Devyani International IPO

download Devyani International IPO

Ask anybody about brands like Pizza Hut, KFC and Costa Coffee and the chances are that most of them have heard these names. Ask them about Devyani International and the chances are that most of the people have not heard that name. Devyani International is a classic example of a company that has brands that are better known than the company itself. Now Devyani International is tapping the IPO market on 04 August to raise funds
through a combination of fresh offer and offer for sale (OFS). Just to give a quick heads up, Devyani International operates under the Yum Brands franchise in India and operates a huge chain of quick service restaurants (QSR). If you add up the total outlets across the 3 marquee brands of Devyani viz. KFC, Pizza Hut and Costa Coffee; they run 696 outlets across 166 Indian cities and towns. An IPO snapshot.

%name Devyani International IPO

Data Source: IPO Filings
Apart from the core brands like KFC, Pizza Hug and Costa Coffee, Devyani International has other areas of business too. For example, it operates stores out of neighbouring Nepal and Nigeria in Africa. In addition, Devyani also operates some of the very focused and localized brands like “Vaango” and “Food Street”.

Key points you must know about the Devyani International IPO

Here are some important points to note about the IPO of Devyani International, which could have a bearing on the final decision.

• The 3 core brands of KFC, Pizza Hug and Costa Coffee, account for 94% of total revenues of Devyani Internationals, so that is what the business is predominantly about.

• In terms of stores break-up, Devyani International operates a total of 284 KFC stores, 317 Pizza Hut stores and 44 Costa Coffee stores across India. That is the total presence across the core brands in India.

• Profitability in the QSR business relies on continuous expansion of stores to improve the reach and then to focus on same store sales growth or SSG as it is called. Devyani has expanded stores at 13% with 30% growth in last 2 years in the midst of the pandemic.

• Recently, the SSG took a hit due to the lockdown but that is largely temporary. In terms of brand gross margins, KFC earns 68%, Pizza Hut 74% and Costa Coffee 79%.

Revenues, profits and application of IPO funds

QSR business is a long gestation business with front-ending of investments which means these companies have to make losses for sustained period. However, as you can see in the table below, the losses have substantially narrowed in FY21, compared to FY20.

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Data Source: Red Herring Prospectus (RHP)

Why investors should seriously consider the Devyani International IPO

Investors may find it hard to reconcile to loss making companies but that is the new model where investors are willing to wait longer. For investors with patience, this can be a good play on the India consumption story. Here are some key valuation points.

a) The 3 brands are in the business for the long haul and you can see their global presence and reach. KFC runs 25,000 stores across 140 countries while Pizza Hut runs 17,650 outlets and Costa Coffee 3,400 outlets globally.

b) The QSR outlets are largely concentrated in the high consumption zones of India like Delhi, NCR, Bengaluru, Kolkata, Mumbai and Hyderabad. Most of them target a similar audience so cross selling opportunities could also arise in the future.

c) Devyani has focused more on the delivery business than on the dine-in business with their share of delivery going up from 51% to 71% in the last 1 year. The pandemic may have tweaked the business model by default, if not by design.

d) An important point to note is that Devyani will use Rs.324 crore out of the IPO proceeds to repay debt, which reduces financial risk and enhances valuations. That is a point worth nothing.

Evaluate investing in the IPO based on your individual risk tolerance, investment Span etc.

Disclaimer

The article is for informative purpose and does not suggest to buy or sell or hold. Decision or investing is to be taken by individuals.

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