Burger King IPO a top buy on attractive valuations, say analysts


Despite the strict lockdown hitting restaurant sectors across the world, analysts feel that the growth prospect of Burger King India Ltd is strong. Analysts at Prabhudas Lilladher expects Burger King to turnaround by FY23/24 led by post covid recovery and benefits from rising economies of scale and new store openings. “Burger King is offered at 2.9 times FY20 enterprise value/sales in comparison to 8.4 times for Jubilant Foodworks and 4.4 times for Westlife Development Ltd,” they said.

According to the brokerage firm, what works in favour of Burger King India is its competitive advantages which make it well placed to capitalize on emerging opportunity with exclusive pan India master franchise of Burger King.

Besides, Burger King India’s flexibility in tailoring menu to Indian tastes, promotions and pricing offers, fixed royalty at 5%, cluster-based approach with faster scalability and operating leverage, high sales per square feet at 31,093 and higher average sales/capex at 1.87 times, strong consumer proposition as a value brand with premium imagery globally and targeting growing section of millennials are other positive factors for the company.

Burger King India is the national master franchisee of the Burger King brand in the country, with exclusive rights to develop, establish, operate and franchise its branded restaurants in India. Its master franchisee arrangement provides the company 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 brand.

The Burger King brand is the second largest largest fast food burger brand globally as measured by the total number of restaurants, with a global network of over 18,675 restaurants in more than 100 countries and US territories as on 30 September.

As on 30 September, Burger King India had 261 restaurants, including eight sub-franchised Burger King Restaurants, across 17 states and union territories and 57 cities across India. As of date, it has 259 company-owned Burger King Restaurants and 9 sub-franchised Burger King Restaurants, of which 249 were operational, including two sub-franchised Burger King Restaurant.

“Although the covid-19 crisis has adversely affected its ability to open new restaurants and expand its restaurant network temporarily, they continue to evaluate the pace and quantity of new restaurant openings and the expansion of its restaurant network,” said Axis Securities.

The company’s revenue registered a CAGR of 50% over FY2018-FY2020 to 841.7 crore, largely driven by significant store addition in the past two years (from 88 stores in FY2018 to 260 stores in FY2020). Further, same-store- sales growth (SSSG) stood at 12.2% and 29.2%, respectively, in FY2018 and FY2019, which also helped in achieving strong revenue growth in the past two years. Gross margin of the company improved from 62.0% in FY2018 to 64.2% in FY2020.

“At IPO price band of Rsc59-60, the offer is valued at 29.5 times /29.3 times its FY2020 EV/EBIDTA considering the diluted equity at upper and lower price band (and price/sales of 2.69 times and 2.72 times at lower end and upper end of price band),” said Sharekhan by BNP Paribas. It added that strong franchisee model, negative working capital, market share gains from standalone players, and strong store expansion plans will help Burger King India improve its growth prospects.

The proceeds from the offer for sale will go to shareholders selling stake, while the amount received from the sale of fresh issue will be utilised for repayment of outstanding borrowings, capex for setting up of new company owned restaurants and general corporate purposes. The company is repaying 165 crore debt out of IPO proceeds. It targets to open 300 restaurants by December 2021 and 700 by December 2026.

“At the upper price band of 60 it is available at 29 times FY20 EV/EBITDA and 3.6 times FY20 EV/sales which seems attractive considering its robust growth in store additions and future revenue,” said Geojit Financial Services Ltd.

In the quick service restaurant segment in India, Domino’s (19%) has the largest market share followed by Subway (8%), Mcdonald’s (7%), KFC (6%) and Burger King (4%). In terms of revenue, Domino’s accounts for the largest share (21%) followed by McDonald’s (11%), KFC (10%), Subway (6%) and Burger King (5%).

“Burger King peer Jubilant Foodworks is currently trading at 8.7 EV/sales on FY20 basis. Burger King won’t get such a premium valuation as Jubilant Foodworks as it does not have a profitability track record like Jubilant, its outlets are young and we believe majority of the Indian people prefers Jubilant – Pizza over burger sold by Burger King,” Keshav Lahoti, Associate Equity Analyst, Angel Broking Ltd said. Burger King has priced its issue at a significant discount compared to Jubilant Foodworks, so looking at the valuation and the growth, the issue seems attractive at the first glance.

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