Sapphire Foods India
Sapphire Foods India is coming out with a 100% book building; initial public offering (IPO) of 1,75,69,941 shares of Rs 10 each in a price band Rs 1120- 1180 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 November 09, 2021 and will close on November 11, 2021.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 112 times of its face value on the lower side and 118 times on the higher side.
Book running lead manager to the issue are JM Financial, BofA Securities India, ICICI Securities and IIFL Securities.
Compliance Officer for the issue is Sachin Tukaram Dudam.
Profile of the company
The company is one of YUM’s franchisee operators in the Indian subcontinent. It is also Sri Lanka’s largest international QSR chain, in terms of revenue for the financial year 2021 and number of restaurants operated as of March 31, 2021 (with 68 restaurants representing 39% of the total number of outlets in the market). It has also established a presence in the Maldives. As of June 30, 2021, it owned and operated 209 KFC restaurants in India and the Maldives, 239 Pizza Hut restaurants in India, Sri Lanka and the Maldives, and two Taco Bell restaurants in Sri Lanka. The company aspires to be India’s best restaurant operator by serving customers great food with great experience at great value. It operates its restaurants in high traffic and high visibility locations in key metropolitan areas and cities across India and develops new restaurants in new cities as part of its brand and food category expansion.
The company has an in-house supply chain function, and it work with its vendor partners for food ingredients, packaging, warehousing and logistics with the goal of providing its restaurants with the optimum level of inventory at the highest level of quality in a standardized and cost efficient manner. It operate warehouses across five cities in India to service its restaurants in India, and has invested in building technology solutions including a restaurant-level SAP enterprise resource planning (ERP) system and POS software solutions in its restaurants. It has also adopted YUM’s global online and digital channel solutions to enhance customer experience in both its physical and digital restaurants and achieve operating efficiency and financial controls within its organization. Its operational excellence in areas such as hygiene and food safety have allowed it to respond to the serious disruptions it faced during the COVID-19 pandemic.
Proceed is being used for:
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.
Enhancement of company’ s brand name amongst existing and potential customers and creation of a public market for equity shares in India.
Industry overview
The food services market in India has shown consistent growth since financial year 2015 and its revenue was estimated at Rs 4,236 billion in financial year 2020. The food services market in India is projected to grow at a CAGR of 8.0% from financial year 2020 to financial year 2025, and is expected to reach Rs 6,211 billion by financial year 2025. The Indian food services market gained strong momentum in the last decade due to changing consumer consumption patterns that have seen an increase in tendency to eat out that had not traditionally been a feature of the Indian lifestyle. This has ensured constant growth of the Indian food services market, which has evolved considerably since the 1980s, when the numbers of organized brands operating in the country were negligible and the market was widely dominated by smaller unorganized players. A noticeable shift began in 1996 with the opening of QSR restaurants such as McDonald's, Pizza Hut and Domino's Pizza, followed by Subway, KFC, Burger King, Haldiram's, Moti Mahal and Taco Bell, among others.
The organized food services market in India (comprising chain and standalone outlets and excluding restaurants in hotels) is estimated at Rs 1,600 billion in financial year 2020, is projected to grow at a CAGR of 15% to Rs 3,189 billion by financial year 2025, and is expected to increase its share of the total food services market from 37.8% in financial year 2020 to 51.3% by financial year 2025, thereby surpassing the unorganized market. The eight largest cities of India have been the center of development for the organized food services market. Delhi and Mumbai accounted for approximately 42% of the total revenue of the chain food services market in India in financial year 2020, and, when combined with the next six cities (Kolkata, Bengaluru, Chennai, Hyderabad, Pune and Ahmedabad), accounted for approximately 87% of the total revenue of the chain food services market during the same period. Food services is a key segment in the Indian economy, which accounted for approximately $56.5 billion in financial year 2020, of which approximately $22.8 billion came from the organized market (chain and organized standalone outlets). Changing consumer dynamics and increasing market proliferation of brands in India are expected to continue to boost the food services sector's growth.
Pros and strengths
Continuous focus on delivering great customer experience: The company monitor the quality of customer experience through a sophisticated Guest Experience Survey (GES) system, a third party tool used around the world to measure customer satisfaction, to give customer feedback on taste of food, speed of service, hygiene and overall satisfaction for all of the restaurants across various channels. This allows the company to reward high performing restaurants, improve restaurants with issues and replicate best practices across restaurants. A vast majority of customers provided positive feedback on service level through the GES system for KFC and Pizza Hut restaurants in India for the three months ended June 30, 2021 and for the financial year 2021.
Strong relationship with YUM: The company is one of YUM’s franchisee operators in the Indian subcontinent with revenue from operations of Rs 13,404.12 million and Rs 10,196.19 million for the financial years 2020 and 2021, respectively. Its association with YUM started in 2015 and presently has the non-exclusive rights to operate restaurants under three of YUM’s leading brands, namely, the KFC, Pizza Hut and Taco Bell brands. It also enjoy access to YUM’s system and system property and expertise in building and establishing brands and operating large-scale restaurants chains gained through over 50,000 KFC, Pizza Hut and Taco Bell restaurants operated by YUM and its franchisees worldwide as of December 31, 2020. The company’s franchisee arrangement allows to operate under the KFC brand in several states in India and across the Maldives, the Pizza Hut brand in several states in India and across Sri Lanka and the Maldives, and the Taco Bell brand across Sri Lanka, while leveraging YUM’s global best practices and system and system property.
