-tier cities, with approximately 18 chain QSR restaurants per million people in urban areas in calendar year 2019 compared to approximately765 in the United States. Company intends to capitalize on fast-paced restaurant expansion trend.

Offer and its objects

The IPO will be complete offer for sale of Rs 2073.25 crore by existing shareholders- Sapphire Foods Mauritius Limited, QSR Management Trust, WWD Ruby Limited, Amethyst Private Limited, AAJV Investment Trust, Edelweiss Crossover Opportunities Fund and Edelweiss Crossover Opportunities Fund- Series II.

Price band for the IPO is Rs 1120 to Rs 1180 per equity share of face value Rs10 each.

Company will not directly receive any proceeds from the Offer, and all the Offer Proceeds will be received by the Selling Shareholders, in proportion to the Offered Shares sold by them.

Promoters of the Company are Ravi Sapphire Foods Mauritius Limited and QSR Management Trust. Promotersand group hold an aggregate of 38,173,680equity Shares, aggregating to 60.08% of the pre-Offer issued and paid-up Equity Share capital. The post IPO shareholding for the same is expected to be around 49.97%.

The issue, through the book-building process, will open on 9 Nov 2021 and will close on 11 Nov 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.

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

Company is led by professional management team having diverse experience across industries including consumer, retail and QSR. This helps in bringing cross-industry perspectives to operations and growth.

Company has wide variety of vegetarian and non-vegetarian value offerings at both entry and premium price points, enabling it to drive new customer acquisition across different income classes, and at the same time upsell products through use of meal combos and add-ons.

Company has a well-defined new-restaurant roll-out process that enables it to identify new locations and build out restaurants quickly. Company’s total number of restaurants in the Territories grew from 376 restaurants as of March 31, 2019, to 482 restaurants as of September 30, 2021.

Company is Sri Lanka’s largest international QSR chain in terms of revenue for the financial year 2021and number of restaurants operated as of March 31, 2021.

The sustained growth of online shopping has resulted in brick-and-mortar retailers rationalizing their retail space, thereby increasing availability for food services players in the organized retail environment. Thus, malls are leasing prime floor space to increase the number of food services players in their premises due to high revenues generated from the food services sector. This Increased availability of retail space can benefit the company.

Company has multiple levels of supervision and quality control for its restaurant operations including third-party audits covering quality control, operating processes, and hygiene in accordance with protocols defined by YUM.

Majority of company’s restaurants and menu items are configured to enable quick delivery, and it has also adopted a hybrid model of maintaining a significant owned online delivery platform and working with third-party delivery aggregators.

Company iscontinuouslyoptimizing the restaurant size (both the front-of-house customer area and back-of-house kitchen area) to reduce capital expenditure, occupancy, and operating costs without impacting revenue capacity. For reference the average size of all its KFC restaurants in India decreased from 2,736 sq. ft. as of March 31, 2019, to 1,645 sq. ft. for restaurants that opened in financial years 2020 and 2021 and 1,746 sq. ft. for restaurants that opened in the three months ended June 30, 2021.

Young Indian consumers aged 15 to 34 years constitute 34% of the total population, forming a considerable market for food services, especially QSRs. These consumers have a higher frequency of eating-out and ordering-in as compared to the rest of the population, which can drive growth for the company.

Over the past few years, company has built organizational capabilities in minimizing wastage and enhancing efficiencies, through a combination of ERP systems, processes, and people. Restaurant-level cost benchmarking programs such as PACE SETTER has helped in continuously improving restaurant operating margins.

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.

Company reported restated loss after tax of Rs 26.40 crore, Rs 75.17 crore, Rs 99.89 crore, Rs 159.24 crore and Rs 69.40 crore for the three months ended June 30, 2021, and 2020, and FYs 2021, 2020 and 2019, respectively. As company continue to grow its business by opening many new stores every year. It expects to report losses until such time as these new restaurants mature.

As of June 30, 2021, company had Rs 95.23 crore of aggregate outstanding term loan from banks and bank overdraft comprising Rs 93.38 crore of term loan from banks and other financial institutions and Rs 1.84 crore of bank overdraft. Company must use a substantial portion of its cash flow from operations to pay interest, thereby reducing the availability of cash flow for working capital.

Company relies on arrangements with Yum for KFC’s, Pizza Hut’s and Taco Bell, which derive substantially all of its revenue. Any termination of or inability to renew these arrangements, will have a material adverse effect on the company’s prospects.

Company is required to pay YUM a monthly royalty fee of between 6.0% to 6.3% of its net sales from operation of the KFC, Pizza Hut and Taco Bell restaurants in the Territories, and to spend 5.0% or 6.0% of net sales (including 1.0% to be spent on local store marketing). In the three months ended June 30, 2021, and 2020, and FYs 2021, 2020 and 2019, company paid YUM royalty in the amount of Rs 19.82 crore, Rs 7.05 crore, Rs 65.56 crore, Rs 85.73 crore and Rs 80.53 crore respectively, representing 6.5%, 6.4%, 6.4%, 6.4% and 6.7%, respectively, of total revenue from operations.

