Last updated: 08 Nov, 2021 | 05:13 pm
Sapphire Foods India Limited (Sapphire Foods) IPO opens for subscription on 9th November. The company is looking to raise up to Rs 2,073 crore through the public issue. Here are the details:
About the IPO
Sapphire Foods India Limited IPO Date: 9 November - 11 November 2021
Sapphire Foods India Limited IPO Price band: Rs 1,120 - Rs 1,180
Issue Size: Rs 1,968 crore - Rs 2,073 (Offer for Sale of up to 17,569,941 Equity Shares)
Post Issue Market Cap: Rs 7,117 crore - Rs 7,498 crore
Reservation: QIB 75%, Retail - 10%, NII 15%
Bid lot: 12 shares, and in multiples of 12 shares
Objectives of the issue
The net proceeds from the IPO will be utilized for the following purposes :
About Sapphire Foods
Sapphire Food Operations
KFC - As of March 31, 2021, KFC is the largest QSR chain serving chicken in India in terms of restaurant count. It has a total of 488 restaurants in India. KFC in India and the Maldives has an extensive menu featuring chicken on the bone, boneless chicken and other chicken products, burgers, rice dishes, wraps, beverages, and desserts. As of June 31, 2021, they owned and operated 209 KFC restaurants in India and the Maldives. For Sapphire Foods KFC is their largest revenue generator.
Pizza Hut - Pizza Hut is the 2nd largest pizza chain in India in terms of revenue in FY20, and the market leader in Sri Lanka in terms of revenue for FY21 and number of restaurants. They operate 239 Pizza Hut restaurants in India, Sri Lanka, and the Maldives as of June 30, 2021.
Taco Bell - Taco Bell is the largest Mexican-inspired restaurant chain in the world in terms of store count as of December 31, 2020. Taco Bell in Sri Lanka has various types of tacos, chalupas, burritos, and other related items. They operate 2 Taco Bell restaurants in Sri Lanka as of June 30, 2021
KFC was the largest chicken QSR brand in the world in terms of global retail sales as of December 31, 2020, Pizza Hut was the largest pizza chain in Asia in terms of store count as of December 31, 2020 and Taco Bell was the largest Mexican-inspired restaurant chain in the world in terms of store count as of December 31, 2020.
Sapphire Foods competes within the food services market and the QSR segment not only for customers but also for personnel and suitable sites for their restaurants. The company generally competes based on product and service quality, price, and location.
The competitors of Sapphire Foods include QSR chains like McDonald's, Domino’s Pizza, Subway, and Burger King.
Leading QSR brand with substantial market presence - They are an omnichannel player that leverages its brick and mortar restaurants and digital stores to provide dine-in, delivery, and takeaway services. It creates brand awareness and visibility and improves customer retention in a competitive food service market.
Strong relationship with YUM - YUM has many franchise operators, and Sapphire Food is the largest in the Indian subcontinent in terms of revenue. After starting operation in 2015, they now have access to YUM's system and system property and expertise in building and establishing brands and operating large scale restaurants chains.
Great customer experience - The company is highly focused on providing an excellent customer experience. They have a sophisticated Guest Experience Survey (GES) through which it monitors the quality of their customer experience. Using these surveys, they are able to reward high-performing restaurants, improve restaurants with issues and replicate best practices across restaurants.
Operational excellence - The company has made significant investments in its operations and has a well-defined process that helps its restaurant teams to consistently deliver great-tasting products, food safety, hygiene, and guest experience. They have invested in specialty equipment and technology to enhance food safety and reduce human error.
Convert unorganized food services to the brands - COVID-19 pandemic had a negative impact on the foodservice industry. However, it also provided opportunities to brands that can assure consumers of consistent great-tasting products, food safety, hygiene, etc.
The company plans to continue to build their restaurant network using a cluster strategy, where they would launch their brands from flagship locations in high traffic and high visibility locations in key metropolitan areas and cities and then develop new restaurants within that cluster.
Pursue inorganic growth - Sapphire Foods has built their organization and developed their human resources to grow brands and drive consumption, deliver great operations, and customer experience. They plan to actively explore opportunities to acquire high-quality and scalable QSR and food brands in complementary categories in existing or new geographies.
Franchise Arrangement - The company operates its restaurants under the Franchisee Arrangement that imposes certain restrictions and obligations on them with respect to operations, and, which if terminated or limited, could adversely affect business, results of operations, cash flows, and financial condition.
Failure of quality control systems - The quality and safety of the food served by the company is critical to its success. They have to maintain consistent food quality and prevent food contamination and other health hazards. These significantly depend on the effectiveness of the quality control systems. A failure or deterioration in its quality control systems or protocols for supply chains or restaurants could lead to the termination of the Franchisee Arrangement and impact the revenue.
Losses to continue or even increase - They have reported losses in the last three financial years. They may incur additional losses in the future as they continue to grow their business by opening a number of stores every year.
Sapphire Foods has reported a drop in its topline from Rs 1,340 crore in FY20 to Rs 1,019 crore in FY21, as the business got impacted by Covid-19 related disruptions. However, the company was able to reduce its losses from Rs 159 crore in FY20 to Rs 99 crore in FY 21, due to various steps such as downsizing its stores, to cater to rising deliveries, rather than dine-ins amid the pandemic.
Sapphire Foods has seen robust growth in terms of store additions and revenues. Between FY19 -21, the total store count has increased to 450 from 376. They are YUM's largest franchise operator in the Indian subcontinent, and have the rights to operate under YUM’s leading brands Taco Bell, KFC and Pizza Hut.
Given its negative earnings, comparison with listed peers on the basis of P/E is not possible. At the higher end of the price band, Sapphire Foods IPO is priced at a Mcap/ Sales ratio of ~7.4 times on a post-issue fully diluted basis (based on FY21 sales). This is lower compared to its listed peers Jubilant Foodworks (12.1 times), Burger King (10.27 times) and Devyani International (15.71 times). However, as Jubilant Foodworks has superior profitability and return ratios, it is expected to command a premium valuation. Notably, Jubilant Foodworks was the only peer to report a profit in the previous year.
Given lower profitability, reasonable valuations, and poorer return ratios as compared to its peers, we remain ‘Neutral’ on the long-term prospects of the issue. Given a fancy for IPOs in the ongoing season, the company may still see strong subscription numbers. Hence, investors looking for listing gains can subscribe to the issue.