Sapphire Foods IPO, no fresh issue: Check grey market premium; subscribe or stay away from KFC operator?

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Updated: November 09, 2021 12:37 PM

KFC and Pizza Hut operator Sapphire Foods India's IPO opened for subscription on Tuesday, in a price band of Rs 1,120-1,180 per share.

sapphire foods, pizza hut, kfcSapphire Foods’ initial public offering is entirely offer-for-sale (OFS) of 1.75 crore equity shares by promoters and existing shareholders. Image: Reuters

KFC and Pizza Hut operator Sapphire Foods India’s IPO opened for subscription on Tuesday, in a price band of Rs 1,120-1,180 per share. In the primary market, Sapphire Foods shares were trading at premium. On Tuesday, Sapphire Foods shares were ruling at Rs 1,305, up Rs 125 or 10.6 per cent over the issue price, in the grey market, according to the people who deal in unlisted shares of the companies. Sapphire Foods is one of YUM’s franchisee operators in the Indian subcontinent.

As of Q1FY22, Sapphire Foods owned and operated 209 KFC restaurants in India and Maldives, 239 Pizza Hut restaurants in India, Sri Lanka and Maldives, and two Taco Bell restaurants in Sri Lanka. Devyani International’s 692 stores generated Rs 1,135 crore in FY21, while Sapphire Foods’ 437 stores generated Rs 1,081 crore in sales.

“The company did a preferential allotment at Rs 505 just 2 months back and now IPO at Rs 1,180! This doesn’t inspire confidence,” Aditya Kondawar, COO, JST Investments, told Financial Express Online. Operationally Sapphire’s stores are generating more revenue per store. But Sapphire’s OPM was 18% v/s 26% by Devyani in FY21, Aditya Kondawar added.

Sapphire Foods replica of Devyani International

Kondawar added that Sapphire Foods is a replica of Devyani International in terms of business and brands. “The company seems relatively cheap (Sapphire’s 6.9x Price to sales looks cheaper when compared to Devyani’s 15.5x P/S which is in the exact same business) but as a whole as in the whole QSR segment, there is no margin of safety in the valuations. Also, one must note that Sapphire hasn’t shown any meaningful growth in its financials and the company is loss-making,” Aditya Kondawar added.

Sapphire Foods: Subscribe for long-term

From the long-term perspective, Vikas Jain, Senior Research Analyst at Reliance Securities, has recommended subscribing. “The IPO is valued at 60.2x FY21 EV/EBITDA and 7.3x FY21 EV/sales, which looks to be at a modest discount compared to the recently-listed Devyani International, which appears reasonable due to the better margins profile of Devyani,” Jain said. Fast food culture under QSR is expected to flourish in India due to an increase in the working-class population and continued urbanization. “We note that the QSR business model is quite impressive, as each restaurant franchise starts generating significant RoE at the restaurant level, once it reaches an utilization level of >90%, which bodes well for the long-term investors,” he added.

Sapphire Foods IPO: Valuations reasonable, but subscribe with caution

Analysts at Choice Broking have assigned ‘subscribe with caution’ rating to the issue. While valuation seems reasonable compared to peers, analysts are concerned about business profitability due to higher likelihood of continuing incurring losses in the coming fiscals. Additionally, the company has a short operating history as it started franchise operations with YUM brands in 2015.

(The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)

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