About the company:
Issue Details:
Dates: 9th Nov, 2021 to 11th November, 2021
Price Band: Rs. 1,120 to Rs. 1,180 per share
Minimum Lot: 12 shares
Minimum Application Amount: Rs. 13,440- Rs. 14,160
Total Issue Size: Up to Rs. 2,070cr (The issue is 100% Offer for Sale)
Objects of the offer:
The IPO of Sapphire Foods is purely an offer for sale where promoters are selling 10% of their holdings whereas PE investors like WWD Ruby, AAJV Trust and Edelweiss Fund are selling 18% of total holding.
Objects:
a) Carry out the Offer for Sale of up to 17 million equity shares by the selling shareholders
b) Achieve the benefits of listing the Equity Shares on the Stock Exchanges
c) Enhancement of Sapphire’s brand name amongst its existing and potential customers.
Corporate Profile & Business overview:
Incorporated in November 2009 as Samarjit Advisors Private Limited, the entity was renamed as Sapphire Foods India Private Limited in 2015. Sapphire started its franchise partnership with Yum Brands Inc. in 2015 for Pizza Hut, KFC, and Taco Bell brands. Sapphire Foods Mauritius and QSR Management Trust are the Promoters of the company. The company has other PE investors, Goldman Sachs (18.4%), Edelweiss (9.4%) and CX Partners (6.5%), who have been investing for the past five years. The company runs total 482 restaurants of which 220 KFC restaurants in India and Maldives, 260 Pizza Hut restaurants in India, Sri Lanka and Maldives, and two Taco Bell restaurants in Sri Lanka as on September 30, 2021. As of March 31, 2021, the company had five subsidiaries operating in India, Sri Lanka and Maldives.
Sapphire is Sri Lanka's largest foreign QSR chain in terms of sales (Rs. 190 crore, or 35% of total market revenue) and number of locations (as of March 31, 2021). (with 68 restaurants representing 39% of the total number of outlets in the market). In the Maldives, they've also built a foothold. To service its restaurants in India, Sapphire has warehouses in five different locations. It has used YUM's worldwide online and digital channel solutions to improve customer experience in both real and virtual restaurants, as well as improve operational efficiency and financial management.
In terms of financials the company has reported inconsistent growth in revenues mainly due to one off year amid COVID-19 and due to increased overheads, rising leases, and staff expenditures, the firm reported EBITDA losses from FY15 to FY17. However, due to operational stabilisation and SSSG improvement, losses decreased and EBITDA was positive in FY18. Since FY19-20, the business has decreased the store size of new KFC and Pizza Hut outlets by 40%, lowering overall capex and improving store economics. If Sapphire continuous this strategy it is expected to come out of the blues earlier than expected.
Key Strengths:
Diversified Presence: In India, Sapphire Foods has 407 restaurants, 73 in Sri Lanka, and two in the Maldives. They own 219 KFC franchises across West, North, South, and Central India, as well as 188 Pizza Hut franchises. Sapphire Foods' restaurant franchises are more prevalent in India's west and south where over 40% of the population is non-vegetarian. In 1993, Sapphire Foods became the first foreign quick-service restaurant to open in Sri Lanka. In addition, through an indirect subsidiary, they entered the Maldives in Male in 2018.
Largest QSR in Sri Lanka: Pizza Hut was the first foreign QSR chain to enter the Sri Lankan market in 1993, through its subsidiary Gamma Pizza kraft Lanka, and is now present in 44 cities. Since then, Pizza Hut has maintained its position as the market leader in terms of store count and revenue, with 73 locations as of September 30, 2021, accounting for 39 percent of total outlets and 35 percent of revenue among important QSR brands in Sri Lanka. Furthermore, the Sri Lankan business generated a greater EBITDA margin than the Indian business, which has continued to improve over the course of FY19-21 despite the negative impact on the business.
Focusing on improving store economics: Since FY19-20, Sapphire has reduced the size of new KFC and Pizza Hut stores by 40% in order to lower its capex, occupancy and operating costs. Sapphire was able to lower overall capex and opex per store, as well as improve realisations and payback time, as a result of this. During FY2021, Sapphire Foods's omni channel approach saw high conversion of sales from dine-in, takeout, and delivery channels, with 31.2 percent, 26.9%, and 41.9 percent of sales correspondingly.
Key Risks:
Further increase in losses: Sapphire reported losses worth Rs.26.4 cr, Rs.75.1 cr for June 30, 2021 and FY21 respectively. It may continue to incur additional losses in the future as it continues to expand significantly which can lead to more capex and opex.
High Competition: 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 competitors include international QSR chains operating in India, such as McDonalds, Domino’s Pizza, Subway and Burger King, as well as local restaurants in the QSR segment.
Negative Cash flows: In addition to reporting losses Sapphire’s cash flows remain depressed as well, It had reported negative (Rs.160 million) cash outflow from operating activities as of June 30, 2021 and considering the company’s debt profile (Debt to Equity-1.98x) it may incur negative cash flows in the future.
Peer Comparison:
|
Company
|
Number
of Stores
|
Total
Income(Rs Cr)
|
Debt to
Equity (Times)
|
RoNW (%)
|
Price to Sales (Times)
|
|
Jubilant Foodworks
|
1380
|
3,385
|
1.5
|
16.2
|
12.1
|
|
Westlife Development
|
305
|
1,030
|
2.6
|
(20.1)
|
6.9
|
|
Burger King Ltd
|
270
|
523
|
1.1
|
(25.8)
|
10.3
|
|
Devyani International
|
803
|
1,198
|
2.1
|
(48.5)
|
15.5
|
|
Sapphire
Foods
|
450
|
1,081
|
1.8
|
(22.2)
|
7.4
|
Conclusion:
As you can see the IPO looks fairly priced at a price to sales of 7.4 times in comparison with its major peers. In terms of financials, Sapphire’s continuous losses in the Indian business right from its partnership with YUM Restaurants, is a major worry. Sapphire’s worldwide brand appeal and its ability to maximise revenue potential across all channels, particularly delivery, and the long term growth potential of the QSR industry, provides an opportunity to rapidly expand new restaurants of its key brands. However, considering that the QSR market is a highly competitive one, Sapphire’s inability to curtail losses can hamper its growth prospects and earnings potential. As there are more efficient players available in the secondary market to play the QSR growth story, we recommend investors to ‘AVOID’ this IPO.
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