Devyani International Limited IPO Review

Hey Everyone, 

So this blog will be divided into three parts: 

Part 1: All about the Company 

Part 2: Important Dates of IPO 

Part 3: My opinion on whether to apply or not and approx listing gain. 

Lets start our first part: 

Devyani International Limited IPO

Overview of the company 

• The Company was incorporated in 1991 as Universal Ice Creams Pvt Ltd, then in 2000 it was renamed as Devyani International Pvt Ltd and was converted to a public limited company in 2005. 

• Currently the company is the largest franchisee of Yum Brands on Non-exclusive basis. 

• Yum Brands is an American Fast food corporation which operates multiple global fast food brands namely KFC, Pizza Hut and Taco Bell 

• As of December 2020, Yum Brands has its presence in more than 150 countries with almost 50,000 locations 

• In 1997 Devyani started its association with Yum Brands and it opened its first Pizza Hut Store in Jaipur. Since then, the company has expanded to cover 696 locations in 166 cities across India. 

• Devyani International operates only Pizza Hut and KFC Stores from the portfolio of Yum Brands. It also has the Franchise of Costa Coffee brand and stores across India. 

Business Segments in which the company operates 

Devyani International roughly operates in three segments namely: 

• Core Brands (KFC, Pizza Hut and Costa Coffee): As of June 2021, the company currently has 284 KFC stores and 317 Pizza Hut stores in operation. It also operates 44 Costa Coffee stores. Covid-19 pandemic was very harmful to the company in terms of Same-Store Sales Growth (SSSG) with all 3 core brands selling SSSG falling a lot. SSSG for Pizza Hut and KFC remained resilient and fell 30% and 34% respectively for FY 21 while Costa Coffee saw a much bigger fall of 62% in FY 21. Inspite of the Pandemic, Devyani has showed a great growth momentum and added 109 stores in core brands and due to this it has successfully mitigated the fall in the SSSG rate of the core brands. The Delivery Channel accounted for 51% and 70% of revenue from operations of the core brands in FY 2020 and FY 2021 respectively. This includes the KFC and Pizza Hut mobile apps, web ordering services, phone ordering services and delivery aggregators 

• International Business (KFC and Pizza Hut stores in Nepal and Nigeria): In the International Business, Devyani operates 39 stores as of June 2021 including 34 KFC stores and 3 Pizza Hut stores in Nigeria and Nepal

• Other Business (Other Brands like Vaango and FoodStreet): Company in other Business operates a large number of small Brands which usually operates in the Food court in malls and outlets in airports.

Devyani International Limited Business Model:

 

	Fiscal
	2019		2020		2021
	Amount (in Millions)	% of Total Revenue from Operations	Amount (in Millions)	% of Total Revenue from Operations	Amount (in Millions)	% of Total Revenue from Operations
Core Brands Business	9776.03	74.59%	11085.23	73.11%	9535.69	84.02%
International Business	1103.66	8.42%	1491.06	9.83%	1153.58	10.17%
Other Business	2177.61	16.62%	2535.42	16.72%	598.73	5.28%
Other Operating Revenue	48.65	0.37%	52.14	0.34%	60.38	0.53%
Revenue from operations	13105.98	100%	15163.86	100%	11348.38	100.00%

 The Major Contribution in the Core Brands Business comes from KFC. The details are:

Particulars	As of / for the year ended March 31			As of / for the three months ended
	2019	2020	2021	31-Dec-20	31-Mar-21
	(₹ million except percentage)
Brand Contributions
- KFC	853.65	972.66	1,181.70	423.16	574.64
- Pizza Hut	655.48	438.96	372.44	153.57	156.69
- Costa Coffee	181.73	174.09	33.21	27.11	25.81
Total Brand Contribution - Core Brand Business	1,690.87	1,585.71	1,587.35	603.83	757.13
Brand Contribution - Margin (%)
- KFC	18.39%	15.97%	18.34%	19.14%	22.62%
- Pizza Hut	15.49%	10.52%	12.94%	16.14%	15.13%
- Costa Coffee	20.15%	21.24%	15.52%	35.63%	30.27%
Total Brand Contribution - Margin Core Brands Business	17.30%	14.30%	16.65%	18.65%	20.68%

Note 1) Information is limited to Core Brand Business

Note 2) Brand Contribution is calculated as revenue from operations at the store less (i) cost of materials consumed at the stores (ii) Employee benefit expenses of employees at the store and (iii) other expenses incurred at store level

Segment wise Details:

• KFC is the single largest brand for the company with sales of Rs. 644.26 crores contributing to 56.77% of the total revenue in FY 21. As of June 2021, Devyani has 284 KFC stores in 107 cities in India.

  It operates in two main formats which are:

  1.       Large Format with full-service dining
  2.       Small Format to cater to delivery / takeaway orders.

  In order to operate KFC stores in India, Devyani International has entered into a Technology and Trademark License agreement with Yum Brands which is valid for 10 years with one time option to renew for another 10 years.

  Customer facing operations governs this agreements in all of their stores which includes Product innovation and development, Menu architecture, Product and Services pricing, Marketing initiatives and supplier selection. 

• Pizza Hut is the second biggest brand for Devyani accounting for 25.37% of the total sales for FY 21. As of June 2021, the company operates 317 pizza Hut stores in 106 cities in India.

  It also operates into two main formats:

  1.      Large Format with full-service dining
  2.       Small Format to cater to delivery / takeaway orders.

  Like in the case of KFC, Devyani enters into a TLA and TMA with Pizza Hut to operate its store in India. The agreements are valid for 10 years with one-time option to extend for 10 more years.

