IPO analysis: Devyani International Limited

IPO rating: Invest for long-term  

 About the issue:  

Devyani International Ltd is the largest franchisee of Yum Brands and among the largest quick-service restaurants (QSR) chain operators in India. The company is coming out with its initial public offering (IPO) of equity shares with a face value of Re 1 per equity share. The issue size of the company is Rs 1,838 crore, with a fresh issue comprising Rs 440 crore while the remaining include the sale of shares worth Rs 1,398 crore by existing investors, according to its red herring prospectus. The price band of the issue has been fixed at Rs 86 to Rs 90 per equity share. The IPO opening date is August 04, 2021, while it will be closing on August 06, 2021. The issue will be listed on the Exchanges on August 16, 2021. The IPO market lot size is 165 shares. A retail-individual investor can apply up to a maximum of 13 lots (2,145 shares or Rs 1,93,050). The net proceeds generated from the IPO will be utilised towards repayment/pre-payment of the firm's borrowings fully or partially as well as for other general corporate purposes.  

 Devyani International IPO details  

About the company:  

Incorporated in 1991, Devyani International Ltd is the largest franchisee of Yum Brands and among the largest quick-service restaurants (QSR) chain operators in India with 655 stores across 155 cities all over the country as of March 31, 2021. Yum Brands Inc operates many fast food brands such as Pizza Hut, KFC, and Taco Bell.  

It operates three business verticals mainly core brands (KFC, Pizza Hut, and Costa Coffee stores in India) including international business (stores in foreign countries i.e. Nepal and Nigeria) and other businesses (own branded stores i.e. Vaango, Food Street, Masala Twist, Ile Bar, Amreli, and Ckrussh Juice Bar). Firstly, the business started with a Pizza Hut store in Jaipur but subsequently, expanded operations in both KFC and Pizza Hut. As of March 31, 2021, it operates 264 KFC stores, 297 Pizza Hut outlets, and 44 Costa Coffee stores in India.   

 Competitive strengths:  

• It has a product portfolio of well-recognised QSR brands.  
• Largest franchisee of Yum Brands in India.  
• Cross brand synergies provide operating leverage benefits.  
• Disciplined financial approach with a strong focus on cash flow management.  
• Strong store network; 264 KFC stores, 297 Pizza Hut stores, and 44 Costa coffee outlets.  

Financials:  

The revenue of the company de-grew by 22 per cent in the fiscal year 2021. The company has not made a profit in the last three years and due to the company’s inability to control its losses, the loss amount is increasing every year.  

Recommendation:  

The main purpose of the IPO is repayment of debt fully or partially and not expansion, which is not very promising. The current and continuing impact of the ongoing COVID-19 pandemic on its business and operations has been significant. The impact of the pandemic on its operations in the future, including its effect on the ability or desire of customers to dine-in stores is uncertain and may be significant. It continues to have an adverse effect on business prospects, strategies, business, operations, and future financial performance. The company permanently closed 61 stores under its core brands business in the fiscal year 2021 due to a significant decline in footfalls on account of COVID-19. Further worsening the impact, the operating expenses does not linearly decline with the revenue, adding to the financial woes. Many of its expenses are less variable in nature and may not correlate to changes in revenues, such as lease expenses, depreciation, employee benefit expenses, and other costs associated with operating and maintaining the stores. More than 90 per cent of their revenue comes from Pizza Hut and KFC stores despite having so many brands under its name, leading to concentration risk. The company is exposed to all of the risks associated with leasing real estate as most of its lease agreements range between 5 years and 20 years. Its business depends on the continued success and reputation of core brands globally, and any negative impact on these brands, or a failure by them or owners of its core brands to protect these brands along with other intellectual property rights & proprietary information, may adversely affect its business, operations & financial condition. The prevalence of home delivery in Indian QSR is expected to continue to grow due to changing lifestyles as well as consumer eating patterns in a post COVID atmosphere. Operators will be forced to modernise and digitise their operations and have an online presence to meet customer demand. The proliferation of cloud kitchens in the future will stand as a witness to the rise in demand for home deliveries and growing reluctance to visit regular dine-in outlets. Owing to the uncertain market scenario and all other factors above, we recommend investing for a ‘long-term’ duration in this company.  

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