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Burger King IPO Financial Analysis (Subscribe for Long Term)

Burger King IPO  Fundamental Analysis

Strengths

  • One of the fastest-growing international QSR chains in India based on the number of restaurants. A robust and increasing trend in revenue from operations on a YoY basis.
  • National master franchisee arrangement which allows using Burger King’s globally recognized brand name.
  • Operational quality, the advantage of brand positioning, people-centric culture, and effective technology systems.
  • Challenges

  • Increase in lease rentals due to proposed expansion with proceeds from IPO.
  • Sustaining the growth projections amidst the covid crisis.
  • Business profile

    The company is into the business of Quick Service Restaurants (QSR) under the international brand name of "Burger King”. The globally recognized Burger King brand was founded in 1954 in the United States and is owned by Burger King Corporation. Master Franchisee arrangement provides BK (India) exclusive rights to develop, establish, operate, and franchise Burger King branded restaurants in India. The arrangement also provides flexibility to tailor the menu, promotions, and pricing to the Indian tastes and preferences while meeting Burger King's global quality assurance standards.

    As of September 30, 2020, BK had 261 restaurants, including eight Sub-Franchised Burger King Restaurants, across 17 states and union territories and 57 cities across India. BK’s number of outlets has grown to 202 as of June ’19 from 12 in FY 2015 (year of incorporation) showing a CAGR of 98.7% during the first 5 years of operations.

    BK has a single contract with a large third-party distributor for procurement of raw materials and packaging which aids in cost efficiencies and reduction in working capital requirements.

    The peers of the company are other international QSR chains operating in India which are McDonald's, KFC, Domino’s Pizza, Subway, Pizza Hut, and other local restaurants in the QSR segment. In FY20 Domino’s Pizza has achieved the largest market share of the chain QSR sub-segment by a number of outlets (19%)due to aggressive marketing, an attractive value proposition, and a strong home delivery network and has a 21% market share in terms of revenue.

    Burger King India Financial profile

    The total revenue for FY 20 has increased by 30% to Rs 846.83 crore from Rs 644.13 crore in FY 19 though the losses have widened to Rs (78) crore from Rs (39) crore in FY19. The increase in losses was mainly because of increased expenses in the form of finance cost (lease rentals), cost of material consumed (increased sales), and depreciation because of the increase in the number of restaurants in FY 20. The profitability and sales of H1FY20 are affected due to lower footfalls and sales due to the pandemic.

    Although the same-store sales(SSS) grew at 29.21% and 6.11% in FY 2019 and in the nine months ended December 31, 2019, respectively, the SSS decreased by 0.30% in Fiscal 2020 and by 56.90% in the six months ended September 30, 2020, primarily due to the impact of the COVID-19 pandemic.

    The sales have begun to normalize but it would take time to reach the pre covid levels.

    Cost of materials consumed (food, beverages, and packing materials)and other costs (lease rentals, power, and fuel, repairs and maintenance of properties, and others) jointly account for approximately70% of the expenses incurred to run the business.

    Among these, apart from materials consumed, lease rentals would continue to form a significant expenditure as all the business operations are conducted on-premises through leases, subleases, or leave and licenses. An increase in the number of restaurants with planned expansion may expose BK to increased cost unless BK is able to secure properties at appropriate locations which are cost-effective as well. However, the increased cost may be offset by an increase in demand with BK’s Indian-centric premium product offerings, discount deals, beverage offerings, online food ordering and delivery, and tech-savvy consumers.

