Sapphire Foods India IPO: Care for a Bite?

It’s that time of the year again! New purchases are in season, and we are coming out of the pseudo-hibernation during the pandemic to resume our careers or get back to the new “normal.” What unites everyone’s experience is the “Arrey treat to banta hai” or “Bahot din se bahar ka nahi khaya.” Even though fine dining restaurants exist, these grubby pangs will need something faster, easily accessible, and pocket-friendly to satisfy them.

A major player in the QSR (fancy-speak for fast-food/takeaway restaurants) happens to be Sapphire Foods India, serving a smorgasbord of tastes from well-known brands as KFC, Taco Bell, and Pizza Hut. Having served food for, well, forever, Sapphire now presents a platter with something different, an IPO for your consideration. Want to know more? Read on!!

Industry Overview

There are multiple factors that contribute to the growth of a country like the expansion of urbanization, size of middle-class families, increasing youth population. These demographic attributes of our country will provide growth opportunities and lead to the success of the QSR & food-service industry. Considering other elements, like more spending by the Indian population on non-vegetarian products, enhancement in ordering-in and dining-out attributes due to increasing penetration of digitalization, especially among the youth population, and willingness to pay more for food in restaurants are also contributing positively to the GDP of the country. 

Taking a look at the growth in this sector, currently, the food services market in India has shown consistent growth since the financial year 2015, and its revenue was estimated at ₹ 4,236 billion in the financial year 2020. The food services market in India is projected to grow at a CAGR of 8.0%, reaching ₹ 6,211 billion by FY 2025.

Focusing specifically on the chain market, the size of the chain market in India is estimated at ₹ 398 billion in the financial year 2020, and is projected to grow at a CAGR of 20% to ₹ 993 billion by the financial year 2025. Growth in the chain market is expected to be driven in the next five years by the increased presence of international brands and more robust back-end infrastructure. Due to COVID-19, consumers have become more cautious about hygiene and safety issues. Such change in the habits of consumers is being leveraged by chain restaurants, primarily chain QSRs. Chain QSRs and CDRs aim to meet the requirements of consumers in the new normal, from high food quality and service standards to superior processes or delivery capabilities.

Now that we’ve seen the haystack (industry) let’s take a closer look at the not-so-hidden needle (Sapphire Foods).

Company Overview

Sapphire Foods was established by the acquisition of around 250 Pizza Hut and KFC stores situated in India and Sri Lanka in September 2015. This acquisition was connected by a leading group of Private Equity firms. Talking about the number of stores as of 31st March 2021, it had 204 restaurants of KFC in Maldives and India while 231 stores of Pizza Hut situated in India, Sri Lanka, and the Maldives; along with this, it also has 2 taco bell outlets in Sri Lanka. In the subcontinent, the company's total number of restaurants increased from 376 in 2019 to 437 in 2021. 

QSR Management Trust and Sapphire Foods Mauritius Ltd. are the major promoters of Sapphire Foods. QSR Management Trust is currently holding 5.83 percent of total shares in this company while the shareholding of Sapphire Foods Mauritius ltd., stands at 45.52 percent. Sapphire Foods works closely with Westlife Development Limited, Jubilant Foodworks Limited, and Burger King India Limited.

Keeping a close eye on its operations, the company works with the vendor partners for packaging, logistics, food ingredients, and warehousing. It also has an in-built supply chain which is integrating all the functions in its operation chain. In terms of numbers, the company has 5 warehouses in different parts of India and has also invested in developing digital answers to all its eateries’ problems. 

The company usually prefers to work with restaurants with heavy traffic and more visibility, providing more focus on metropolitan cities of the country, considering QSR is more popular over in those centers. They also focus on increasing the number of restaurants in India. This is part of Sapphire Foods’ cuisine and brand expansion strategy. 

The company also employs the YUM brand's global web and digital channel solutions to improve customer experience, operational efficiency, and financial control.

Now let’s put a numerical filter on the outputs of the company.