  TLA: Technology License Agreement
  TMA: Trademark License Agreement

• Costa Coffee is the Third biggest brand that Devyani operates. It accounted for 5-7% of the total sales in FY19 & FY 20 but fell to 1.88% of total sales in FY 21 due to extreme impact from Covid-19. Devyani operates 44 costa coffee stores across 17 cities in India

  It operates into two formats which are:

  1.    Full Retail Stores in High Street Locations and Malls
  2.    Branded Kiosks in airports, Hospitals and food courts on highways.

  In 2004, in order to operate Costa brand and stores Devyani International has entered into an International Development Agreement (IDA) with Costa International Limited. Initial agreement was valid upto 2014 and which was renewed twice for 5 years each.

  As per the Costa IDA, Devyani can only procure products from costa or costa approved suppliers. Devyani has flexibility in the operations such as Product development, Pricing, Marketing and Supply chain Management etc. Costa IDA Obligates Devyani to spend 2% of the stores gross sales in local promotional activities based on the marketing plan which is approved by costa.

• International Business Segment of Devyani:

  Devyani runs a total of 39 stores under this segment including 34 KFC stores, 3 Pizza Hut stores and 2 other brand stores. This segment accounted for 10.17% of sales in FY 21. Devyani operates both KFC and Pizza Hut in Nepal while in Nigeria it only operates KFC stores on a non-exclusive sole franchisee basis.

  Nigeria accounted for 80.82% of international business revenues and delivered an EBITDA margin of 23.67% in FY 21

  Nepal accounted for 19.18% of International Business revenues and delivered an EBITDA margin of 23.44% in FY 21

• Other Business of Devyani:

  Vaango is a South Indian QSR Brand selling staple South Indian Dishes like Idli, Dosa and Vada. It was started in 2011 by Devyani and currently has 27 stores open in 15 cities under this brand. These outlets are generally located in food courts in malls and shopping complexes. Devyani also operates many small brands like ‘The Food Street’, ‘Ckrussh Juice Bar’, ‘Ile Bar’ and others which are mainly situated in food courts at airports, malls, highways and hospitals.

Store Opening and Continuing Fees

Each New Store under the Core Brands needs an Initial opening fee. Under the KFC and Pizza Hut TLAs of 2021. The initial fee is $53,400 for a KFC store and $26,700 for a Pizza Hut Store. There is an nominal initial fee to be paid to open a Costa Coffee store.

Under the KFC and Pizza Hut Tech Licencing agreement, Devyani shall pay 6.30% of the sales of every store as a continuing fees for the Right to Use the specific KFC and Pizza Hut format and operating systems.

Under Costa International Development Agreement, for each store Devyani needs to pay a franchisee fees of 6% sales excluding GST for the Right to sell Coffee Products and use the Costa Brand

Industry Analysis

The Indian Food services sector is expected to grow at a CAGR of 15.50% by 2025.

The  No. of transactions and Outlets are also expected to grow at a CAGR of 6.90% and 4.50% respectively

The QSR or Quick Service Restaurants segment is the biggest sector in the Food services Industry in India accounting for 34.1% of Industry Sales in FY 20

		Channel	CAGR 2020-25
			Chain	Independent
		Quick Service Restaurants	14.80%	12.20%
		Full Service Restaurants	18.40%	15.90%
		Coffee and Tea Shop	17.80%	14.80%
		Ice Cream Parlor	21.20%	18.70%

 Companies Strength

• The Biggest Strength of Devyani International are the Brands and their wide global reach. KFC and Pizza Hut are Globally Recognized Fast Food Brands 

• QSR Categories by chain operators

• The company has a long association with Yum Foods and Costa which provides it access to many innovative products or processes developed by these international giants globally.

• 50% of the company’s Core brand stores are located in and around 5 major urban regions which are Mumbai, Hyderabad, Bengaluru, Kolkata, and New Delhi & NCR

• KFC does not have any organized competition in India in the Fried chicken food segment

Companies Weakness

• The Company is still a loss making company and has not made profits

• The company is overly reliant on its association with Yum foods with KFC and Pizza Hut accounting for 92.28% of revenues in FY 21.

• According to the TLAs signed with Yum, Devyani International has limited power over key actions like setting prices, deciding on supplier etc. It is involved in only marketing and store operations. This limits the company’s influence on future growth drivers like innovation and product development

• The company’s business model is very capital intensive which involves large amount of acquiring debt or lease the property to built the stores.

• The finance cost was at 13% of revenues while depreciation and amortization were at 20.22% of revenues, thus implying a significant strain on the company’s earning capacity

Part 2 Important Details of this IPO

IPO Opening Date	Aug 4, 2021
IPO Closing Date	Aug 6, 2021
Basis of Allotment Date	Aug 11, 2021
Initiation of Refunds	Aug 12, 2021
Credit of Shares to Demat Account	Aug 13, 2021
IPO Listing Date	Aug 16, 2021
IPO Price	₹86 to ₹90 per equity share
Market Lot	165 Shares

My Opinion about this IPO

As per the analysis, it seems that this is a great IPO to invest for the Listing Gain point of view. The Current Grey Market Premium of the Company is around 40% and thus we can expect an listing gain of around 35-40%

This are my personal views, all the equity investments are subject to market risk. Please read all offer documents before investing. This blog is only for information and education purposes. Please consult your investment adviser before investing.

Thank You for Reading this Article 

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