Burger King IPO review (May apply)

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Review By Dilip Davda on November 28, 2020

•    BKIL is growing international QSR Chains in India.
•    'BURGER KING', 'POPEYES', 'TIM HORTONS' are the world brands.
•    The company has suffered losses for reported financial periods.
•    On PE and P/BV parameters, the issue is priced aggressively.
•    97% of owned outlets is the prime positive factor at present.
•    Changing lifestyle, shifting preference of habits posse's big concerns.

ABOUT COMPANY:
Burger King India Ltd. (BKIL) is one of the fastest-growing international QSR chains in India during the first five years of operations based on the number of restaurants. (Source: Technopak) As the national master franchisee of the BURGER KING® brand in India, it has exclusive rights to develop, establish, operate and franchise Burger King branded restaurants in India. Company's master franchisee arrangement provides with the ability to use Burger King's globally recognised brand name to grow its business in India while leveraging the technical, marketing and operational expertise associated with the global Burger King brand.

The globally recognised Burger King brand, also known as the 'HOME OF THE WHOPPER®', was founded in 1954 in the United States and is owned by Burger King Corporation, a subsidiary of Restaurant Brands International Inc., which holds a portfolio of fast-food brands that are recognized around the world that include the BURGER KING®, POPEYES® and TIM HORTONS® brands. The Burger King brand is the second-largest fast-food burger brand globally as measured by the total number of restaurants, with a global network of 18,675 restaurants in more than 100 countries and U.S. territories as at September 30, 2020.

BKIL's customer proposition focuses on value leadership, offering customers variety through innovative new food offerings at different dayparts, catering to the local Indian palate, offering a wide range of vegetarian meal options, and its taste advantage and flame grilling expertise.

Following fancy for ready to eat and lavish lifestyle, BKIL was able to reach a milestone of 200 outlets in India in the first five years of operations. All was going well till FY20, but then COVID-19 pandemic played a spoil sport and the company faced the music with a severe setback in the first half of the current fiscal. With the sudden change in lifestyle and awareness of healthy food habits to survive in the pandemic is a big concern for this chain of stores.

As of September 30, 2020, BKIL had 261 restaurants, including eight Sub-Franchised Burger King Restaurants, across 17 states and union territories and 57 cities across India. Of our 261 restaurants as of September 30, 2020, 226 were operational. As at the date of this Red Herring Prospectus, it had 259 Company-owned Burger King Restaurants and nine Sub-Franchised Burger King Restaurants, of which 249 were operational; including two sub-franchised Burger King Restaurant.

BKIL plans to continue to build its restaurant network using a cluster approach and penetration strategy with the objective to provide greater convenience and accessibility for customers across relevant geographies. BKIL owns around 97% of the total outlets in India. Management is confident of achieving the target of opening 700 outlets PAN India by extended timeframe up to December 2026 despite current slowdown witnessed following a pandemic.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for repayment/prepayment of outstanding borrowings (Rs.164.98 cr.), capital expenditure for own outlets (Rs. 177.00 cr.) and general corpus fund needs, BKIL is coming out with a maiden combo offer of fresh equity issue worth Rs. 450 cr. and offer for sale of 60000000 equity shares of Rs. 10 each to mobilize Rs. 810.00 cr. (at the upper price band). BKIL has fixed a price band of Rs. 59 - Rs. 60 for this book built IPO. The company will issue approx. 75000000 fresh equity shares at the upper price band of the issue. Minimum application is to be made for 250 shares and in multiples thereon, thereafter. The issue opens for subscription on December 02, 2020, and will close on December 04, 2020. Post allotment shares will be listed on BSE and NSE. The issue constitutes 35.37% of the post issue paid-up capital of the company.

The company has reserved 75% of the issue for QIBs, 15% for HNIs and 10% for Retail investors.

Having raised initial equity at par, BKIL issued further equity in the price range of Rs. 20 to Rs. 90 per share from November 2014 to November 2020 including pre-IPO placement of 13200000 shares at Rs. 44 per share by way of a rights issue to promoters in May 2020 and 15712820 shares at Rs. 58.50 each to Amansa Investment on November 18, 2020. With this issue, BKIL is looking for a market cap of approx. Rs. 2290 cr. post this issue.

The average cost of acquisition of shares by the promoters is Rs. 23.11 per share.  Post issue, BKIL's current paid-up equity capital of Rs. 306.65 cr. will stand enhanced to Rs. 381.65 cr.

The issue is jointly lead managed by Kotak Mahindra Capital Co. Ltd., CLSA India Pvt. Ltd., Edelweiss Financial Services Ltd. and J M Financial Ltd. While Link Intime India Pvt. Ltd. is the registrar to the issue.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, BKIL has posted turnover/net profit (loss) of Rs. 388.74 cr. / Rs. - (82.23) cr. (FY18), Rs. 644.13 cr. / Rs. - (38.28) cr. (FY19) and Rs. 846.83 cr. / Rs. - (76.57) cr. (FY20). Thus while the top line has shown rising trends, bottom line expressed negative earnings with inconsistency.

For the first half of the current FY21, it has posted a loss of Rs. - (118.95) cr. on a turnover of Rs. 151.65 cr. verses loss of Rs. - (17.43) cr. on a turnover of Rs. 425.37 cr. for the corresponding previous period. The company suffered a severe setback for the first half of the current fiscal on account of COVID-19 pandemic. Management clarified that the company is generating cash surplus, but due to accounting provisioning, it posted losses for all these years.

For the last three fiscals, BKIL has posted an average EPS of Rs. - (2.43) and an average RoNW of - (23.78%). Thus the issue is expressing negative P/E. The issue is priced at a P/BV of 7.87 based on its NAV of Rs. 7.62 (against FV of Rs. 10) as on September 30, 2020. The issue is priced at a P/BV of 3.01 on the basis of post-issue NAV of Rs. 19.93 (at the upper cap)

COMPARISION WITH PEERS:
As per offer documents, BKIL has shown Jubilant Foodworks and Westlife Developments as its listed peers. They are currently trading at a P/Es of around 229.66 and 00 (at the close of November 27, 2020, at BSE). However, they are not strictly comparable on an apple to apple basis.

MERCHANT BANKER'S TRACK RECORDS:
On BRML's front, four lead managers associated with this issue have handled 22 public issues in the past three years out of which 9 issues closed below the issue price on listing date.

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