IPOs in India have always attracted a lot of investors. For example, the recent listing of the Happiest mind gained 111% on the 1st day. So those who got the shares in the IPO were sitting on 111% profit on 1st day. Likewise, Chemcon Speciality Chemicals was listed at a premium of 115% over its issue price. Rossari Biotech started the first trading day with a whopping 57.65% premium over its IPO price. Route Mobile was listed at a 104.86% premium over its issue price.
Now there is another IPO in the market. It is the IPO of Burger King India. I hope most of you are aware of the Burger King brand. It is famous for it’s Burgers. Especially the Whopper Burger.
So the question is - Should you invest in Burger King India IPO or not?
In this article, we will investigate the Burger King India company and conclude if it is worth applying for the IPO or not.
So I have divided the analysis into 5 parts:
- We will first discuss the Key Facts about the company and its IPO.
- Then we will discuss the QSR market in India i.e. Quick Service Restaurants in India and its future growth prospects.
- Then, we will discuss the competitive analysis of Burger King India.
- Then we will analyze the financial performance and future growth prospects of Burger King India.
- Finally, we will conclude if it is worth investing in the Burger King IPO or not!
Key Facts about the Company and its IPO- Burger King India is a master franchise of the American company Burger King. So what is a master franchise? It means Burger King India has the exclusive rights to establish and operate Burger King restaurants in India.
- Burger King specialized in Burgers. Their Whopper burgers are famous all over the world.
- Burger King India opened its first restaurant in Nov 2014. Till date, the company has 258 Company-owned Burger King Restaurants and nine Sub- Franchised Burger King Restaurants. It means, within 6 years, the company has grown from 0 to 269 restaurants.
- Company has launched an IPO Rs 810 Crore out of which, Rs 450 Cr is from fresh issue of shares and Rs 350 Cr is an offer for sale i.e. Rs 450 Cr would be invested in the company in terms of paying the debts and growing the stores and Rs 350 Cr worth of shares are being sold by its promoter QSR Asia.
- The IPO is priced at a band of Rs 59-60 and you can apply for a minimum of 1 lot which consist of 250 shares. It means, the minimum investment would be Rs 15,000 at 60 Rs price band. So if you want to buy 2 lots i.e. 250 shares, you need to invest Rs 30,000. At max, investors can apply for 13 lots.
- Investors can apply for the IPO between 2nd Dec-4th Dec 2020.
QSR market in India and Future growth prospectsDo you know what QSR is?
Well, QSR stands for Quick Service Restaurants. For example, it includes Dominos, McDonalds, Pizza hut, Burger King, etc.
Future Growth Prospects of QSR Market:
- Increasing availability of retail space: There is a growing trend to increase the presence of food services market outlets in highways, railway stations, metro rail stations, and airports. Highways specially have seen rapid growth in passenger traffic with improvement in infrastructure resulting in increased penetration of food and services market outlets at strategic locations.
- Increasing eating-out and ordering-in behaviour: There is an increasing trend in urban cities in India, across all economic classes, to eat out without the need for a special occasion but rather as part of a shopping experience or a leisure outing.
- Growth of online food delivery: Due to factors like busy lifestyle and increase of disposable income, a rise in the use of smart phones, and higher internet penetration in India, the online food delivery market is growing at a fast rate. This is helping drive more growth in the QSR segment.
- India-centric offering: Big international brands such as Domino’s Pizza, Subway, McDonald’s, and Burger King have incorporated to their menus a large range of products that are created to target the Indian taste palate.
- Premiumization Trend: Today, many people prefer big brands like Dominos, McDonald's, Burger King due to their premium and differentiated product offering. This trend would continue to grow in the future.
Overall, the QSR market has a bright future in India.Competitive Analysis of Burger King
- QSR segment in India is highly competitive. Burger King competes with International QSR chains such as McDonalds, KFC, Domino’s, Subway and Pizza hut as well as local restaurants in QSR segment.
- If we discuss the food segment, McDonalds is the direct competitor in the Burger category. However, if you compare Burger vs Pizza then Pizza is more popular in India and Domino’s is the leader in that space.
