Can Burger King deliver WHOPPER returns to an investor?

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Burger King IPO is all set to open on 2nd December. Let us analyse and try finding out if one should invest in it or not.

Burger King and Food Services Business

  • One of the youngest and fastest growing QSR (Quick Service Restaurant) with a total of 268 outlets.
  • Food services is a key segment accounted for approximately $56.5 billion in Fiscal 2020, of which only $22.8 billion comes from the organized market. Clearly shows Indians’ love towards the local Bhel /Gol Gappewala. However, the organised sector (chain market) has grown at a CAGR of 18% over a period of 5 years and it is expected to grow at similar rates till 2025.
  • Unlike Dominos, Burger King has a different business model where a JV with local entity is created for smooth operations. Most of the stores are company owned and downside to this model is that it is capital intensive and, therefore, prone to financial risk.

Proposed Utilisation of Net Proceeds

  • Out of total fresh proceeds of 450 Cr, 177 Cr will be used towards opening of new 700 outlets by 2026 end. 165 Cr will be allotted towards Debt repayment and balance will be used for “General Corporate Purposes”, as the company states. This includes marketing, acquisitions or JVs, capital requirements, etc.
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Pros & Cons

Pros

  • Conducive environment for growth due to growing millennial population, changing consumption patterns and urbanisation.
  • Gap created by unorganised sector in lockdown can be filled by organised players to some extent.
  • EV/Sales multiple (consider  this as some sort of valuation metric, which is lower the better) of the company is 2.2x against 8.6x of Jubilant Foodworks and 5x of Westlife Development, which shows the attractive valuation of the company. Furthermore, this fair valuation is confirmed by recent Pre-IPO placement at 58.5 per share.
  • The rate at which company expanded since 2015 is impressive. Revenues grew at CAGR of 56.3% during 2016-2020.

Cons

  • The company has been consistently reporting losses leading to equity erosion.
  • It is dependent on global brand for success in India. Any negative impact may seriously affect Indian operations (like it happened with some Chinese companies recently).
  • Largely dependent on single third-party distributor for the purchase, supply and delivery of most of ingredients and packaging materials.
  • Company has been fined for procedural inaccuracies in private placement of preference shares to the promoter.
  • After secondary sale, promoter holding will be reduced by almost half post- IPO.
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Conclusion

I believe it totally depends on investor’s risk appetite and preferences. Given its fair valuation and allotment to retail is just 10% of the total, there are high chances of listing gains for people looking to invest for short term.

In an interview with Bloomberg Quint, company’s CEO was asked-” When are you gonna be profitable?”. His reply was-We’re only about 5 years old. We’re looking at 700 restaurants in the future. And with that, comes a lot of depreciation, lot of investment in capital, etc.” which means company is focusing on growth and not stability.

This IPO may not be desirable for conservative investors but if you’re a young investor who thinks “RISK HAI TOH ISHQ HAI!”, you may well consider applying.

Rushabh Meher

Commerce Graduate | CFA Level 3 Candidate

+91 8275941515

Enveloperushabh.meher3@gmail.com

Disclaimer- This document is for educational purposes only. I am not a SEBI RIA. Please consult your advisor before taking any investment decisions.

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