IPO valuation compares well with peers though many a QSR chain’s present plight may advise caution.
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SAPPHIRE FOODS OFFER AT A GLANCE |
|
| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Nil |
| Offer for Sale | 1,75,69,941shares (Rs 2073 Cr) |
| Face Value | Rs 10 |
| Price Band | Rs1120 – Rs 1180 |
| Mkt/Bid Lot | 12 Nos. |
| Implied M-Cap | Rs 7,507 Cr |
| Implied Equity Cap | Rs 63.54 Cr |
| Free Float | 50.03% |
| Lead Manager | JM Fin, BofA Sec, ICICI Sec and IIFL Sec |
| Registrar | Link Intime |
| Listing At | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
|
| Opening :9-Nov-2021 | Closing :11-Nov-2021 |
| Allotment :16-Nov-2021 | Refunding :17-Nov-2021 |
| DematCredit:18-Nov-2021 | Trading :22-Nov-2021 |
The Offer
Mumbai head-quartered Sapphire Foods India Ltd (SFIL) is going public with an IPO of Rs 2,073.25 Cr. There is no fresh issue in the offer. The entire IPO is an offer for sale of 1,75,69,941 shares from seven existing shareholders. Two promoter-shareholders namely Sapphire Foods Mauritius and QSR Management Trust are offering 55,69,533 shares and 8,50,000 shares respectively. The balance is being offered by five investor-shareholders viz. WWD Ruby (4,846,706 shares), Amethyst (3,961,737), AAJV Investment Trust (80,169), Edelweiss Crossover Opportunities Fund (1,615,569) and Edelweiss Crossover Opportunities Fund Series II (646,227). The offer is being made through the book-building route with a price band of Rs 1120-1180 for Rs10 paid-up share.
Applicants should bid for a minimum lot of 12 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on November 22, 2021. JM Financial, BofA Securities, ICICI Securities and IIFL Securities are acting as managers to the offer and Link Intime has been roped in as registrar to the issue. The bidding opens on Tuesday, November 9, 2021 and closes on Thursday, November 11, 2021.
Lineage
SFIL was incorporated in November 2009 under the name Samarjit Advisors. The original signatories to the memorandum were Shivani Narang and Sushma Narang. Five years after the incorporation, the company changed its name to Sapphire Foods India in December 2014. While the company had historically, in various public documents such as annual reports and secretarial filings, named certain other shareholders as its promoters, pursuant to a board meeting on March 26, 2021, it was resolved that only Sapphire Foods Mauritius Ltd and QSR Management Trust would be the promoters of the company.
As on the date of the Red Herring Prospectus, Sapphire Foods Mauritius held 28,927,588 equity shares, constituting 45.52%, and QSR Management Trust was holding 3,705,590 shares, constituting 5.83% of the paid-up equity share capital of SFIL. The promoter of Sapphire Foods Mauritius is another Mauritian company Samara Capital Management Ltd whose main objective is to act as investment manager to specific private equity funds incorporated in Mauritius.
The Mumbai-registered QSR Management Trust was formed in February 2015 and the trustee is Sagista Realty Advisors Private Ltd. The beneficiaries of the Trust are Shivani Narang, Gautam Gode, Manish Mehta, Paurush Roy, Vikram Ranjan Agarwal, Raj Halve, Sanjay Bhargava, Abhishek Kabra, Anchit Gupta, Deepak Mittal, Pratik Nowlakha and Sapna Kalantri.
Who is the ultimate beneficiary of Samara Capital which has the largest control over SFIL? The offer document does not reveal this piece of information. One thing is clear. Both the so called promoter-entities (Sapphire Mauritius and QSR Management Trust), though registered in different countries, seem to be controlled by a single group.
The nominee director representing Sapphire Mauritius, Sumeet Narang, is the founder and managing director of India-registered Samara India Advisors (incorporated in 2006).
Another nominee director, Manish Mehta, is also currently working as a managing director with Samara India Advisors. QSR Management Trust beneficiaries Gautam Gode and Paurush Roy are on the board of Samara India.
Key Management
A mechanical engineer from Mangalore University and an alumnus of IIM Bangalore, Sanjay Purohit (56), is the only whole-time-director and Group CEO of SFIL. Earlier, he was the Managing Director of Levi Strauss & Co India, and was also associated with Cadbury India, Mobil Peevees Company, Asian Paints, Aristocrat, Goodlass Nerolac, etc.