- For Burger King to sustain, it has to continuously innovate and launch new products as per the taste preference of the consumers. Price and product quality also plays a big factor in driving demand from the consumers.
Financial Performance and Future growth prospects of Burger King
As an investor, it is very important to look at the financials of the company before you invest your money. So let’s have look at the financials:
Revenue Growth
The revenue growth has been great. It has grown at a CAGR of 29.6% in the last 3 years.
Operating Profit Growth:
Operating profit has growth at a phenomenal CAGR rate of 55.1% in the last 3 years.
Net Profit:
So the net profit of Burger King India has been consistently negative in the last 3 years. And that’s where I have a problem. If you look at the reason for the negative profits then there are 2 reasons:
- 1st reason is that the company is investing heavily in the growth and opening of new stores.
- 2nd reason is that the company has taken a lot of debt. Hence, it has to pay a lot of interest annually.
Debt to Equity Ratio:
Debt to equity has been very high for the company. It means the company has taken a lot of debt which is not a good sign.
The net cash flow of the company has been negative. This is a big red sign. In fact, it is the major reason why the company has come up with an IPO. It needs cash. It is already in debt and can’t afford to take more debt. Because if it takes more debt, it will not be able to pay the interest as the company is still in losses.
Risk/concern:- In the short term, COVID19 had a significant impact on Burger King revenues. Company to close down the stores during the lockdown.
- As a result, its revenue fell down to Rs 151 Cr in the 1st and 2nd quarter of the current year as compared to Rs 425 Cr in the 1st and 2nd quarter last year.
- The losses widened to Rs 121 Cr in 1st & 2nd quarters of the current year as compared to a loss of 17.8 Cr in same quarter last year.
- The debt to equity has increased to 4.38 in Sep 2020 as compared to the debt to equity of 3.35 in Mar 2020. This is very alarming.
Considering COVID is not yet over and the cases are increasing, it is going to significantly impact the growth prospects of Burger King. The key part of the company’s business and growth strategy is to maintain the pace of expansion of their restaurants. As per the master franchise agreement, Burger King India has to open 700 restaurants by 31st Dec 2026. So far by Sep 2020, the company has a total of 268 restaurants. It means the company has to open 432 restaurants in the next 6 years. That’s a required growth rate of 17%.
Now the company has to identify suitable locations to fuel the growth. But it is not an easy task. Companies will have to maintain profitability as well. So far it has been in loss. It can’t afford to continuously be in loss at the cost of growth. If company opens new restaurants in areas where it has little or no operational experience or where customer awareness is low then company would have to spend money on promotions. On the other side, if it opens restaurants in or near markets where it already has restaurants then it would result in cannibalisation. It means company will eat its own profits from restaurants already present in the market. This is a big risk for Burger King because its inability to open such a number of restautants could lead to the termination of master franchise.
Conclusion: Should you invest in Burger King IPO or not?
Well, there are 2 aspects of investment: Short term investment and long term investment.
Short term investors are those who are more interested in booking profit after the listing gains. And long term investors are those looking to invest for the long term.
If you are a short term investor, then you should check the “
grey market premium” of Burger King IPO. IPO Grey Market is an unofficial market where IPO applications or shares are bought and sold before they become officially available for trading on the stock exchange. As per the news on economic times, the grey market premium of Burger King is 56%.
Next, you need to look at the "recommendation of various security firms" like ICIC direct, Angel broking, Motilal Oswal, etc. If they are suggesting a buy or no buy. This data would be available during the 3 days of IPO listing.
Finally, you need to check the "subscription status". It means how much % of the IPO has been subscribed. If the IPO has more subscriptions, it means there is more demand than supply. In that case, there are strong chances of premium listing. Again, this information would be available between 2nd to 4th Dec.
Now, if you are thinking about whether it is worth investing in Burger King India for the long term then you need to look at the company fundamentals. If you look at the financials, the company is in bad shape. It’s has been reporting losses every year. It is in high debt and the company has high targets to achieve by 2026. Although the growth looks promising but the financials do not support the growth. So, looking at the financial health of the company, I would not be interested in investing in Burger King IPO for the long term.
PS: To learn more about stock investment, mutual funds, and every aspect of money management, you can explore my video course.
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