Statutory Auditor’s report on company audited standalone financial statements for financial years 2021, 2020 and 2019 included modifications to certain matters including serious delays in the payment of provident fund and professional tax.

There are material outstanding legal proceedings involving Company, Subsidiaries and Directors. These proceedings are pending at different levels of adjudication before various courts. An adverse outcome or any additional complaints may affect company’s reputation and will have an adverse effect on its business.

The prospects of the company, to a large extent are related to the success of the KFC, Pizza Hut and Taco Bellbrands globally, including the financial condition, advertising programs, new product development, overall quality of operations of YUM and its subsidiaries and the successful and consistent operation of KFC, Pizza Hut and Taco Bell restaurants outside the Territories by its other franchisees in other states or countries.

The QSR industry in India is highly competitive. 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.

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.

Under ESOP Sapphire Foods Employee Stock Option Scheme 2019, 785,431 options were granted to eligible employees on September 15, 2021.Grant of stock options under employee stock option plans may result in a charge to its consolidated profit and loss statement.

Valuation

In Q1 FY 2021, consolidated sales rose by 173.03% to Rs 303.05 crore compared to Q1 FY 2020. OPM rose by 3277 bps to 11.25% which led to operating profit of Rs 34.08 crore compared to loss of Rs 23.89 crore in Q1 FY20. Other income decreased 56.81% to Rs 10.88 crore while interest cost fell 2.91% to Rs 17.24 crore and depreciation decreased 8.65% to Rs 53.26 crore. Tax expense for FY21 was of Rs 0.76 crore compared to tax expense of Rs 0.29 crore in FY20. Net loss decreased 64.92% to Rs 26.09crore.

For FY 2021, consolidated sales fell by 23.93% to Rs 1019.62 crore compared to FY 2020. OPM fell by 165 bps to 12.20% which led to 32.97% decrease in operating profit to Rs 124.40 crore. Other income increased 442.12% to Rs 61.62 crore while interest cost rose 4.67% to Rs 75.57 crore and depreciation increased 9.32% to Rs 209.15 crore. Tax expense for FY21 was of Rs 1.20 crore compared to tax credit of Rs 1.74 crore in FY20. Net loss decreased 37.50% to Rs 98.46crore.

At the higher price band of Rs 1180, the offer is made at Post-issue EV/FY21 Sales of 7.39times, on a post-issue equity share capital of Rs 63.54 crore of face value of Rs 10each. Listed industry peers of the company are Jubilant FoodWorks which trades at 15.45 times its FY21 EV/Sales, Devyani international at 15.21, Burger King trades at 12.55times and Westlife Development at 10.33 times.

Sapphire foods: Issue highlights

For Offer for Sale Offer size (in Rs crore)

- On lower price band

1967.83

- On upper price band

2073.25

Offer size (in no of shares )

17,569,941

Price band (Rs)

1120-1180

Minimum Bid Lot (in no. of shares )

12

Post issue capital (Rs crore)

- On lower price band

63.54

- On upper price band

63.54

Post-issue promoter & Group shareholding (%)

49.97

Issue open date

9/11/2021

Issue closed date

11/11/2021

Listing

BSE, NSE

Rating

43/100

Sapphire foods: Restated financials

1903 (12)

2003 (12)

2103 (12)

2006 (3)

2106 (3)

Sales

1,193.82

1,340.41

1019.62

111.00

303.05

OPM (%)

12.23%

13.85%

12.20%

-21.52%

11.25%

OP

145.97

185.59

124.40

-23.89

34.08

Other inc.

12.46

11.32

61.62

25.18

10.88

PBIDT

158.43

196.91

186.02

1.29

44.96

Interest

72.01

72.19

75.57

17.76

17.24

PBDT

86.43

124.72

110.45

-16.47

27.71

Dep.

154.73

191.31

209.15

58.41

53.36

PBT

-68.30

-66.59

-98.69

-74.88

-25.64

Share of Profit/(Loss) from Associates

0.00

0.00

0.00

0.00

0.00

PBT before EO

-68.30

-66.59

-98.69

-74.88

-25.64

Exceptional items

0.00

94.39

0.00

0.00

0.00

PBT after EO

-68.30

-160.98

-98.69

-74.88

-25.64

Taxation

1.10

-1.74

1.20

0.29

0.76

PAT

-69.40

-159.25

-99.90

-75.17

-26.40

Minority Int

-1.38

-1.706

-1.43

-0.79

-0.31

Net Profit

-68.02

-157.54

-98.46

-74.38

-26.09

EPS (Rs)*

-

-

-

#

#

* EPS is annualized on post issue equity capital of Rs 63.54 crore of face value of Rs 10 each

# EPS is not annualized due to seasonality of business

EO: Extraordinary items. EPS is calculated after excluding EO and relevant tax

Figures in Rs crore

Source: Capitaline Corporate Database