Devyani International Ltd. - IPO

 Devyani International Ltd. - IPO - Strong Franchise with Wide Reach

About the Company   

Devyani International Ltd. (DIL), incorporated in 1991, is the largest franchisee of Yum Brands Inc. (Yum). It is one of the largest quick-service restaurant (QSR) chain operators in India with 655 stores across 155 cities as of Mar 31, 2021. Yum operates several fast food brands i.e. Pizza Hut, KFC and Taco Bell. It operates three business verticals namely: (1) core brands (KFC, Pizza Hut and Costa Coffee in India); (2) international business (stores in Nepal and Nigeria); and (3) other businesses (own branded stores namely: Vaango, Food Street, Masala Twist, Ile Bar, Amreli, and Ckrussh Juice Bar). DIL began its relationship with Yum in 1997, when it commenced operations of its first Pizza Hut store in Jaipur. Subsequently, the company continued to expand its operations with both KFC and Pizza Hut franchises. As of June 30, 2021, it was operating 284 KFC stores and 317 Pizza Hut stores in India. Notably, the company collaborates with Yum across various aspects of operations for KFC and Pizza Hut for protection and management of franchisor’s brand apart from product innovation and development, brand strategy and technology initiatives. It also works closely with Yum on advertising, promotion and marketing activities. For Costa Coffee, it enjoys operational flexibility with respect to similar parameters as well as determining menu, ingredients, suppliers and distributors.  

Financials in Brief  

DIL’s financial performance was significantly impacted in FY21 due to business disruptions caused by COVID-19, for which its revenue, EBITDA and PAT recorded negative CAGR of 7%, 16% and 18%, respectively over FY19-FY21. However, the company increased the number of stores from 469 in FY19 to 605 in FY21 under its core brand business i.e. KFC, Pizza Hut and Costa Coffee. Further, its EBITDA margin as on FY21 stood at 15.8%, which is superior compared to key peers like Burger King and Westlife Development. Additionally, its cash flow generation has been impressive with cumulative OCF and FCF of Rs8.2bn and Rs1.8bn, respectively over FY19-FY21.  

Review: May SUBSCRIBE  

The IPO is valued at 62.8x of FY21 EV/EBITDA and 9.9x of FY21 EV/Sales, which look to be reasonable compared to its listed QSR peers and Westlife Development (McDonald’s) and Burger King. Fast food culture under QSR is expected to flourish in India due to increase in working class population and continued urbanization. We note that business model of QSR is quite impressive, as each restaurant franchise starts generating significant RoE at restaurant level once it reaches utilization level of 90%, which bodes well for the long-term investors. Additionally, superior cash flow generation ability of the business offers comfort.

   ''In terms of valuations, the post-issue FY2021 EV/Sales works out -9.9x to (at the upper end of the issue price band), which is low compared to peers (Jubilant Foodworks-15.4x, Burger King India -14.8x, Westlife Development – 10x). Further, Devyani International has a better operating margin compared to Westlife Development & Burger king. We believe this valuation is at reasonable levels. Thus, we recommend a subscribe rating on the issue,'' Angel Broking said in a note.

The quick service restaurant (QSR) company's IPO consists of a fresh issue of ₹440 crore and an offer for sale (OFS) of upto 155.33 million shares by shareholders and promoters.

''Devyani is well placed to benefit from growing industry trends as it has a strong portfolio of highly recognized global brands which cater to a range of customer preferences. The financial performance has been tepid for the company which has further got impacted in FY21 due to the pandemic. However, the company intends to improve its unit performance which would aid better margins. Considering the current market sentiments, investors may subscribe for listing gains,'' Religare Broking said.

Hence, Investors may SUBSCRIBE to the issue.

Investors who wish to subscribe to the Devyani International IPO can bid in a lot of 165 equity shares and multiples thereafter. At the upper price band, they will be shelling out Rs 14,850 to get a single lot of Devyani International. The shares will be listed on both BSE as well as the National Stock Exchange (NSE).

The applicants also must note that the cut-off time for UPI mandate confirmation is Monday, August 9, 2021, upto 12:00 pm. If they fail to do so then their application may not be considered.

   Kotak Mahindra Capital Company Ltd, CLSA India Pvt Ltd, Edelweiss Financial Services Ltd, Motilal Oswal Investment Advisors Ltd are the investment bankers to the issue. The proceeds from the issue will be used for repayment of certain or full borrowings of its firm.

Devyani International (DIL) is the largest franchisee of Yum Brands in India and is among the largest chain operators of quick service restaurants (QSR) in India on a non-exclusive basis, and operates 696 stores across 166 cities in India, as of June 30, 2021. Yum! Brands Inc. operates brands such as KFC, Pizza Hut and Taco Bell and has a presence globally with more than 50,000 restaurants in over 150 countries, as of December 31, 2020.

As on 28th Jan 2022 - Devyani International  has provided 35% returns .