Don’t miss the latest developments in business and finance.

Taking a bite of Burger King's IPO could yield reasonable returns

Reasonable valuation, steady margin profile are positives

Bs_logoBurger King
The logo of Burger King is seen outside a shop. Photo: Reuters
Ram Prasad Sahu Mumbai
3 min read Last Updated : Dec 07 2020 | 7:07 PM IST
If the current financial year is excluded, growth has not been a problem for the Indian quick service restaurant (QSR) business. At 19 per cent annual growth over FY15-20, QSRs far outstrip most other formats in the organised food service market. This trend is likely to hold with annual growth pegged at 23 per cent over the FY20-25 period, according to management consultancy Technopak. 

Burger King India, which is raising over Rs 800 crore in its initial public offering, is eyeing this growth as it seeks to expand its presence in the country by two and half times over the next six years to over 700 stores from its current base of 268 stores. 

While the company, which is the exclusive national franchisee of Burger King in India, is a late entrant into the QSR business as compared to the listed peers, it has been able to ramp up  its stores by 85 per cent in the last five years (since FY15). Its target audience (millennials), presence in the largest category in QSRs (sandwiches, burgers), cluster approach with presence in malls, transit locations and tailored offerings to the India market has helped double its revenue growth over FY18-20.  While overall revenue growth has been strong, same store sales growth however was flattish in FY20 after registering a 29.2 per cent growth in FY19. The management highlighted that a higher base was responsible for the same. 

The two key aspects for investors to look at are near term growth prospects and valuations. At Rs 59-Rs 60, the IPO is priced at 2.7 times on the price to sales metric considering FY20 financials. This is at a 40-70 per cent discount to listed peers Westlife Development (McDonald’s) and Jubilant FoodWorks (Domino’s). 

Analysts say the discount even on other parameters such as enterprise value (EV) to sales or EV to operating profit is on account of the inferior profitability and the longer track record of execution for its peers. While valuations do not seem to be over the top, how the company manages to overcome the current growth challenges for the sector, including lower footfalls, higher share of delivery in the revenue pie and weak operating leverage would be crucial. 

In this context, its plan to pay down its debt from the issue proceeds should help save on interest costs and enable it to turn profitable at the net level. The company also plans to stay the course on expansion with the soft real estate prices expected to offer attractive deals and lower rentals. The other benefit of the ongoing pandemic is that competitive intensity in the QSR business could come down with a sizeable number of competing restaurants expected to close shop. This should help the company benefit from the ongoing shift to the organised segment and improve market share. While the company has launched the new version of Burger King app (it was dependent on aggregators), scaling up will take time and it has been trailing its peers on this count. 

If the company is able to navigate the pandemic, scale up its presence and use the operating leverage to improve margins (gross margins have remained steady at around 64 per cent even in this fiscal), investors could benefit from the long growth runway. 

Topics :Burger KingIPOsMarkets

Next Story