Burger King IPO: Analysis!

Burger King India is set to raise up to ₹810 crore via IPO which opens on 2nd December, Wednesday. Here are the details:

About Burger King India

• Burger King India is the national master franchisee of the Burger King brand in the country. It has exclusive rights to develop, establish, operate and franchise Burger King branded restaurants in India.
• Burger King India is among the fastest-growing international Quick Service Restaurants (QSR) chains in India with 261 stores as at the end of Sep-20 (first store was opened in November 2014). The company aims to have 370 stores by the end of December 2022 (700 stores by December 2026). 
• Globally, Burger King is the second-largest fast food burger brand as measured by the total number of restaurants. It has a global network of 18,675 restaurants in more than 100 countries and the US, as on Sept. 30.

Peers

• Burger King operates in a very competitive market. Listed comparables for Burger King would be Westlife Development, which holds the master franchise for McDonald’s in West and South India and Jubilant Foodworks, which holds the master franchise for Domino's Pizza and Dunkin' Donuts. Among non-listed peers are KFC, Subway and Pizza Hut, besides local restaurants in the segment. 
• Burger King has a 4% market share by Outlet Count and a 5% share in terms of revenue. (see table below)

Key metrics

• “Burger King’s Gross Margins, Average Ticket Size, and EBITDA margins are comparable to that of McDonald’s. Domino’s ranks better in terms of almost all the fundamental metrics.” (shown below)

Financials

• “Burger King’s revenue grew by 2.2x over FY18- FY20 to ₹841.2 crore while store addition rose by 2.95x to 260 stores.”
• The company has not reported a profit in the last 3 years. In H1FY21, Burger King’s loss has expanded to ₹119 crore.
• Covid-19 has significantly impacted the company’s Apr-Sep 20 performance, as a large number of stores were non-operational during the period (revenue down by ~68% and the company registered a loss of ₹119 cr).

About the issue

• Issue  details 
• Issue open: 2nd - 4 Dec 2020 
• Price band ₹59-₹60
• Issue Size: Fresh issue of equity share (~7.5 cr -7.6 cr equity shares based on the price band) and offer for sale (OFS) 6 cr. 
• Issue Size : Fresh issue of Rs. 450crore; OFS of Rs. 354 crore-360crore
• Reservation for QIB - 75% , Retail -10%, Non institutional Investors -15%
• Bid lot: 250 shares, and in multiples of 250 shares
• Post issue market cap ₹2,259 cr- 2,290 cr

INDmoney Recommendation

At the higher end of the price band, Burger King is valued at an attractive 2.7 times Price to Sales ratio, as compared to listed peers Jubilant FoodWorks (P/S of 8.5x) and Westlife Development (P/S 4.4 x). This discounted valuation is justified, as Burger King has not reported a profit in last 3 years, and its outlets are relatively new.

However, the company has seen robust growth in terms of store additions and revenues, and looks to reach 700 stores by 2026 (from 260 currently). Further, the company is repaying around ₹165 cr of debt out of the IPO proceeds, which could help it to become profitable. While the company’s profitability could be under pressure in the near-term, Burger King could turnaround in the next few years as benefits of new store openings and economies of scale kick in. Given attractive valuations (as compared to peers), negative working capital, strong revenue growth and store addition, and robust growth forecast, we remain positive on the prospects of the issue.