The CEO of SFIL’s KFC business, Deepak Taluja, reportedly has more than 24 years’ experience in the QSR and entertainment retail industries. The CEO of SFIL’s Pizza Hut business, Vikrant Vohra, has 19 years’ experience in the hospitality industry and the QSR chain sub-segment. SFIL’s CFO, Vijay Lalchand Jain, has 18 years of experience in the pharmaceutical, consumer products and retail industries. , The Managing Director of SFIL’s Sri Lankan subsidiary, Amar Raj Singh, claims to have more than 30 years’ experience in consumer product companies.
Stakeholders
As on the date of the RHP the two promoter-shareholders collectively held 32,633,178 shares, equivalent to 51.36 % of the paid-up equity share capital of the company. Two group companies, Samara Capital Partners Fund II Ltd and Arinjaya (Mauritius) Ltd held 5,540,502 shares or 8.72%. Five other investor-selling-shareholders viz. WWD Ruby Ltd, Amethyst Private Ltd, AAJV Investment Trust, Edelweiss Crossover Opportunities Fund and Edelweiss Crossover Opportunities Fund- Series II collectively had 21,906,740 shares or 34.48%. The balance 5.45% is held by ten shareholders under public category.
Post offer for sale, while the promoters and their group entities will hold 49.91% at a nominal cost, the five investor selling shareholders would hold 16.91% at a negative cost.
Business Model
Sapphire Foods is one of YUM’s franchisee operators in the Indian subcontinent. It is also Sri Lanka’s largest international QSR chain, in terms of revenue and number of restaurants operated. Sapphire has established a presence in the Maldives too. As of June 30, 2021, Sapphire owned and operated 209 KFC restaurants in India and the Maldives, 239 Pizza Hut restaurants in India, Sri Lanka and the Maldives, and two Taco Bell restaurants in Sri Lanka.
Sapphire reportedly operates restaurants in high-traffic and high-visibility locations in key metropolitan areas across India and develops new restaurants in new cities as part of its brand and food category expansion. The franchisee arrangement with YUM allows the company to operate, on a non-exclusive basis, under the KFC brand in several states in India and across the Maldives, the Pizza Hut brand in several states in India and across Sri Lanka and the Maldives, and the Taco Bell brand across Sri Lanka.
As per the RHP, the Franchisee Arrangement also provides Sapphire with a right to use YUM’s system and system property covering all aspects of business operations, as well as the flexibility to undertake, with YUM’s approval, local or regional promotions, while meeting YUM’s global quality assurance standards.
Currently, about 58% of the company’s revenue is derived from KFC India, 22% from Pizza Hut India and around 19% is coming from Sri Lanka.
Financial Track
The 2009-registered company changed its main business object in 2014. During the three-year-period between 2018 and 2021, the company attained the milestones of opening the 50th Pizza Hut store in Sri Lanka, 150th Pizza Hut store in India and 200th KFC store in India.
On a consolidated basis, the company achieved peak revenue of Rs 1340 Cr in fiscal 2020 but, its margin slumped from 12.2% to 6.8% in that year. Next fiscal, margin was restored to the 2019 level but, revenue slid to Rs 1020 Cr. In fiscal 2019, on Rs 1194 Cr revenue it netted a loss of Rs 69 Cr. Next fiscal, on peak revenue, net loss mounted up to Rs 159 Cr. In fiscal 2021, on lower revenue, it posted a lesser loss of Rs 100 cr.
However, notwithstanding continuous losses, the company could collect a huge share premium of over Rs 1400 Cr which has provided the cushion against the mounting accumulated deficit of Rs 571 Cr at the end of June 2021.
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Sapphire Foods Consolidated Financials (in Cr) |
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| Year Ended |
Mar-21 |
Mar-20 |
Mar-19 |
| Revenue |
1020 |
1340 |
1194 |
| Operating Profit |
124 |
91 |
146 |
| OPM% |
12.2 |
6.8 |
12.2 |
| Other Income |
62 |
11 |
12 |
| EBIDTA |
186 |
103 |
158 |
| EBIDTA % |
17.2 |
7.6 |
13.1 |
| Interest |
76 |
72 |
72 |
| Depreciation |
209 |
191 |
155 |
| Net Profit |
-100 |
-159 |
-69 |
| Accumulated Loss |
545 |
446 |
324 |
| Equity (Implied) |
64 |
50 |
43 |
| Reserves (Implied) |
1486 |
920 |
682 |
| Borrowing |
76 |
71 |
96 |
| Fixed Assets |
415 |
453 |
409 |
Valuation
The average cost of acquisition per share for the promoters and the selling shareholders as on the date of the RHP is as follows: QSR Management Trust Rs 9.36; Sapphire Foods Mauritius Rs 309.09; WWD Ruby Rs 195.38; Amethyst Rs 177.96; AAJV Investment Trust Rs 177.96; Edelweiss Crossover Opportunities Fund Rs 331.86 and Edelweiss Crossover Opportunities Fund- Series II Rs 342.08 against which the present offer is being made with a price band of Rs 1120 – 1180 a share.
