Burger King IPO – Should you take a bite out of this?

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Burger King is the second largest fast food burger brand. It owns 216 Burger-King restaurants and 8 Sub-Franchised Burger King restaurants. It has an exclusive right to establish, develop, and operate Burger King branded restaurants in India. We are the national master franchisee of the Burger King brand in India, which is the second largest fast food burger brand globally based on total number of restaurants as at September 30, 2020.

Issue Details

IPO Date – Dec 2 to Dec 4, 2020

Issue Size – 810 Cr (450 Cr Fresh (165 cr prepayment of borrowing, 177 cr new restaurants) + 360 Cr OFS)

The net proceeds from the IPO will be used to – finance the roll-out of new company-owned Burger King Restaurants and to meet the general corporate purposes.

IPO Price – Rs 59 to Rs 60

Lot Size | Lot Value – 250 shares (Rs 15000 at upper price)

About the Company

Advertising and marketing expenses were 14.25%, 8.52%, 5.83%, 5.17%, and 5.02% as a percentage of revenue from the sale of food and beverages in Fiscal 2018, 2019, and 2020 and for the six months ended September 30, 2019, and September 30, 2020, respectively.

The GMP is at Rs 29-30 now while it was Rs 13 just a few days back! (One thing to note here is that the GMP started with Rs 13, went to Rs 36 two days back, today went to Rs 24 and now at Rs 29 showing high volatility)

As of September 30, 2020, it had 4,836 employees, which decreased from 6,141 as of March 31, 2020, as a result of attrition resulting from certain employees (especially restaurant staff) returning to and remaining in their hometowns as a result of the COVID-19 crisis.

The following table sets forth the growth in and the total number of Burger King Restaurants in India by region and operating structure –

Share price increase of 36% in 6 Months

Burger King took a Pre-IPO Placement by way of a rights issue of 13,200,000 Equity Shares to their Promoter Selling Shareholder for cash at a price of ₹ 44 per Equity Share aggregating to ₹ 580.80 million pursuant to the resolution of the Board dated May 23, 2020

Just after 6 months, the issue price is Rs 60, a 36% premium over the pre IPO raise from selling promoters. Quite surprising to see this.

Business Model

Joint venture: under this model, the international brand enters into a joint venture agreement with a local entity to create a new entity that operates as a master franchisee for the operation of the international brand in the country.

The local partner has a deep understanding of the consumer behavior in the country and provides real estate to the international brand, as well as setting up the supply chain, which allows the international brand for a faster scale in the country. Companies operating under the joint venture model are allowed to make small alterations in the size of the format based on the availability of real estate and for better unit economics in certain areas such as metro stations, tier-II cities, highway locations, etc.

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Examples of companies operating under this model in India include Starbucks, Burger King, and TGI Friday’s.

Risks

Their business depends in part on the continued international success and reputation of the Burger King brand globally, and any negative impact on the Burger King brand may adversely affect business, results of operations, and financial condition.

They rely on a single third-party distributor for the purchase, supply, and delivery of most of their ingredients and packaging materials and if they are required to source ingredients or packaging materials from alternative distributors, deliveries to certain of their restaurants may be disrupted or delayed.

The QSR industry in India is competitive. They compete primarily with international QSR chains operating in India, such as McDonald’s, KFC, Domino’s Pizza, Subway, and Pizza Hut, as well as local restaurants in the QSR segment. These international QSR chains have been introducing food products that cater to India’s specific palate while Maintaining their core offerings; for example, Domino’s now offers wraps and KFC offers rice bowls in India. Burger King therefore also offers Boss WHOPPER® and Masala WHOPPER® and rice bowls, which are designed specifically for the customers in India.

Credit Ratings –

On May 29, 2020, they obtained from ICRA Limited: (a) a reaffirmed long term credit rating of “ICRA BBB+” (pronounced as ICRA triple B plus) with a negative outlook due to the impact of COVID-19 (revised from a stable outlook in a prior credit rating from ICRA Limited on 5 December 2019) which included their sanctioned term loan for the amount of ₹2,100 million;

(b) a long term credit rating of “ICRA BBB+” (pronounced as ICRA triple B plus) with a negative outlook which included their bank overdraft for the amount of ₹200 million; and

(c) a short term credit rating of “ICRA A2” which included a bank guarantee of ₹100 million. We did not receive a credit rating during Fiscal Years 2018 and 2019;

Total Estimated costs to set-up a new Company-owned Burger King Restaurant of Average Size –

*average restaurant size of 1,300 square feet to 1,400 square feet

Webinar Takeaways –

700 restaurants by 2026, so 5% royalty capped of sales (Royalty capped till December of 2039)

Financials –

Balance Sheet

P&L

Cash Flows

Operating Cash Flow (OCF) has been increasing steadily.

