Since the largest franchisee of KFC, Pizza Hut and Costa Coffee is a loss-making firm, analysts are valuing it on metrics such as EV/Ebitda and EV/sales, and largely have a subscribe rating on the issue. Some of them even suggest subscribing for listing gains.
“Devyani’s valuation of 9.5 times EV/sales on FY21 basis is broadly in-line with Westlife and 30-35 per cent discount to Burger King and Jubilant Foodworks. We recommend ‘Subscribe’ as valuation is justified due to increase in consumer preference for branded QSRs, value/unique proposition (fried chicken for KFC), and improving profitability with higher focus on delivery model and smaller store formats,” said Antique Stock Broking.
The IPO is valued at 62.8 times FY21 EV/Ebitda. Reliance Securities said it looks reasonable compared to its listed QSR peers and Westlife Development (McDonald’s) and Burger King.
This brokerage said that the fast-food culture under QSR is expected to flourish in India due to an increase in the working-class population and continued urbanisation.
“We note that the business model of QSR is quite impressive, as each restaurant franchise starts generating significant RoE at restaurant level once it reaches utilization level of over 90 per cent, which bodes well for long-term investors. Additionally, the superior cash flow generation ability of the business offers comfort. Hence, we recommend subscribing to the issue,” it said.
Analysts noted that the QSR has followed a cluster-based expansion approach for the last few years. As a result, 47 per cent of its store count comes from 4 main clusters in India – Delhi/NCR, Bengaluru, Kolkata and Hyderabad.
In its analysts meeting, which was attended by Nirmal Bang Institutional Equities, the company said top 10 cities account for 54 per cent of the store count. North India has the highest contribution in terms of a number of stores, since traditionally, Pizza Hut stores were present in North India and the brand started expanding in West and South after getting delivery rights.
South India has the highest contribution from the sales perspective because KFC is highly concentrated there, Nirmal Bang noted while suggesting that the company does not have the rights for opening KFC stores in West India (except Mumbai airport).
Devyani has opened 40-50 stores across its brands in the last 2-3 quarters and expects to sustain this momentum. For the next 2-3 years, it wants to follow the small store format for Pizza Hut. The company has managed to open 43 stores in June quarter. It opened 109 stores across core brands in the second half of FY21.
The company’s financial performance has been tepid. It got impacted further in FY21 due to the pandemic. So far, the company has recorded losses in the last three financial years.
“However, the company intends to improve its unit performance which would aid better margins. Considering the current market sentiments, investors may subscribe for listing gains,” Religare Securities said.