After the offer for sale, the residual cost of holding for the selling shareholders, who would collective hold nearly two-thirds of the company’s equity, will be either nominal or negative. Hence, after the lapse of the lock-in period, unless and until the company posts a positive bottom line, one can expect a heavy selling pressure.
As regards peer discounting, since most of the QSR chains are in losses, one cannot arrive at a P/E multiple. Nevertheless, in terms of Price to Cash Earnings, Book value, EBIDTA and Revenue, SFIL compares well with its peers.
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HOW SAPPHIRE FOODS COMPARES WITH PEERS |
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Financials |
||||||
| (Amount in Cr) |
Sapphire |
Jubilant | Devyani | Westlife | Barbeque |
Burger |
| Market Cap |
7498 |
49866 | 17623 | 9179 | 6331 |
6213 |
| Borrowing |
76 |
0 | 381 | 215 | 121 |
0 |
| Fixed Assets |
415 |
868 | 445 | 521 | 298 |
476 |
| Revenue |
1020 |
3312 | 1135 | 986 | 507 |
494 |
| Other Income |
62 |
73 | 64 | 44 | 46 |
28 |
| EBIDTA |
186 |
844 | 318 | 95 | 94 |
36 |
| Interest |
76 |
163 | 153 | 85 | 85 |
82 |
| Net Profit |
-100 |
231 | -63 | -99 | -92 |
-174 |
| Equity Cap |
64 |
132 | 120 | 31 | 19 |
384 |
| Reserves |
1486 |
1295 | 1321 | 450 | 492 |
807 |
| Acc. Loss |
545 |
0 | 887 | 0 | 184 |
516 |
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Stock Features |
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| Current Price (Rs) |
1180 |
3779 | 147 | 589 | 1634 |
162 |
| Face Value (Rs) |
10 |
10 | 1 | 2 | 5 |
10 |
| Book Value |
158.04 |
108.12 | 4.61 | 30.88 | 84.49 |
17.57 |
| Promoter Stake % |
49.97 |
41.94 | 62.91 | 57.14 | 34.6 |
52.62 |
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Profitability |
||||||
| OPM % |
12.2 |
23.3 | 22.4 | 5.2 | 9.6 |
1.5 |
| Net Margin % |
-9.2 |
6.8 | -5.3 | -9.6 | -16.6 |
-33.3 |
| Cash EPS |
17.42 |
46.01 | 1.41 | 2.58 | 7.93 |
-1.21 |
| Earnings Per Share |
-15.49 |
17.57 | -0.49 | -6.38 | -23.35 |
-4.53 |
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Discounting |
||||||
| Price/Earnings |
– |
215.1 | – | – | – |
– |
| Price/Cash EPS |
67.7 |
82.1 | 103.7 | 228.2 | 206.2 |
-134.0 |
| Price/Book Value |
7.5 |
35.0 | 31.8 | 19.1 | 19.3 |
9.2 |
| Price/EBIDTA |
40.3 |
59.1 | 55.4 | 96.2 | 67.0 |
173.8 |
| Price/Revenue |
7.4 |
15.1 | 15.5 | 9.3 | 12.5 |
12.6 |
|
Price/Fixed Assets |
18.1 | 57.5 | 39.6 | 17.6 | 21.2 |
13.1 |
Concern
The company boasts of its “professional management team with robust corporate governance practices and clearly defined company values that guide its organization behavior and culture”. But, the fact is, they are unable to trace some of the company’s historical corporate and secretarial records!
Also, there were instances of non-compliances (i.e., delay in filing of Form DI with RBI) as required under the erstwhile Foreign Exchange Management. Further, there were serious delays in a large number of cases in the payment of provident fund, employees’ state insurance and professional tax.
Promoter-nominee directors Sanjay Purohit and Sumeet Narang are also on the board of a closely-held company, Paradise Food Court, which is engaged in the same line of business. This could result in a potential conflict of interest.