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Burger King enters into IPO formation as plan for expansion develops

On December 2, Burger King India's 810 Crore IPO will open for bidding. The fast service restaurant chain's primary offering

Burger King has been a part of India’s quick restaurant service for the past recent years. Thet have been growing to popular demand ever since. From reviews ranging from best to worse, it’s fair to say the potential Burger king has against its competitors who are a part of the QSR (1) in the long run. Burger King’s entry into India might have not just started the American food chain movement in India. Still, with the modernizing youth, the struggle to keeping the brand atop the ranks is a far-fetched thought in today’s competition. The competition that Burger India faces is a strict patronization of brand identity that comes from their father, “The BURGER KING Corporation” in the United States. The company demands India open at least 500 Burger King stores by December 2026.

Rajeev Varman – Indianizing Burger King

Real estate costs are one of the most daunting aspects of establishing a presence in India. “If you look at properties in Indian metro cities, the prices are comparable to markets such as New York, LA, San Francisco, and Chicago,”

says Rajeev.

“It’s pricey real estate. India’s food and beverage industry are much smaller and shallower than its counterparts overseas. To raise sales while also covering real estate expenses, you’re left with a complicated situation. But Rajeev has successfully opened more than 148 restaurants since coming to India and looks forward to launching many more. I want to establish a good company, a good culture, and a good customer value, and I want to do all of that at the right rate,”

he says.”

“I’ve seen in India that you can’t run any faster than the speed you can run in the environment. You could make the wrong choices if you try to outpace the world or purchase your buildings all at once”. (2)

Burger King’s IPO growth

For its 810 crores, initial public offering opening on December 2, Fast Service restaurant chain Burger King India (3) on Friday set a price range of 59-60 per share. The company will sell to the public new shares worth about 450 crores. In contrast, the promoter entity QSR Asia(4), held by the private equity company Everstone Group (5) and its limited partners, will sell up to 60 million shares at the upper end of the price band worth about 360 crores. The promoter party would retain 52.9 percent of the enterprise after the IPO. In its Red Herring Prospectus, Burger King India said it would use the funds to repay existing debt and finance capital investment for new company-owned stores.

The company has received Pre-IPO funding of 92 crores from public market investor Amansa Investments (6) at 58.5 per share. Burger King India said it holds a master franchise agreement that gives it the freedom to adapt its menu to Indian tastes and decide on promotions and pricing. The IPO arrives in some states when a new wave of covid infections is raised, raising fears that local authorities could implement new restrictions.

In India, most Burger King outlets are now open. CEO Rajeev Varman said that shifting demand from the unorganized industry to the organized and easing real estate prices would open up opportunities for the business, which is well-financed and has a strong team. When the Covid-19 pandemic ruined his plans, the company was close to releasing its IPO in March. Burger King India’s food and beverage revenues for the first six months of fiscal 2021 stood at 134 crores, down sharply from 420 crores at the same time last fiscal year.

The December IPO launch – the season of bidding

Following the SBI Card’s IPO at the beginning of March, the primary market’s mood was hit due to the coronavirus outbreak and the consequent effects on economic activities and the secondary market. From January highs, benchmark indices crashed 25 percent each in March. Because of COVID consequences. A few dozen companies want to catch market sentiment companies such as Kalyan Jewellers, Suryoday Small Finance Bank, ESAF Small Finance Bank, Nazara Technologies, to tap investors’ mood. But he claims that in December, Burger King India, Kalyan Jewellers, Nazara Technologies, and RailTel Corporation can only be possible IPOs and not all.

“The number of IPOs in 2020 may be comparable to 2019, when there were 16 mainboards IPOs if the planned IPOs start in December. “Sensex and Nifty touched all-time high and trading above pre-coronavirus level. Thus, it is the right time to bring an IPO into the market, which would provide a better valuation. As we advance, we expect a new IPO in the market,”

said Amarjeet Maurya, AVP – Mid Caps at Angel Broking (7).

It is anticipated that the strong momentum seen in the last few months will also continue in the coming year, although some consolidation could occur in the near term.

We believe that the Indian stock market rally will continue to move in 2021 and that the primary market will also reflect the same story. Looking ahead, continued improvements in global risk appetite and expected improvement in domestic economic activity would further boost Indian equities to perform well, reflecting an increase in GDP growth,

“We believe the Indian stock market rally to continue its movement in 2021, and the primary market will also mirror the same story. Looking ahead, continued improvements in global risk appetite and expected improvement in domestic economic activity, reflecting a rise in GDP growth will further boost Indian equities to perform well,”

said Prashanth Tapse. (8)

Trades and value at Burger King’s IPO

Jubilant Foodworks’ Burger King peer is currently trading on the Financial year 2020 basis at 8.7 economic value. We believe that Burger King will not earn such a premium valuation as Jubilant Foodworks as it does not have a record of profitability like Jubilant; its outlets are young. We believe that most Indians prefer Jubilant – Pizza over Burger King’s burger,

“Burger King peer Jubilant Foodworks is currently trading at 8.7 EV/sales on FY20 basis. We believe 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. We believe most Indian people prefer Jubilant – Pizza over burger sold by Burger King, “

– associate equity analyst.

