Devyani International - IPO Note

Devyani International may not be known as a company but its brands are ragingly popular among Indian households, especially among the Indian youth, Devyani is the largest franchisee of Yum Brands in India and operates a massive chain of quick-service restaurants (QSR) in India. It operates under the brands of KFC (Kentucky Fried Chicken), Pizza Hut and Taco Bell. In addition, Devyani is the master franchise for Costa Coffee in India. It operates 696 outlets across 166 cities and towns in India.

Devyani International IPO is of Rs.1,838 crore consisting of Rs.440 crore by way of new issue and Rs.1,398 crore by way of offer for sale (OFS).

Key terms of the IPO issue of Devyani International

_{Data Source: IPO Filings}

The business spread of Devyani can be classified as under.
•    Core brands of KFC, Pizza Hut and Costa Coffee in India
•    Stores operated globally especially in Nepal and Nigeria
•    Miscellaneous operating brands like “Vaango” and “Food Street”.

A quick look at the financials of Devyani International 

Like in the case of many QSR restaurants, the company has been making losses, although its losses have substantially narrowed in FY21, compared to FY20. The table below captures the gist of the financials of Devyani International.

_{Data Source: Company RHP}

For the latest fiscal year FY21, the revenues from the core brands and the international brands accounted for 94% of total revenues. Devyani currently operates 284 KFC stores, 317 Pizza Hut stores and 44 Costa Coffee stores across India. Stores have expanded at over 13% annually with the number of stores increasing from 469 stores to 621 stores over the last 2 years.

In the FY21, the same store growth (SSG) did suffer a temporary reverse but that was largely on account of the lockdowns imposed due to COVID-19. All the 3 core brands had very strong gross margins. For example, as of FY21, KFC had a gross margin of 68%, Pizza Hut 74% and Costa Coffee 79%. For FY 21, the core brands contributed 84% of revenues compared to 74% in FY19, showing sharper brand penetration.

Investment Perspective for Devyani International

QSR is a front-ended business which is capital hungry in the early years and only recovers later as the brand penetrates deeper. The key is SSG, which took a hit in FY21 purely due to the pandemic and the consequent shutdowns. Here are some parameters that would help you take a decision on investing in the IPO of Devyani International.

a)    Over the last 3 fiscal years, KFC has had average daily sales of over Rs.100,000 per day while Pizza Hut and Costa Coffee have jointly contributed half of that. The average transaction size over the last 3 years has gone up across all the 3 core brands.

b)    All three are established global brands. For example, KFC runs 25,000 stores globally across 140 countries while Pizza Hut runs 17,650 restaurants worldwide. Even Costa Coffee runs 3,400 outlets globally.

c)    Devyani outlets have a strong presence across key consumption centers of India like Delhi, NCR, Bengaluru, Kolkata, Mumbai and Hyderabad. Cross brand synergies are huge since they target the same median segment. 

d)    For the QSR business, the delivery business is always more economical and profit-making than the dine-in business. In FY21, the share of delivery was 71% compared to 51% in FY20. That trend is expected to stabilize. 

e)    Out of the fresh funds raised, Rs.324 crore will be used to defray debt, which is normally valued accretive for QSR companies.

Also Check: List of Upcoming IPOs in August 2021

In a nutshell, most of the QSR brands in India like Westlife (McDonalds) and Burger King are also making losses while Jubilant (Domino’s) is the only listed profit making QSR entity. It is hard to apply traditional P/E parameters but considering its brand, reach and SSG driven model, this is a good way to participate in the burgeoning QSR story in India.