Unravelling Devyani International IPO

Have you ever wondered sitting in a KFC or a Pizza Hut about how that business is run? Is it a good business? Or if you can invest in it? Yes? Then the upcoming IPO is definitely of your interest. It’s Devyani International's debut in the stock markets.

You may be wondering what the relation is between Devyani International Ltd (DIL) and KFC or Pizza Hut. So, fun fact... DIL is the largest operator of Pizza Hut, KFC, and Costa Coffee in India. The company operates in the Quick Service Restaurant (QSR) segment.

So, before we delve into the company, let’s understand the QSR industry.

QSR Industry Overview

Quick Service Restaurant is a specific type of restaurant that serves fast food cuisine. We can say that companies like McDonald's, Dominos, BurgerKing, Subway, Haldirams, etc., operate in the QSR segment.

QSR segment weighs about 34% of the total food and beverage (F&B) market sales in India. India’s F&B market forms Rs 8366.6 billion in 2020, estimated to grow at a CAGR of 1.9% until 2025. Whereas the QSR is expected to grow at a stunning rate of 12.4% until 2025 -

(Source: DIL’s drhp)

Not only this, QSR is expected to witness rapid growth in the number of transactions and number of outlets (as shown below). This is what is driving investors crazy and is one of the reasons why we can say that recent debutants like Zomato, Burger King, Barbeque Nation have made bumper listing gains.

(Source: DIL’s drhp)

Now that you’ve understood the industry, let’s look at the company’s attributes.

Everything you need to know about DIL

Devyani International Ltd is the largest franchisee of Yum! Brands and operates 655 stores across 155 cities all over the country as of Mar 31, 2021. They can be categorized as below:

1. Core Brands (KFC, Pizza Hut, and Costa Coffee stores in India), 
2. International Business (stores in foreign countries, i.e., Nepal and Nigeria),
3. Other Businesses (own branded stores, i.e., Vaango, Food Street, Masala Twist, Ile Bar, Amreli, and Ckrushh Juice Bar).

Currently, it operates 264 KFC stores, 297 Pizza Hut stores, and 44 Costa Coffee stores in India.

Financials of Devyani International

The company's revenue was in an upward direction except in FY21, due to lockdown and the complete closure of operations in March and April of 2020. Moreover, Devyani International is still a loss-making company, and the company operates on very thin operating margins, i.e., a mere 5%. The company can start making profits with a reduction in debt, but still, it would be considerably difficult for the company to raise its operating margins.

The company’s revenue slipped in 2021 due to Covid-19. But a major change was that 70% of its earnings came from delivery and takeaway stores. Earlier, core brands (including international business) would contribute to about 85% of the company’s revenue, but in 2021, they contributed to about 95% of the company’s revenue, as evident from the following pie-chart -

Promoters: RJ Corp Ltd, Ravi Kant Jaipuria, and Varun  Jaipuria are the company’s promoters. Now, RJ Corp is the parent investor in Varun beverages, which is the largest bottler for Pepsi India. So, the company has a strong promoter group that is experienced in this business.

Competitive Analysis

The QSR segment is growing more and more competitive in India. Mostly, the Indian population is habitual to food items that are hot-and-instant. Yet, with the upcoming younger generation, there seems a tilt in eating habits. Western snacks have started gaining market share. But still, the majority of the market is unorganised and unlisted.

Competitors of Devyani would be Burger King, Jubilant Foodworks (Dominos & Dunkin donuts), Westlife Development (McDonald's), Café Coffee Day (CCD), etc.

While comparing Devyani with competitors, it would be wise to look at no. of outlets:

Devyani has increased its outlet count to 565 by 2020. That’s an addition of nearly 100 outlets in just one year! With an outlet count of 605 by 2021, it’s on its way to compete with the giants like Jubilant. But DIL’s yet to turn a profit. In fact, of all the competitors, only Jubilant FoodWorks made profits in 2020.

Details of DIL’s IPO

Moving ahead, Let’s see how big the IPO issue size is. DIL is planning to raise about ₹ 1,838 crores through the primary market, of which ₹ 1,398 crores would be offered for sale (OFS). And the balance of ₹ 440 crores will be a fresh issue. Of this, ₹ 357.8 crores will be used to reduce the debt the company has.

SWOT analysis

What have we learned from knowing about Devyani Intl Ltd? Let’s do a SWOT analysis to get a clear picture.

• Strengths

  • The company operates in multidimensional business verticals. 

  • It has beverages as well as food items along with some indigenous South Indian stores like Vaango. This gives a diversified portfolio to Devyani.

  • Along with that company has a strong promoter group RJ Corp which brings in experience of 2 decades.

  • Talking about the growth story, the company increased its core brand outlets from 469 to 605 in just 2 years.

• Weaknesses

  • The company has to operate on very thin margins and finds it tough to raise them.

• Opportunities

  • The growing QSR segment with changing lifestyle and eating habits of the younger generation can act as fuel to fire for the company's growth.

• Threats

  • The company faces fierce competition from rivals like Dominos, Burger King, McDonald's, Subway, Haldiram’s, Smokin Joe’s, etc.

Conclusion

As an investor, you would probably be better off waiting for a year or two to see how the company is performing in the market and refining its operations to generate profits.

But if one is concerned about listing gains, all the peers from the F&B business had huge listing gains in the past year. So, you can make a point here that this company having world-class franchises like KFC and Pizza Hut will have listing gains as well. You can’t be sure, though.

However, as you’re putting your hard-earned money at stake, you’d be wise enough to do proper analysis & see if the asset fits into your investment objectives. Though this piece would have given you a snippet, there’s a lot more about the company that you must research and only then make a decision.

Invest wisely!