Sapphire Foods IPO - Information Note

Sapphire Foods India Ltd, the largest franchisee of YUM Brands in the Indian sub-continent, will come out with an IPO of Rs.2,073.25 crore. The issue will open for subscription on 09-November and close on 11-November. The entire issue will be an offer-for-sale (OFS) so there will be no fresh funds coming into the company nor any equity dilution. Sapphire Foods is expected to have an indicative market cap of Rs.7,498 crore.

As of June 2021, Sapphire Foods owns and operates 209 KFC restaurants in India and Maldives, 239 Pizza Hut outlets across India, Maldives and Sri Lanka as well as 2 Taco Bell outlets in Sri Lanka. All 3 are globally leading QSR brands with combined annual revenues of $50 billion between them.

In the last 2 years, Sapphire has grown its number of QSR outlets from 376 to 450 and has over 7,000 employees on its rolls.
 

Key terms of the IPO issue of Sapphire Foods India Ltd
 

_{Data Source: IPO Filings}
 

Here are some of the key merits of the Sapphire Foods India Ltd business model

I) Sapphire is the largest YUM Brands franchisee in Indian sub-continent and has a strong spread across India, Sri Lanka and Maldives.

II) QSR has been a fast growing business and with home delivery picking up in a big way during the pandemic, the future outlook is very bright.

III) Sapphire has non-exclusive rights to operate KFC, Pizza Hut and Taco Bell brands, with reach and ability to offer a palate to the young and mobile crowds.

IV) While the company is still making losses due to front-ending of expansion and promotion costs, its EBITDA margins are healthy in the range of 16-18%.

V) Sapphire has a very comfortable debt/equity ratio of 0.16, which makes the company less vulnerable to financial and business cycles.
 

Check - Sapphire Foods India IPO - 7 Things to Know
 

How is the Sapphire Foods IPO structured?

The Sapphire Foods IPO will be a total offer for sale where the promoters and some of the early investors will be diluting their stake through the issue. Here is a gist of the IPO offer.

A) The OFS component will comprise the issue of 1,75,69,941 shares and at the peak price band of Rs.1,180, the OFS value works out to Rs.2,073.25 crore. There is no fresh issue component in this IPO.

B) Out of the total OFS of 175.70 lakh shares, promoters will sell 64.19 lakh shares. Among other early investors; WWD Ruby will offer 48.47 lakh shares, Amethyst will offer 39.62 lakh shares while Edelweiss (across 2 funds) will offer 22.62 lakh shares.

The promoter holdings will get diluted post-OFS from 60.08% to 49.97%. Post the IPO, public shareholder will go up from 39.92% to 50.03%.
 

Key Financial parameters of Sapphire Foods
 

_{Data Source: Company RHP}

There are 3 inferences from the financials of Sapphire Foods. Firstly, while the company has been making net losses, the EBITDA margins have been steadily improving over the last 2 years. Secondly, the debt equity ratio is extremely low at 0.16X and that gives the company the opportunity to grow rapidly without impacting its business solvency. 

Lastly, in the QSR business the profits begin to grow when same-store sales pick up rapidly and the share of home deliveries picks up. Sapphire has been seeing a positive trend on  both these counts.
 

Investment Perspective for Sapphire Foods India Ltd

Being an OFS, the Sapphire Foods IPO will not dilute equity.

a) Since the company is currently making loses, it can be seen as a bet on the fast growing QSR business in India, as well as anticipated revenge-buying.

b) The product portfolio in all 3 QSR brands are tweaked to have an offering for every possible time of the day, thus ensuring round the clock demand.

c) Offers the perfect omnichannel experience comprising of take-away, dine-in, own delivery and aggregated delivery (via Zomato, Swiggy etc).

d)  Standardized operating processes, quality levels and customer experience across all outlets based on global set standard allows easy scalability.

If you look at the peer group, Sapphire Foods and Devyani have among the highest Restaurant EBITDA as percent of sales. Competition in the QSR space may be heating up, but there is enough space for linear growth. That is what investors must focus on.

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