Reblog: Devyani International IPO review

• DIL is the largest franchisee of Yum Brands in India.
• The company is also the largest player in the QSR segment.
• Outlets of DIL are most fancied amongst today’s generation.
• Re-run of the Zomato saga is very much likely for this IPO as well.
• Cash surplus/risk seekers may consider investing in this negative P/E offer.

Preface:
While we have witnessed madness in the rush for loss-making companies maiden floats in the recent past with the historic saga of Zomato, there are four IPOs lined up for opening on a single day i.e. 4th of August 2021. DIL is one of them and has also become the talk of the town on the lines of performance by Zomato, the latest loss-making company’s debut as well as companies like Burger King, Barbeque Nations in the recent past. Few Dividend scheme MFs investing in Zomato IPO has raised eyebrows.

On the one hand, the Primary market has started a new equation of valuations for loss-making companies, permission from regulators for loss-making companies to float on the other hand has surprised one and all. If we recall the Controller of Capital Issues (CCI) regime, loss-making companies IPOs were not at all permitted. While SEBI has been alarming on issue price band for more than a decade now, it has not done any concrete thing on this issue.

However, according to seasoned players, CCI was a controller of issues and hence was empowered to do so, whereas, post opening up of financial sector for global play, SEBI being a regulator, is trying to just regulate the security market. When advanced countries have seen listings of loss-making companies, why India cannot follow the same. All such companies do run disclaimed on the front page of offer documents about their loss-making status and likely continuation of the said trends for coming years. Thus it is for the knowledgeable investors to take a final call on their investment decisions.

However, it is worthwhile to note that SEBI has initiated its plans on the book-building process and pricing mechanics as per a recent media release. Let us hope that it takes a prudent measure on this aspect to protect retail investors masses.

About the Company:

Devyani International Ltd. (DIL) is the largest franchisee of Yum Brands in India and also among the largest operators of chain quick-service restaurants (“QSR”) in India (Source: Global Data Report), on a non-exclusive basis, and operate 655 stores across 155 cities in India, as of March 31, 2021, and 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 brands and has a presence globally with more than 50,000 restaurants in over 150 countries, as of December 31, 2020. In addition, DIL is a franchisee for the Costa Coffee brand and stores in India. Its business is broadly classified into three verticals that include stores of KFC, Pizza Hut and Costa Coffee operated in India (KFC, Pizza Hut and Costa Coffee referred to as “Core Brands”, and such business in India referred to as the “Core Brands Business”); stores operated outside India primarily comprising KFC and Pizza Hut stores operated in Nepal and Nigeria (“International Business”); and certain other operations in the F&B industry, including stores of own brands such as Vaango and Food Street (“Other Business”). Revenue from Core Brands Business, together with International Business, represented 83.01%, 82.94% and 94.19% of its revenue from operations in Fiscals 2019, 2020 and 2021, respectively.

Following the onset of COVID-19, it has increased focus on safety by the introduction of contactless delivery and takeaway, ensuring greater cleanliness of stores, additional safety measures such as frequent sanitization and temperature checks. Among measures, it adopted to counter the effects of COVID-19 include re-developing menus to focus on delivery and takeaway options. DIL also introduced measures to reduce fixed and variable costs and sought rental waivers from store landlords and lessors. It also rationalized certain loss-making stores to ensure that the company continues to maintain a profitability position and strong financial performance. DIL serves a wide range of customers across various price points as a multi-dimensional comprehensive QSR player. It will continue to invest in technology to maintain its competitive advantage.

Issue Details / Capital History:

To part finance its plans for repayment/prepayment of certain borrowings (Rs. 324 cr.) and general corpus funding, DIL is coming out with a maiden IPO via book building route to mobilize Rs. 1838 cr. at the upper price band of the issue. The issue comprises a fresh equity issue worth Rs. 440 cr. (approx. 48888840 shares) and an offer for sale of 155333330 equity shares of Re. 1 each (worth Rs. 1398 cr.). The company has fixed a price band of Rs. 86 – Rs. 90 per share. The issue opens for subscription on August 04, 2021, and will close on August 06, 2021. The minimum application to be made is for 165 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 16.98% of the post issue paid-up capital of the company.

DIL has reserved 550000 equity shares for its eligible employees and out of the residual portion, it has allocated 75% for QIBs, 15% for HNIs and 10% for retail investors.

Book Running Lead Managers (BRLMs) to this issue are Kotak Mahindra Capital Co. Ltd., CLSA India Pvt. Ltd., Edelweiss Financial Services Ltd. and Motilal Oswal Investment Advisors Ltd. Link Intime India Pvt. Ltd. is the registrar to the issue.

Having issued initial equity at par, DIL raised further equity in the price range of Rs. 15 to Rs. 43.33 per share (based on FV of Re. 1 per share) between July 2000 and March 2021. It has also issued bonus shares in the ratio of 2 for 1 in February 2002, 3.3 for 1in May 2011 and 1 for 1 in January 2012. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. Rs. N.A., Rs. 0.66, Rs. 3.24 / Rs. 3.24 and Rs. 30.61 per share.

Post issue, DIL’s current paid-up equity capital of Rs. 115.36 cr. will stand enhanced to Rs. 120.25 cr. At the upper price band of the issue, DIL is looking for a market cap of Rs. 10822.71 cr.

Financial Performance:

On the financial performance front, on a consolidated basis, DIL has posted turnover/net profits (loss) of Rs. 1323.68 cr. / Rs. – (59.29) cr. (FY19), Rs. 1535.04 cr. / Rs. – (78.75) cr. (FY20) and Rs. 1198.90 cr. / Rs. – (81.32) cr. (FY21). While it has marked a setback in the top line for FY21, it has reported higher losses for all these years.

For the last three fiscals, DIL has (on a consolidated basis) posted an average EPS of Rs. – (0.76) and an average RoNW of – (24.26%). The issue is priced at a P/BV of 87.38 based on its NAV of Rs. 1.03 as of March 31, 2021, and at a P/BV of 19.52 based on its post-issue NAV of Rs. 4.61 (at the upper cap).

As the company has been incurring losses for the last three fiscals, its P/E is negative. (NOT ASCERTAINABLE)

Comparison With Listed Peers:

As per offer documents, DIL has shown Jubilant Foodworks, Westlife Development and Burger King as its listed peers. They are currently trading at a P/E of around 133.56, 00 and 00 (as of July 30, 2021). However, they are not truly comparable on an apple to apple basis.

Dividend Policy:

The company has not declared any dividend for the three fiscal years preceding the date of DRHP and until the date of RHP. It will follow a prudent dividend policy post listing based on its earnings and future prospects.

Merchant Banker’s Track Records:

The four BRLMs associated with the offer have handled 24 pubic issues in the past three years, out of which 6 issues closed below the issue price on the listing date.