Although the absolute share price below Rs 100 should not affect investors buying decision, it does attract more retail investors who have a misconception that lower-priced shares move faster and give higher returns.
Sunil Shankar Matkar
August 05, 2021 / 03:29 PM IST
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Rishabh Shah, Research Analyst at BP Equities believes Devyani International does have an edge over its peers in terms of the product portfolio.
“It not only provides diversification in cuisine (such as chicken, burgers, pizza, South-Indian food and street food) but also in terms of the formats (such as dine-in, cafés, delivery, take-away and drive-thrus),” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
The company does not have any major competition in the chicken category with KFC contributing around 57 percent of the total revenues in FY21.
Edited Excerpts:-
Q: Do you think KFC & Pizza Hut operator Devyani International is reasonably priced? Also do you think the pricing IPO below Rs 100 by Devyani (like Zomato did) is a good strategy to attract retail public in the IPO?
At the upper price band, Devyani International is valued at 9.54x Price/Sales which is reasonably priced when compared to its listed industry peers i.e, Jubilant Foodworks – 12.9x, Burger King – 14.4x and Westlife Development – 8.81x. The industry does command a premium, with investors expecting strong growth backed by changing eating habits of the young population and expansion of food deliveries. Coming to the pricing, although the absolute share price below Rs 100 should not affect investors buying decision, it does attract more retail investors who have a misconception that lower-priced shares move faster and give higher returns.
Q: Is it better to apply for Devyani International IPO than investing in listed peers Jubilant Foodworks, Westlife Development and Burger King India? Why should investors subscribe to Devyani International?
The food segment is a highly competitive space with brands competing on product & service quality, price and location. However, Devyani International does have an edge over its peers in terms of the product portfolio. It gives a diversified exposure to different food segments with strong globally recognized brands in the portfolio. It not only provides diversification in cuisine (such as chicken, burgers, pizza, South-Indian food and street food) but also in terms of the formats (such as dine-in, cafés, delivery, take-away and drive-thrus). Also, the company does not have any major competition in the chicken category with KFC contributing around 57 percent of the total revenues in FY21.
Q: Do you expect Devyani International IPO to surpass subscription figures of Zomato IPO?
With 4 IPOs hit the market this week, it would be difficult for Devyani International IPO to surpass the subscription figures of Zomato. However, the issue is likely to sail through given the high demand for IPOs.
Q: Why investors are so much interested in companies like Devyani International and Zomato, which are loss making currently?
Although companies in the food segment have been loss-making, investors are not betting on their track record but on their future growth potential. These new-age digital companies are rapidly expanding their reach supported by strong industry tailwinds and changing consumption habits. Also, investors’ excitement was tremendous with Zomato being the first start-up in the Indian food segment to be listed. This listing has opened up possibilities for other start-ups to get listed which is very positive for the Indian market. However, one should not forget the risks that come with it especially in such a bull market.
Q: Devyani International has been making losses in the reported years in prospectus. Will it turn profitable after couple of years?
Over the short term, Devyani International could continue to make losses given its significant investments in growing the business. Also, the company is operating on thin margins of 5 percent which would make it difficult to be profitable soon. However, the topline is expected to grow rapidly as the long-term triggers remain intact.
Q: How should investors evaluate Devyani International before subscribing IPO?
Since Devyani International is a loss-making company, investors cannot apply the common price-to-earnings (P/E) valuation method or analyze profit growth rates. Instead, investors should check the company’s financials by evaluating the growth rates of revenue, stores, etc. One should understand the business model and find out the company’s plans. Certain industry metrics such as revenue per customer and same-store sales growth could be evaluated. Also, the company could be valued using other metrics such as price/sales and enterprise value/sales which can be compared to other loss-making companies in India or abroad.
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