Devyani International is the largest franchisee of Yum Brands in India and is among the largest operators of chain quick-service restaurants in India. It operates 696 stores across 166 cities in the country.
Sunil Shankar Matkar
August 04, 2021 / 02:01 PM IST
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Vikrant Kashyap, Research Analyst at KRChoksey Research, feels Devyani International’s size and its intention to add stores and focus on improving unit metrics makes it a good opportunity for investment.
“The rising per capita income, increasing internet penetration, urbanization, changing consumer preference and food habits, young population, business culture and western lifestyle are expected to play key role in growth of the industry,” he said in an interview with Moneycontrol’s Sunil Shankar Matkar.
Edited Excerpts:
Q: Do you think Devyani International is reasonably priced? Also, do you think that pricing IPO below Rs 100 by Devyani (like Zomato did) is a good strategy to attract retail investors?
Looking at the brands Devyani International has and scale and opportunity it has for growth, it is adequately priced. While price band plays important role in selection process, there are other factors which are equally important like retail investors associate themselves with brands and franchisee they know. Similarly, if we look at recent IPOs in similar space like Mrs. Bectors Food Specialities (retail subscription 29.3x) and Barbeque Nation (retail subscription 13.13x), where price band is relatively higher than Rs 100, are able to attract higher retail participation.
Also read – Devyani IPO: KFC, Pizza Hut operator to launch offering tomorrow. Know the lot size, issue size and price band
Q: Is it better to apply for Devyani International IPO than investing in listed peers Jubilant Foodworks, Westlife Development and Burger King India?
In last one year, Jubilant Foodworks has given return of more than 100 percent, Westlife Development has given return of more than 50 percent and Burger King India has given more than 300 percent return from its IPO price. Looking at the performance of these companies in a pandemic year, an investor should look to invest in Devyani International’s IPO for listing gains as well as for long term opportunity it presents. If we compare these companies on price to sales (on FY21 sales) Devyani International (price to sales 9.5x) is available at a discount to Jubilant Foodworks (price to sales 15x) and Burger King India (price to sales 14x) and almost at par with Westlife Development (price to sales 8.85x).
Q: Do you expect Devyani International IPO to surpass the subscription figures of Zomato IPO?
Looking at the business model of Zomato and Devyani, they are not comparable as Zomato is largely a ‘Platform’ company with only visible competition from Swiggy while Devyani is a ‘QSR chain’ which is a crowded place. Devyani has edge over competition largely due to globally recognised brands with immense opportunity for scale. In the recent past exceptional gains from IPOs have created euphoria among investors which is resulting in higher subscription but we should remain watchful of the fact that three more IPOs opened same day along with Devyani International which can possibly impact subscription figures.
Also read – Devyani International, KFC and Pizza Hut operator, opens IPO today: Should you grab a bite?
Q: Why investors are so much interested in companies like Devyani International and Zomato which are making losses currently?
Both companies operate in an Industry which is large in size and expected to growth at decent rate and provide economies of scale. The Indian food services sector generated a total revenue of Rs 8,36,660 crore ($ 117.5 billion) in 2020, growing at a CAGR of 1.9 percent from Rs 7,60,140 crore ($ 118.5 billion) in 2015. Historically, the QSR channel recorded the fastest growth among all foodservice channels, at a CAGR of 5.5 percent from 2015 to 2020. Digital and delivery penetration was already gaining momentum before the pandemic. Now, a transformation that was projected to take years is happening in just months. Use of online platforms has surged, thanks to increased mobile app orders. This could be a positive for the industry, since mobile use can result in higher margin, lower friction transactions and greater retention of customer data.
Q: Devyani International has been making losses in the reported years in the prospectus. Will it turn profitable after a couple of years?
Devyani International has taken various initiatives to grow its business and improve operating efficiency including rightsizing its stores, improving unit metrics, focus on growing core brands, focus on delivery which is a structural change in the industry, negotiating lease rentals, store expansion and paying off debt from IPO proceeding.
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However, the economic recovery post Covid-19 is key for the QSR industry. Reports suggest organised restaurant business will take at least a year after the lockdown is lifted to recover from the Covid-19 pandemic as recovery would be gradual. Hence, we should remain watchful for the company’s performance in next couple of years.
Q: How should investors evaluate Devyani International before subscribing to the IPO?
Devyani International is the largest franchisee of Yum Brands in India and is amongst the largest operators of chain quick service restaurants in India and operates 696 stores across 166 cities in India. Apart from it Devyani International has franchisee of Costa Coffee and its own food & beverages (F&B) brands like Vaango and Food Street. Despite the industry is badly hit by pandemic Devyani International added stores in Core Brands Business and going forward it will continue adding more stores in Core Brands Business.
Rising per capita income, increasing internet penetration, urbanization, changing consumer preference and food habits, young population, business culture and western lifestyle are expected to play key role in growth of the industry. The company’s size and its intention to add stores and focus on improving unit metrics makes it a good opportunity for investment.
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