Devyani International coming with an IPO to raise upto Rs 1858 crore

Devyani International 

• Devyani International is coming out with a 100% book building; initial public offering (IPO) of 20,64,96,120 shares of Rs 1 each in a price band Rs 86-90 per equity share. 
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on August 04, 2021 and will close on August 06, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 1 and is priced 86 times of its face value on the lower side and 90 times on the higher side.
• Book running lead manager to the issue are Kotak Mahindra Capital Company, CLSA India, Edelweiss Financial Services and Motilal Oswal Investment Advisors.
• Compliance Officer for the issue is Anil Dwivedi.

Profile of the company

The company is the largest franchisee of Yum Brands in India and are among the largest operators of chain quick service restaurants (QSR) in India, on a non-exclusive basis, and operate 655 stores across 155 cities in India, as of March 31, 2021, and 696 stores across 166 cities in India, as of June 30, 2021. Yum! Brands Inc. operates brands such as KFC, Pizza Hut and Taco Bell brands and has presence globally with more than 50,000 restaurants in over 150 countries, as of December 31, 20201. In addition, it is a franchisee for the Costa Coffee brand and stores in India.

The company’s business is broadly classified into three verticals that includes stores of KFC, Pizza Hut and Costa Coffee operated in India (KFC, Pizza Hut and Costa Coffee referred to as Core Brands, and such business in India referred to as the Core Brands Business); stores operated outside India primarily comprising KFC and Pizza Hut stores operated in Nepal and Nigeria (International Business); and certain other operations in the F&B industry, including stores of its own brands such as Vaango and Food Street (Other Business). Revenue from its Core Brands Business, together with its International Business, represented 83.01%, 82.94% and 94.19% of its revenue from operations in Fiscals 2019, 2020 and 2021, respectively.

Proceed is being used for:

• Repayment/prepayment of all certain of borrowings.
• General corporate purposes.

Industry overview

The Indian food services profit sector generated a total revenue of Rs 8,366.6 billion ($117.5 billion) in 2020, growing at a CAGR of 1.9% from Rs 7,601.4 billion ($118.5 billion) in 2015. Growth was mainly driven by the rise in the number of transactions, which grew at a CAGR of 2.4%, during the same period. Increased deliveries, a higher demand for eating out, urbanization, and an increased exposure to different food types have played a significant role in the growth of transactions, especially in 2020, due to COVID-19. The number of transactions is expected to grow by an even higher rate of 6.9% in the period between 2020 and 2025. While both dine-in and take-away/ delivery transactions are expected to grow during this period, deliveries are projected to grow at a higher rate compared to dine-ins. For instance, in the ice-cream parlour channel, take-away is projected to grow by a robust CAGR of 40.6%, compared to 6.9% for dine-ins, from 2020 to 2025. Concurrently, food delivery applications, such as Zomato and Swiggy, are expected to play an even more prominent role during the forecast period, and the pandemic has amplified their role in the ecosystem.

The number of outlets is expected to grow at a CAGR of 4.5% in the period between 2020 and 2025. Growth in the quick service restaurant (QSR) channel, supported by urbanization and increasing exposure of the youth to these food types, is expected to play a key role in the overall growth of the foodservice industry. The total foodservice revenue is expected to grow to Rs 17,220.3 billion ($219.4 billion) in 2025, registering a strong CAGR of 15.5% from 2020 to 2025. Historically, the QSR channel recorded the fastest growth among all foodservice channels, at a CAGR of 5.5% from 2015 to 2020. Their ability to provide affordable meals, with a quick service time, helped them register significant growth during this period. Global chains, such as KFC, McDonald’s, and Burger King, have invested in expanding their presence in the market. Dependence on take-away for a large part of its sales helped the channel during 2020, amid the pandemic. The channel is expected to continue to grow at a robust rate in the coming years as well. Mobile operators and full-service restaurants (FSR) also registered significant growth rates during the review period. Pub, club, and bar channels declined in value historically. This decline was mainly in 2020, as lockdown restrictions affected the channel substantially. Take-away and deliveries could not help the channel, as they did for other channels, and hence the overall sales value declined by a CAGR of 0.8% between 2015 and 2020.