    Table 1 - Financials and Ratios (Amount in Rs Crore)
    Title H2FY21 FY2020 FY2019 FY2018
    Total Revenue 151.65 846.83 644.13 388.74
    PAT -119.01 -77.58 -38.55 -86.46
    EBITDA -13.93 103.96 78.99 8.13
    Total Assets 1177.12 1197.70 920.47 730.36
    Operation Margin(%) -1.18% 8.68% 8.58% 1.11%
    Net margin(%) -10.11% -6.48% -4.19% -11.15%
    EPS -4.14 -2.87 -1.44 -3.10
    return on net worth -40.91% -27.93% -14.55% -30.74%

    Peer comparison with listed peers

    According to its RHP, the average store size of Burger King India is 1,300-1,400 square feet, half or even lesser than the average store size of McDonald’s at 2,600-3,200 square feet. Until now Burger King has focussed more on having its stores in the malls; 60 percent of its restaurants are in the malls. Lower store sizes and better cost management has helped the company maintain several other financial ratios at par despite having cheaper average product prices.

    Apart from higher growth, several other parameters work in favor of Burger King India. For instance, it has a PAN (Presence Across Nation)-India license compared with Westlife, which operates in the West and South India. Burger King India’s royalty payment to the parent is capped at 5 percent which expires in the year 2039. For Westlife, royalty payment to McDonald’s is capped at 5 percent until 2023 and will eventually rise to 8 percent.

    Table 2- Listed Peer Comparison
    Particulars Burger King Jubiliant (Dominos) Westlife (McD)
    Face Value per share Rs 10 Rs 10 Rs 2
    Income for FY20 (INR Crores) 846.83 3996.90 1560.79
    Basic EPS -2.87 21.22 -0.47
    NAV per share 10.31 85.02 37.07
    Return on net worth -28.00% 24.85% -1.27

    Valuation

    Due to the carried forward losses BK has negative P/E. Its NAV is Rs 7.62 against the face value of Rs10. P/BV is Rs 7.87 calculated at the upper band issue price of Rs 60 which hints at a premium valuation. However, its established peer like JubiliantFood commands very high valuations i.eP/E @ 255.71 and P/BV @ 27.86. The industry P/E is 71.03. Further, valuation under this sector is also derived from the brand positioning, Supply-chain model, and customer penetration opportunities. BK has shown an impressive CAGR of 98% in new stores opening over the last 5 years and its revenues have also increased consistently (barring Covid impacted period).  Therefore, it is can be expected that BK growth trajectory will continue and its valuation will keep improving as it achieves break-even in coming years.

    Sectoral Outlook

    The Indian food services market has gained momentum in the last decade due to changing consumption patterns that have seen an increase in a tendency to eat out that had not traditionally been a feature of the Indian lifestyle. This has ensured a constant growth of the Indian food services market. Also, higher internet penetration coupled with the rising of digital commerce, innovation in payments, real-time payment, and mobile point of sale has contributed to increased operational activities across the food services market. Thus, the QSR segment has the potential to capitalize on the growing opportunity in India as they gear up to mark their presence in Tier 1 and Tier 2 cities apart from the metros.

    Future prospects and Conclusion

    BK, under its Master Franchise Agreement, is obligated to develop 700 restaurants by Dec 31, 2026. The proceeds of the IPO would be utilized towards repayment of existing debt and for funding the rollout of new restaurants. With increasing trend seen in its revenue from operations in the last three fiscals and gradual recovery in footfalls and sales post lockdown, BK would be on the growth and expansion spree for the next couple of years.

    BK has a strong brand positioning in the Indian market and has been able to leverage the technical, marketing, and operational expertise associated with the global Burger King brand. Its strategy to launch stores in new city locations with high impact and high visibility in addition to quality product offerings adds to its strengths. Hence it is a growth opportunity investment option for investors with a long-term focus.

    Reviewer recommends Subscribe for Long Term to the issue.

    Review By CA Priyanka Choudhary on 19th Nov 2020

    Review Author

    About CA Priyanka Choudhary

    CA Priyanka Choudhary, a freelance chartered accountant

    Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

    Email: [email protected]

    DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.


    FAQs

    With the current books and future growth plan point we can say Burger Kind IPO is one of the profit giving IPO for short term investors as well as long term investor. The current Grey Market Price (GMP) is also showing around 45 to 50% gain on listing day. The retail quota is very small, requesting all retail investors to apply with 1 application from each account for listing gain.

     


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