Its food and beverage selling revenue rose from Rs 376 crore in FY18 to Rs 836 crore in FY20. However, at the end of FY20 and in the six months ended September 2020, the COVID-19 crisis had a significant effect on its operating output, resulting in a decrease in food and beverage sales revenues to Rs 134 crore in the six months ended September 2020, compared to Rs 419 crore in the six months ended September 2019.

The business will use new issue proceeds for the roll-out of financing for new Burger King Restaurants operated by the company; and general corporate purposes. Burger King had more than 259 restaurants and nine sub-franchised restaurants, of which 249 were operating, plus two sub-franchised Burger King Restaurants, as of November 25, the filing date for the red herring prospectus. Under the Master Franchise and Growth Agreement, at least 700 restaurants (including Burger King Restaurants and Sub-Franchised Burger King Restaurants) are established and opened by the company by December 31, 2026, recently extended by one year from December 31, 2025, due to the COVID-19 crisis.

Comparision to other brands IPO’s

In India, the QSR sub-segment is mostly dominated by Domino’s Pizza, which had a market share of approximately 19 percent of the number of outlets as of September 30, 2020. The Indian market has reacted positively to American cuisine restaurants’ entry, such as McDonald’s, Subway, Burger King, and KFC, especially burger, chicken, and sandwich companies.

The total number of Domino’s outlets in India is 1,354 (9), led by Subway (10) with around 54 branches, McDonald’s (11) with around 480, KFC at 454 (12), Wow! Momos at 370 branches, and Burger King (13) at 460 branches. Against Westlife Development’s (McDonald’s) 17 percent and Domino’s 12 percent over the same period, Burger King saw revenue growth of 56.3 percent over FY16-20. Between fiscal 2015 and fiscal 2020, the number of outlets for existing foreign brands increased at a rate of 1.1 to 1.5 times. During the same period, according to the company’s Red Herring Prospectus, Burger King, a relatively new entrant to the Indian market, expanded at a rate of 21.6 times.

Risks and factors Burger King accounts for

In its red herring prospectus, Burger King India reported that since the last week of March, the COVID-19 outbreak had significantly impacted its operations. At the end of March 2020, 201 restaurants were temporarily closed by the company. However, 130 restaurants have re-opened for service by April 1, 2020. The company had a total of 261 restaurants operating throughout the nation as of September 20. Burger King claimed in the Red Herring Prospectus, “As of the date of filing of this Red Herring Prospectus, we 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 Restaurants,” (14)

Due to the COVID-19 pandemic, in the six months ended September 30, 2020, the company’s revenue decreased to Rs 133 crore compared to Rs 420 crore in the six months ended September 30, 2019. As a QSR restaurant operator, the organization’s sector is vulnerable to health problems resulting from foodborne diseases, health epidemics, and other events linked to harmful food.

The exclusive right of Burger King to establish, operate, and franchise in India depends on the Master Franchise and Growth Agreement, which imposes on its operations certain limits and other obligations. Besides, the Master Franchise and Development Agreement’s termination will also have a material adverse effect on the company, operating results, and the financial condition of Burger King.

In Fiscal 2018, 2019, and 2020, Burger King announced a restated loss of Rs 83 crore, Rs 38 crore, and Rs 77 crore, respectively. It also announced a loss of Rs 18 crore and Rs 120 crore. Besides, as of September 30, 2020, it had negative retained earnings of Rs 461 crore, leading to the depletion of a large portion of its other equity. The credibility of Burger King India depends in part on its brand’s continued international success and reputation globally. Any negative impact on the brand of Burger King can also adversely affect our business, operating outcomes, and financial condition in India.

SEBI’s documentation on the IPO Placement

The SEBI prospectus (15) of Burger King’s placement has indicated a lot about the IPO of the QSR. Here is a cut from the 320+ paged document –

“Our initial public offer price will be decided by agreement between the underwriters and us and may not, after this offering, be representative of the market price of the equity shares. You will not be able to resell them at or above the initial public offering price if you buy the equity shares in our initial public offering. We cannot guarantee you that the initial public offering price of our equity shares or the market price after our initial public offering would be equal to or greater than the prices of our shares in privately negotiated transactions that may have occurred from time to time before our initial public offering.”

The holding in one venture capital undertaking of any individual VCF or FVCI registered with SEBI should not exceed 25 percent of the VCF or FVCI corpus. Using a subscription to an initial public offering, VCFs and FVCIs can invest only up to 33.33 percent of the investable funds.