IPO Analysis: Sapphire Foods India Ltd

IPO Rating: AVOID  

About the issue:  

 Sapphire Foods India Ltd runs QSR (Quick Service Restaurant) chain as a franchise operator for YUM’s. The company is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 10 per equity share. The maiden offer comprises an offer for the sale of shares worth Rs 2,073.25 crore by existing investors, according to its red herring prospectus. The price band of the issue has been fixed at Rs 1120 to Rs 1180 per equity share. The IPO opening date is November 9, 2021, while it will be closing on November 11, 2021. The issue will be listed on the exchange on November 22, 2021. The IPO market lot size is 12 shares. A retail-individual investor can apply up to a maximum of 14 lots (168 shares or Rs 1,98,240). The net proceeds generated from the IPO will be utilized to carry out the offer for sale of up to 17,569,941 equity shares by the selling shareholders, achieve the benefits of listing the equity shares on the stock exchanges, and enhancement of company’s brand name amongst existing and potential customers and creation of a public market for equity shares in India.  

Sapphire Foods IPO Details :

About the company:  

Sapphire Foods India is YUM brand's largest franchise operator in the Indian subcontinent in terms of revenue as of FY'20. It is also Sri Lanka's largest international QSR chain in terms of revenue for FY' 2021 and the number of restaurants operated as of March 31, 2021. As of March 31, 2021, the company owned and operated 204 KFC restaurants in India and the Maldives, 231 Pizza Hut restaurants in India, Sri Lanka and the Maldives, and two Taco Bell restaurants in Sri Lanka. The company's total number of restaurants in the subcontinent region grew from 376 in 2019 to 437 in 2021.  

The company has an in-house supply chain function and works with vendor partners for food ingredients, packaging, warehousing, and logistics. The company operates warehouses across five Indian cities and has invested in building technology solutions in their restaurants. The company employs the YUM brand's global online and digital channel solutions to enhance customer experience and achieve operational efficiency and financial control. The company operates its restaurants at high traffic and high visibility locations in key metropolitan areas and cities across India and develop new restaurants in new cities as part of its expansion strategy.  

Competitive Strengths:  

• One of India's largest restaurant franchisee operators and Sri Lanka's largest international QSR chain.  

• YUM's largest franchise operator in the Indian subcontinent in terms of revenue.  

• Focus on delivering an excellent customer experience.  

• Quality control and operational excellence.  

• Scalable business model.  

• Experienced management team with robust corporate governance practices.  

Company Financials:  

The company’s EBITDA stood at Rs 178.7 crore in FY21 as against Rs 1,48.6 crore in FY19, which grew with a CAGR of 9.66%. But it decreased by 3.7% when compared with FY20. The Covid breakout in FY21 has affected the chain restaurants on a large scale. 

Recommendation:  

Quick service restaurant chains are increasingly getting popular in India. According to Technopak BoK, as of FY20, the market share of QSR in the chain food services market in India is 47% and is expected to be 54% by 2025. Also, there is a low penetration of the QSR into the urban cities. Hence, there is huge headroom for growth for the company. Also, the company has been recently formed and has the benefit of scaling its business that is it can keep on adding as many stores as it wants. However, the company is still a loss-making firm.  

Devyani International can be an ideal candidate for comparison as a listed peer. It operates in a similar business. It too has been a loss-making company. Recently in Q1FY22, it posted a net profit number. Interest cost is one of the major reasons why profitability is eaten away. Also, there is no fresh issue in the IPO, while all the shares issued are offered for sale (sold by existing shareholders) which pose a concern from a long-term perspective. We recommend to AVOID investing in the IPO.