IPO of Pizza Hut & KFC Operator, Sapphire Foods, Opens on 9 November. Key Details to Know

Sapphire Foods India, which operates KFC and Pizza Hut outlets has fixed the price band for its initial public offering (IPO) between Rs 1,120 and Rs 1,180 per share.

The initial share sale will open on 9 November and conclude on 11 November. The bidding for anchor investors will open on 8 November 2021.

At the upper end of the price band, the public issue is expected to fetch Rs 20.7 bn.

Sapphire Foods is an omni-channel restaurant operator and the largest franchisee of Yum Brands in the Indian subcontinent. It's backed by marquee investors such as Samara Capital, Goldman Sachs, CX Partners, and Edelweiss.

JM Financial, BofA Securities, ICICI Securities, and IIFL Securities are the lead managers to the company's public issue.

Sapphire Foods India IPO Details

Issue Type	Book Built Issue IPO
Face Value	Rs 10 per equity share
IPO Price	Rs 1,120 to Rs 1,180 per equity share
Market Lot	1 lot - 12 shares
Issue Size	Rs 20.7 bn
Offer for Sale	Rs 20.7 bn
Basis of Allotment Date	Tuesday, November 16, 2021
IPO Listing Date	Monday, November 22, 2021

Data Source: Company's Red Herring Prospectus (RHP)

The IPO will be entirely an offer for sale (OFS) of 17.5 m equity shares by promoters and existing shareholders.

As a part of the OFS, Quick service restaurant (QSR) Management Trust will sell 8.5 lakh shares, Sapphire Foods Mauritius will offload 5.6 m shares, WWD Ruby will divest 4.8 m shares, and Amethyst will offer 4 m shares.

Presently, the promoters hold 60.08% stake in the company. Post issue the shareholding will come down to 49.97%.

Category-wise reserved portion

Investors can make bids for a minimum of 12 equity shares and in multiples, thereafter, translating to a minimum investment of Rs 14,160 per lot at an upper end of the price band.

Up to 75% of the net issue has been reserved for qualified institutional buyers (QIBs), 15% for non-institutional buyers, and the remaining 10% for retail investors.

About Sapphire Foods

Sapphire Foods India is YUM brand's largest franchise operator in the Indian subcontinent in terms of revenue as of financial year 2020.

It's also Sri Lanka's largest international QSR chain in terms of revenue and the number of restaurants operated as of 31 March 2021.

As of 31 March 2021, the company owned and operated 204 KFC restaurants in India and the Maldives, 231 Pizza Hut restaurants in India, Sri Lanka, and the Maldives, and 2 Taco Bell restaurants in Sri Lanka.

The company's total number of restaurants in the subcontinent region grew from 376 in 2019 to 437 in 2021.

The company has an in-house supply chain function and works with vendor partners for food ingredients, packaging, warehousing, and logistics.

It 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.

Sapphire Foods operates its restaurants at high traffic and high visibility locations in key metropolitan areas and cities across India. It develops new restaurants in new cities as part of its expansion strategy.

Financial snapshot of the company

For the financial year 2021, the firm reported revenue from operations at Rs 10.2 bn versus Rs 13.4 bn a year ago.

Net loss for the period stood at Rs 998.9 m against Rs 1.6 bn last year. Total borrowings were at Rs 756.6 m from Rs 712 m last year.

Key Financial Parameters

(Rs bn)	FY19	FY20	FY21
Revenues	11.9	13.4	10.2
Revenue Growth (%)		12.6%	23.9%
Expenses	12.7	14.2	11.8
Net Profit\Loss	-0.7	-1.6	-1

Data Source: Company's RHP

The company said it has been substantially affected by the covid pandemic and it may continue to affect its business, results of operations, financial condition, cash flows, and reputation in the future.

For more details, check out Sapphire Foods' Red Herring Prospectus.

Comparison with listed peers

As per the offer documents, the key competitors for the company are Devyani International, Jubilant Foodworks, Westlife Development, and Burger King.

Company (Rs m)	Total Income	Net Profit\Loss	Return on Net Worth (%)
Devyani International	11,989	-630	-48.5%
Jubilant Foodworks	33,850	2,320	16.2%
Westlife Development	10,303	-990	-20.7%
Burger King	5,229	-1,740	-25.8%
Sapphire Foods	10,812	-999	-22.2%

Data Source: RHP, Equitymaster

Impact of Covid-19 on food services market in India

QSR formats, primarily QSR chains, were the first in the food services market to demonstrate a recovery from the effects of the Covid-19 pandemic.

Chains such as McDonald's, Domino's, Pizza Hut, and KFC had started deliveries, drive thrus, and over the counter ('OTC') pick-ups long before Covid-19. So they quickly adapted to providing delivery and takeaway services.

Moreover, people preferred to order from reputable international QSR chains given the high levels of hygiene and safety standards maintained by these chains.

In the fourth quarter of financial year 2021, high street international chain QSR restaurants recovered to almost 100% of their revenues in the fourth quarter of financial year 2020 prior to covid.

Technology developments

Covid-19 has caused chain restaurants to move to digital platforms for ordering food. Market leaders such as Domino's and Pizza Hut are leveraging their own apps to attract new and loyal customers.

Some technologies being used in the food services market are:

• Data analysis to improve management and the customer experience.
• Tools such as mobile apps, messaging and social media to provide customers with a more targeted and customized virtual experience.
• Allowing guests to pay their bill and to tip through the restaurant's app.
• Point of sales tablets to take orders and display orders instantly on screens in the kitchen.
• Self-order kiosk, digital menu boards, free Wi-Fi, and wireless chargers.

Key risk factors for chained pizza, burger, and chicken restaurants

Consumer shift towards healthy options: Indian consumers, especially urban consumers, are moving towards healthy lifestyles and healthy food. Market experts expect this shift towards healthy food to increase.

Thus, brands such as KFC which serve chicken as a core offering are expected to be at risk from this trend.

Increasing competition: The Indian food services market is fragmented, comprising many unorganised players that contribute nearly 62% of the total food services market.

Due to competitive pricing, many small and mid-sized restaurants directly compete with large, organised brands in terms of varied offering options for eating out.

Shortage of skilled staff and high attrition: The food services market experiences shortages of trained manpower.

Direct employees in the restaurant industry in India in financial year 2020 was 8.4 m and is expected to reach 11.8 m people by financial year 2025, which implies that approximately 650,000 skilled manpower will be required in this industry every year.

However, there are only 50,000 to 60,000 graduates from government or private institutions in the hospitality sector every year.

Accordingly, there is a huge unmet requirement for talented manpower in the restaurant industry, which is likely to be fulfilled by unskilled manpower, leading to poor service delivery.

The shortfall in quality manpower, as well as the industry's attrition rate of 35% to 40%, keeps the cost of manpower high.

High real estate cost: For a food services outlet, real estate (rent) is the second major cost component after raw materials, and accounts for approximately 12% to 15%, and sometimes up to 20% of total revenues.

What's the ideal IPO strategy to follow?

In the past few months, a large number of corporate houses have submitted proposals for floating IPO. A number of IPOs are also expected to hit the market soon.

As companies line up to raise funds from the market amid high valuations, investors need to consider numerous factors before investing their money in an IPO.

If you are investing in an IPO, weigh in all the positive and negative factors affecting the company.

Take a close look at the company's financials and valuations. It would give you a clear picture of what's brewing.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more here...