Pros and strengths

Highly recognized global brands: The company operates franchises of several highly recognized global QSR brands and are the largest franchise partner for Yum in India. Its Core Brands include: (i) KFC, a global chicken restaurant brand with over 25,000 restaurants in over 140 countries, (ii) Pizza Hut, the largest restaurant chain in the world specializing in the sale of ready-to-eat pizza products and (iii) Costa Coffee, a global coffee shop chain with over 3,400 coffee shops in 31 countries. It is the non-exclusive sole franchisee for KFC and Pizza Hut in Nepal, and for KFC in Nigeria. It is also a franchisee for Costa Coffee in India. In addition, it owns and operate stores of certain other brands that include Vaango, Food Street, Masala Twist, Ile Bar, Amreli, and Ckrussh Juice Bar. Its Core Brands Business as well as its Other Business offers a range of full and limited-service dining experiences not only in terms of cuisine, that includes a variety of offerings such as burgers, pizza, south-Indian food and street food, but also in terms of the format of offerings including dine-in, cafés, take-away, delivery, and drive-thrus.

Multi-dimensional comprehensive QSR player: The company is a multi-dimensional comprehensive QSR player. Its close association with Yum together with its technical, marketing and operational expertise has enabled it to establish itself as a comprehensive player in the QSR industry in India with expertise and control in all areas of operations. The QSR channel has been rapidly growing in popularity in India, owing to factors such as rise in literacy, exposure to media, increase in disposable incomes, easier and greater availability and proliferation of internet. The sales value of the QSR channel is forecast to grow at a CAGR of 12.4% between 2020-2025. Economic recovery and greater investments from western fast-food chains are expected to drive growth.

Presence across key consumption markets with cluster-based approach: The company operated 655 stores across all brands and was present in 26 states and three union territories across 155 cities in India, as of March 31, 2021. It operated 696 stores across all brands and was present in 26 states and three union territories across 166 cities in India, as of June 30, 2021. It has a strong presence in key metro regions of Delhi NCR (comprising Faridabad, Ghaziabad, Gurgaon, Delhi and Noida), Bengaluru, Kolkata, Mumbai and Hyderabad. As of March 31, 2021 and June 30, 2021, it had 304 stores and 323 stores, respectively, of its Core Brands located in these five major metros in India. With its cluster-based expansion approach, it has been able to address demand in high-potential domestic markets. Its portfolio of brands in its Other Business also helps it scale up its store network. It consider guest traffic and distance from existing stores under the same brand to minimize sales transfer that may occur from existing stores. Other factors it consider as part of its cluster based approach include retail presence at a particular location and the brand recognition and recall value of its Core Brands.

Cross brand synergies with operating leverage: The company has expanded its operations in the last few years and has opened 72, 50 and 111 stores under its Core Brands Business in Fiscals 2019, 2020 and 2021, respectively. In addition, it acquired 13, 9 and 51 KFC stores from Yum in Fiscals 2019, 2020 and 2021, respectively. It has been able to leverage substantial operating synergies across the brands it operates. According to it, one of the most important aspects of its business that distinguishes it from its competitors is its focus on bringing cost efficiencies at each level. It has streamlined business processes from conceptualization of its stores to execution of daily operations. Its sourcing, warehousing and distribution of its raw materials is centralized for particular regions and across its Core Brands Business. This reduces the storage space required at its stores, thereby enabling it to minimize its store operating costs, without incurring significant additional expenses at the commissary level. 

Risks and concerns

Rely on arrangements with Yum for KFC and Pizza Hut stores: Revenue from operations from its KFC and Pizza Hut stores together amounted to Rs 9,971.15 million, Rs 11,750.36 million, and Rs 10,472.26 million, and represented 76.08%, 77.49% and 92.28% of its total revenue from operations, in Fiscals 2019, 2020 and 2021, respectively. It is therefore significantly dependent on its arrangements with Yum for its business and operations. These arrangements are set out in various development agreements, trademark license agreements and technology license agreements. It has previously been unable to meet its minimum development obligations within prescribed timelines, and while it have been granted extensions and have subsequently been able to meet such obligations within extended timelines, there can be no assurance that it will be granted such extensions in the future or that it will be able to consistently honor these commitments in a timely manner or at all.

Rely on the Costa IDA with Costa for its Costa Coffee stores: Pursuant to the company’s Costa IDA, it had been granted exclusive development rights in India that were contingent upon its ability to meet certain development commitments set out therein. Owing to its inability to meet such development commitments and remedy its breach within cure periods that were granted to it, its exclusive development rights were subsequently terminated. As a result, while it has the right to operate its existing Costa Coffee stores for terms specified in the operational agreements with respect to such stores, it is refrained from opening any new stores in India unless it receive Costa’s prior consent to do so, thereby limiting its ability to grow its Costa business. Additionally, Costa also has the right to unilaterally terminate the Costa IDA in the event it fail to pay sums due to Costa within timelines specified therein, have more than two operational agreements terminated by Costa, challenge the validity of trade mark owned by Costa or fail to comply with its obligations under the Costa IDA or applicable laws.

