Burger King India’s IPO will open for subscription tomorrow. The fast-food major is just a little over half-a-decade old, and is one of the fastest growing quick service restaurant (QSR) chains in the country. Burger King and its promoters are looking to raise Rs 810 crore in the IPO through a combination of a fresh issue and an Offer For Sale (OFS). Burger King began operating in India in the financial year 2015, and has since seen rapid expansion to now owning 261 restaurants across the country.
Burger King’s fresh issue is worth Rs 450 crore, while the OFS, where the promoter QSR Asia Pte is selling six crore shares, is worth Rs 360 crore. Investors can subscribe to the issue in bid lots of 250 shares at a price band of Rs 59-60 per share. Post the issue the promoter group’s shareholding in the company will drop from the current 94.3% to 60.1%. The Rs 450-crore fresh issue will be used by Burger King to repay outstanding debt and for expansion of the business by setting up more company-owned restaurants.
Financially, the company is still in the rudimentary stages and has not managed to turn profitable so far. However, the rapid expansion has helped increase total income of Burger King 48.4% CAGR between financial year 2017 and 2020. “Same-store-sales growth (SSSG) stood at 12.2% and 29.2%, respectively, in fiscal year 2018 and fiscal year 2019, which also helped in achieving strong revenue growth in the past two years,” said brokerage firm Sharekhan in a recent note. Except for financial year 2017, Burger King has reported positive operating cash flow for every year since then.
The pandemic and the results lockdowns have had a serious impact on the business of Burger King. In the current fiscal year, Burger King saw five store closures. Since operations began Burger King has seen only 7 restaurant closures. “For the nine month ended December 2019, SSSG stood at 6.1%, but due to Covid-19 pandemic led crisis and lockdown, SSSG declined by 0.3% in the previous financial year. It declined further by 56.9% in the first two quarters of this fiscal year,” Choice Broking said in a note.
Axis Securities also took note of the significant impact of the pandemic on Burger King’s business. In the six months ended September 30, 2020 revenue from sales of foods and beverages dropped to Rs 134 crore compared to Rs 419 crore in the same period last year.
“At the higher price band of Rs 60 per share, Burger King’s share is valued at an EV/sales multiple of 5.2x, which is at a discount to the peer average of 8.9x,” said Choice Broking. On the other hand Sharekhan says that the offer is valued at 29.5x/29.3x its FY2020 EV/EBIDTA on the upper and lower price band. Jubilant FoodWorks, the much mature peer in the QSR industry has an EV/EBITDA value of 38.7x. Price to sales Jubilant trades at 8.5x while Burger King is 2.7x.
Should you subscribe?
Although the company is still not making profits, the rapid expansion that it plans could help the firm. “Considering Covid-19 as an exceptional phase for the sector, we feel that with positive advancement in vaccine development and considerable relaxation in the economic activities, it is expected to report improved financials over the period,” said Choice Broking while advising investors to subscribe to the issue.
The future plans of Burger King have also impressed Angel Broking. “Burger King has priced its issue at a significant discount compared to Jubilant FoodWorks, so looking at the valuation and the growth the company is expected to do in the future, the issue is looking attractive to us at the first look,” said Keshav Lahoti Associate Equity Analyst, Angel Broking.