Triggers –

India has one of the youngest populations in comparison to other leading economies. The median age in India in 2020 is estimated to be 28.7 years compared to 38.5 and 38.4 years in the United States and China, respectively, and the median age in India is expected to remain under 30 years until 2030.

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Increasing urbanization

Growing middle class

Valuations –

The company is loss-making at the bottom line and the operating level as well. Post-IPO, the company’s market cap at the upper band will be 2290 Cr, and as per FY20 sales of 847 Cr, the company is coming at a Price to sales valuation of 2.7x which is comfortably priced as its peer Westlife development trades at 6.16x Price to sales and Jubilant Foodworks trades at 10.3x.

The company’s NAV is Rs 7.62 as of Sept 30, 2020. (At upper band, the PBV is 7.87x)

Indian food services market overview

A noticeable shift began in 1996 with the opening up of QSR such as McDonald’s, Pizza Hut, and Domino’s Pizza, followed by Subway, KFC, Burger King, Haldiram’s, Moti Mahal, and Taco Bell, among others.

Structure –

The Indian food services market is classified into two segments, organized and unorganized, based on three key characteristics:

Accounting transparency, organized operations with quality control and sourcing norms, and outlet penetration. Any food services outlet that does not conform to these parameters is considered to fall within the unorganized segment, which primarily includes dhabas, roadside small eateries, hawkers, and street stalls.

By contrast, food services outlets that conform to these parameters fall within the organized segment and can be subcategorized as chains (domestic or international outlets that have more than three restaurant outlets across the country) or standalone outlets.

Chains are further subdivided into six sub-segments based on average price charged per person, service quality and speed, and product offering:

  • Fine dining (FDR): full service restaurants with high quality interiors, specific cuisine specialty, high standard of service translating to high average per cover. Fine dining targets rich and upper middle class consumer segments as it offers unique ambience and upscale service with highly trained staff;
  • Casual dining (CDR): a restaurant serving moderately priced food in an ambiance oriented towards affordable dining with table services. The offering bridges the gap between fast food establishments and fine dining restaurants;
  • pub, bar, club and lounge (PBCL): outlets that mainly serve alcohol and related beverages and include night clubs and sports bars;
  • quick service restaurants (QSR): these are focused on speed of service, affordability and convenience and include the dine-in/takeaway/delivery sub-formats;
  • Cafes: these include coffee bars and parlours, and chai bars. They are mostly casual restaurants that emphasize on serving beverages and food incidental to those beverages; and
  • Frozen desserts (FD/IC): small kiosk outlets of ice cream brands which have been extended to dine-in concept of frozen yogurt and ice cream brands.

Chain Market –

The chain market in India has evolved and witnessed a majority of changeover during the last three decades. The transition phase of the chain market can be divided into 3 stages as set out in the table below:

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The chain market in India was estimated at ₹398 billion in Fiscal 2020 and is projected to grow at a CAGR of 19% to ₹965 billion by Fiscal 2025.

Chain QSR market

In order to remain competitive in a growing market, achieve scale and increase consumer acceptance, most of the QSR companies are adjusting their offerings (including flavours, pricing and services) to meet the demands of the Indian market. Amongst the initiatives to achieve these goals are the opening of vegetarian restaurants in certain parts of the country, the creation of non-beef and non-pork based menus, the separation of vegetarian and non-vegetarian cooking areas, the introduction of local flavors to the menu, the roll-out of home delivery services and the setting of India-centric pricing with affordable entry level products in the menu.

Where is the customer spending?

During Fiscal 2020, the split of expenditure by sub-segment on eating out was 38% in QSR, 31% in CDR, and 14% in Café. Easy access, competitive pricing, availability of combos, and meal packages drive QSR’s preference between the younger population and professionals working in office environments. The table below shows the average monthly spend on eating out per household during Fiscal 2016 and Fiscal 2020, as well as the CAGR between those periods:

Food Trends –

Larger focus on value meals

Contemporization of Indian cuisine

Cloud-based kitchens

Conclusion –

Being into the food QSR business where there are no moats and any one can come and hyperscale in a matter of years (Rebel Foods – 1000 restaurants in 24 months) and uproot the competition and its incumbents. We see nothing sticky or a very close brand recall about this business.

But at the same time, we see how the younger Indian generation has moved from Indian Snacking to western snacking such as burgers , Pizza etc. Given the strong brand presence and consumption all over the globe coupled with a very high consumption by the younger population, we have a ‘Subscribe’ on the IPO.

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JST Investments

JST Investments

JST Investments is a Mumbai-based investment firm that believes in long-term wealth creation. It's a brainchild of Aditya Kondawar, Aditya Shah, and Anish Moonka.
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