Business depends on continued success and reputation of core brands globally: The company’s success to a large extent is directly related to the success of its Core Brands globally, including their financial condition, marketing strategies, product development as well as overall quality and success of their operations amongst competitors. Core Brands comprise the ‘KFC’, ‘Pizza Hut’ and ‘Costa’ brands that are not owned by it. The ‘KFC’ brand is owned by Kentucky Fried Chicken International LLC, the ‘Pizza Hut’ brand is owned by Pizza Hut International LLC, and the ‘Costa’ brand is owned by Costa International Limited. It is permitted to use these brands based on the arrangements entered into with these brand owners under which it is required to pay certain royalty and continuing fees. Royalty and continuing fees in Fiscals 2019, 2020 and 2021 amounted to Rs 727.66 million, Rs 840.39 million and Rs 724.99 million, respectively, and represented 5.55%, 5.54% and 6.39% of its revenue from operations in such periods, respectively. It therefore have no control over the management or operations of its Core Brands globally except for those jurisdictions and outlets developed and operated by it. As a result, a variety of factors affecting the Pizza Hut, KFC and Costa Coffee brands that are beyond its control could have a material adverse effect on its business.

Face competition: The QSR industry in India is competitive. It compete primarily with international QSR chains operating in India, such as McDonalds, Burger King, Domino’s Pizza, Starbucks, and Subway, as well as local restaurants and chains in the QSR segment such as Café Coffee Day and Chai Point. It generally compete on the basis of product and service quality, price and location, and the industry is often also affected by changes in consumer tastes, economic conditions, demographic trends and consumer disposable income. For instance, during and post the COVID-19 pandemic, cloud kitchens that are designed exclusively for deliveries, are expected to see a rapid growth. Longer-term strategies being adopted by the F&B industry include opening dark/ cloud kitchens to expand footprint at a lower cost. In the event it does not successfully adapt to these evolving formats or are required to expend significant resources to do so, it may be unable to remain competitive and maintain or grow its market share effectively.

Outlook

Incorporated in 1991, Devyani International 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 Mar 31, 2021. Yum Brands Inc operates many fast food brands i.e. Pizza Hut, KFC, and Taco Bell brands. It operates 3 business verticals; 1. Core Brands (KFC, Pizza Hut, and Costa Coffee stores in India), 2. International Business (stores in foreign countries i.e. Nepal and Nigeria), and 3. Other Businesses (own branded stores i.e. Vaango, Food Street, Masala Twist, Ile Bar, Amreli, and Ckrussh Juice Bar). The company attribute its growth over the years to its employees and consider them to be among its key assets. It ensure that employees across its Core Brands Business, International Business and Other Business, undergo training to be able to provide quality customer service and ensure high standards of food safety and quality. Its communication practices are aligned with consumer needs and preferences and are targeted at boosting overall customer experience across all its stores. On the concern side, The company’s business is dependent upon increasingly complex and interdependent information technology systems, including internet-based systems, to support business processes including day to day operations, supply chain and restaurant management. It depends on third parties for all of its power and fuel requirements. Since it has significant power consumption, any unexpected or significant increase in its power tariffs could increase the operating costs of its stores.

The issue has been offered in a price band of Rs 86-90 per equity share. The aggregate size of the offer is around Rs 1775.86 crore to Rs 1858.46 crore based on lower and upper price band respectively. On the performance front, total income decreased by 21.90% from Rs 15,350.41 million in Fiscal 2020 to Rs 11,988.95 million in Fiscal 2021 primarily due to the impact of the COVID-19 crisis and the temporary closure of a number of its stores across India due to the lockdown related restrictions on its business operations commencing from end of Fiscal 2020, as well as reduced store-level operations, including reduced operating hours and dining closures in line with GoI guidelines, which resulted in a significant decrease in customer footfalls at its stores given the lockdown, and significant decrease in same-store sales. It has recorded a loss for the year of Rs 629.87 million in Fiscal 2021 compared to Rs 1,214.18 million in Fiscal 2020. The company intends to continue to seek additional franchise opportunities for its Core Brands Business. Its focus will continue to remain on increasing sales across the KFC and Pizza Hut brands by opening additional stores. It also intends to launch targeted marketing campaigns for such value products. It intends to leverage its core menu items and work with Yum to introduce innovative menu items to meet evolving consumer preferences and local tastes, drive customer engagement and continue to broaden the brand appeal of its Core Brands.