Financials of the company

Checking up on the financial condition of the company, it has revenue from operations of Rs 1,019.62 crore for FY21. In FY21, the company lost Rs 99.89 crore, compared to Rs 159.25 crore the previous year. Due to the Covid-19 problem, revenue from operations fell to Rs 1,019.62 crore from Rs 1,340.41 crore at the same time.

The loss for the quarter ending June 2021 was Rs 26.4 crore, substantially smaller than the loss of Rs 75.17 crore which was reported in the previous fiscal year's similar period. With the alleviation of Covid concerns and the resumption of economic activity, revenue jumped dramatically to Rs 303.05 crore from Rs 110.99 crore at the same time. Total borrowings were at Rs 75.66 crore. 

Aa gaya swaad (company ka)?? Now let’s “crunch” some numbers.

Key details of the IPO

Now that you know what the company intends to raise, here’s why they want to raise it.

Purpose of the IPO

The corporation will not profit from this offering because all proceeds, subtracting issuance expenses, will go to stockholders selling off their shares and reducing their holdings in the company. As all the money will be received by the shareholders selling their stakes, the company is launching an IPO to provide an exit to its existing shareholders and achieve the benefits of listing the equity shares on the stock exchanges. This IPO will also help the company intensify its brand name and become more strengthened among its existing and potential consumers and help create a public market for its equity shares in India where the investors can experience freedom of entry and exit. 

So far, we’ve looked at the company, now let’s turn the spotlight on you, the investor. Below are some points that we think would interest or concern you.

The Strengths of Sapphire's IPO

• Talking about the strengths of this IPO, the company is one of the largest franchise operators in India as well as the largest international QSR chain of Sri Lanka. It is a Leading quick-service restaurant brand with a large market presence and size.

• The company is very customer-oriented and aims to improve its experience with the associated brands. They monitor the quality of their customer experience through a sophisticated Guest Experience Survey (“GES”) system, a third-party tool used around the world to measure customer satisfaction, to give them customer feedback, etc.

• Another benefit to be considered is that the business model of Sapphire Foods is scalable to multiple places. 

• The franchise agreement allows it to operate on a non-exclusive basis, under KFC, Pizza Hut, and Taco Bell brands in various states in India, across Sri Lanka, and the Maldives. It can also enter into contracts with other brands and is not limited to the current selection.

• Across five Indian cities, Sapphire Foods operates warehouses and has strategically invested in building technological solutions in their restaurants. The company has also strategically utilized the YUM brand’s global online and digital channel resources. 

• The company prides itself in a hospitable work environment led by competent management and employs capital raised through formal institutions. 

• The company is continuously improving its operational excellence. They have made significant investments in their operations, and have a well-defined process that helps their restaurant teams consistently deliver great-tasting products, food safety, hygiene, and guest experience.

• It also has a strong business control and internal audit system comprising three layers, including financial excellence review, data analytics team, as well as process and risk review.

The Weaknesses of Sapphire's IPO

• The Covid pandemic had adverse effects on the company’s internal operations and is expected to face lasting effects on the company’s financials as well.

• The company has incurred losses after tax as well as negative cash flow for the financial years 2019, 2020, and 2021 and the loss for the three-month periods ending in June 2020 and 2021. With a growing business, the company needs to counter these trends.

• Volatility in the cost of inputs may have a magnified effect on the profitability of the company.

• Increased competition in the QSR chain sub-segment may have a negative impact on the company.

• Their success is dependent on the KFC, Pizza Hut, and Taco Bell brands’ global popularity and reputation, as well as YUM’s marketing efforts and innovations.

The Bottom Line

Now that we have presented this information to you, you can consider yourself “served.” While the QSR industry is on the uptick, Sapphire India being the major player in the field, it certainly isn’t alone with significant competitors waiting to get a bite of the action.

What will you do then? Will you indulge in this public offer? Or will you fast and sit this one out? Let us know in the comments section below and share with your peers to find out their palates.

*Disclaimer: The stock discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.