IPO Note - Devyani International Ltd By Nirmal Bang
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BACKGROUND
Devyani International Ltd. (DIL) is the largest franchisee of Yum Brands like KFC, Pizza Hut in India and are among the largest operators of chain quick service restaurants (QSR) in India. on a non-exclusive basis, and operate 696 stores across 166 cities in India, as of June 30, 2021. In addition, it has a franchisee for the Costa Coffee brand and stores in India. The company’s business is broadly divided into the following three verticals:
(i) KFC, Pizza Hut and Costa Coffee stores operated in India (KFC, Pizza Hut and Costa Coffee referred to as Core Brands Business);
(ii) stores operated outside India, primarily comprising KFC stores and Pizza Hut stores (International Business); and
(iii) other operations in the F&B industry, including stores of other brands such as Vaango and Food Street
Objects of the Issue
The issue of Rs 1838 cr consists of Rs 1398 cr offer for sale and Rs 440 cr fresh issue to repay the debt
Investment Rationale
* Portfolio of highly recognized global brands +
* Presence across key consumption markets with a cluster-based approach
* Strategically expand store network of the Core Brands Business
* Focus on delivery channel for Core Brands
* Disciplined Financial Approach
Valuation and Recommendation
The company’s revenues grew by 16% in FY20 however due to Covid related disruption, sales declined in FY21. Nonetheless, the company continued its store expansion spree during this phase. Also, it took many steps at operational level like – (a) rationalized loss-making stores (b) restructured Pizza hut stores and reduced the size. All the above steps resulted in improvement in EBITDA margins in FY21 to 20% from 16.8% in FY20, despite lower sales in FY21. Going forward, the management has guided to continue to store opening momentum. We believe the full benefits of operational changes have not yet been accounted in current profitability and would continue to improve EBITDA in coming years as well. The company is repaying debt with the IPO proceeds which would reduce the interest cost burden, hence aiding PAT growth. We recommend “Subscribe”.
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