Great place to work led by experienced management team: The company is led by a professional management team with robust corporate governance practices. Its management team has diverse experience of an average of over 20 years across industries including consumer, retail and QSR which brings cross-industry perspectives to its operations and growth, and have demonstrated ability to build and profitably grow businesses. The company has experienced restaurant operators who run the restaurants and deliver superior customer service in an efficient manner. The company strive to make the company an attractive place to work where its employees would be eager to come to work every day, by building a culture that is purpose-driven, safe, engaging and collaborative.
Operational excellence: The company has made significant investments in its operations and has a well-defined process that helps the restaurant teams to consistently deliver great tasting products, food safety, hygiene, and guest experience. These operating procedures are consistent with the global standards of KFC, Pizza Hut or Taco Bell, as the case may be, with respect to product quality, food preparation methods, food safety and cleanliness and customer service standards. The company has multiple levels of supervision and quality control for its restaurant operations including third-party audits covering quality control, operating processes and hygiene in accordance with protocols defined by YUM.
Risks and concerns
Working capital requirements: The company requires working capital to finance the purchase of ingredients and packaging materials and other related work before payment is received from its customers. The actual amount and timing of company’s future working capital requirements may differ from estimates as a result of, among other factors, unforeseen wastage of perishable products, unanticipated expenses, regulatory changes, economic conditions and additional market developments. All of these factors may result, or have resulted, in increases in its working capital needs. The company have historically used internally-generated cash flows to finance working capital requirements, except for one subsidiary, Gamma Pizzakraft Lanka Private Limited, which had aggregate bank overdraft/other credit facilities in the amount of Rs 108.09 million as of September 25, 2021, to finance its working capital requirements
Deterioration in quality control systems have an adverse effect on business: The quality and safety of the food it serve is critical to its success. Maintaining consistent food quality and preventing food contamination and other health hazards depends significantly on the effectiveness of the quality control systems, policies and guidelines, which in turn depends on a number of factors, including the design of the quality control systems and compliance with those quality control systems. During the COVID-19 crisis, the company also implemented high standards of safety and hygiene protocols across its restaurants covering guest safety, crew safety, sanitisation, social distancing, temperature checks and safe deliveries. These have included hourly sanitisation of critical areas (including billing counters, entrance door handles, guest tables and baby chairs), half-hourly hand washing and sanitisation by staff and continuous monitoring of staff health. The company cannot assure that the quality control systems or protocols that the company and its suppliers have in place will prove to be adequate.
Increased competition in QSR chain sub-segment: The QSR chain sub-segment of the food services industry is very competitive. The company competes primarily with international QSR chains operating in India, Sri Lanka and Maldives, such as McDonalds, Burger King, Domino’s Pizza and Subway, as well as local restaurants and restaurant chains in the QSR segment. The company generally competes on the basis of product and service quality, price and location, variety of menu offerings and the industry is often also affected by changes in consumer tastes, economic conditions, demographic trends and consumer disposable income. The company’s competitive position also depends on its ability to develop and launch new products, effectively market and advertise the products and respond to and appeal to consumer preferences, including with respect to the value, variety and quality of products.
Rely on third-parties for warehousing and logistics services: The company rely on third-parties for warehousing and logistics services. These services are critical to supply chain and ability to manage supply chain risk and distribution costs, as well as maintain control and traceability over products. However, the ability of such third parties to provide with these services effectively depends on a number of factors. To the extent that any of third-party providers experience any disruptions or delays in operations in the future due to, for example, insufficient labour or transportation resources, non-compliance with licensing or permit requirements, breakdowns in transportation or other factors which are beyond company’s and their control such as those affecting road transportation or its infrastructure, political unrest, bad weather conditions and natural disasters, supply chain could be disrupted and ability to source ingredients and packaging materials and deliver products to restaurants could be disrupted, which could adversely affect business, results of operations, cash flows and financial condition.
Outlook
Sapphire Foods India is YUM brand's largest franchise operator in the Indian subcontinent. 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 5 Indian cities and has invested in building technology solutions in their restaurants. The company employs 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. It is led by a professional management team with robust corporate governance practices and clearly defined company values that guide its organisation behaviour and culture. On the concern side, The QSR chain sub-segment of the food services industry is very competitive. It compete primarily with international QSR chains operating in India, Sri Lanka and Maldives, such as McDonalds, Burger King, Domino’s Pizza and Subway, as well as local restaurants and restaurant chains in the QSR segment. Beside, the company may maintain insurance which is typical in its industry. However, such insurance may not be adequate to cover all losses or liabilities that may arise from its operations, particularly when the loss suffered is not easily quantifiable.
The issue has been offered in a price band of Rs 1120-1180 per equity share. The aggregate size of the offer is around Rs 1967.83 crore to Rs 2073.25 crore based on lower and upper price band respectively. On the performance front, the company’s total income decreased by 20% to Rs 10,812.35 million for the financial year 2021 from Rs 13,517.36 million for the financial year 2020. Such decrease was primarily due to a decrease in revenue from restaurant sales. Its restated loss for the year after tax decreased by 37.3% to Rs 998.97 million for the financial year 2021 from Rs 1,592.47 million for the financial year 2020. The company plans to continue to strengthen the relevance of KFC and Pizza Hut as full meal options in addition to snacking, thereby straddling all parts of the day. The company plans to continue to build its restaurant network using a cluster strategy, where it would launch its brands from flagship locations in high traffic and high visibility locations in key metropolitan areas and cities and then develop new restaurants within that cluster. This approach is expected to allow it to efficiently manage its vertically managed and scalable supply chain and drive down costs, thereby yielding the benefits of improved operating leverage.
