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Burger King India - IPO Review - ICICI Direct

Posted On: 2020-12-01 08:30:21 (Time Zone: Arizona, USA)

Burger King India (BKI) is a fast growing international QSR chain in India. It started its operations in 2014 and within five years established 261 restaurants across major cities. The company has exclusive rights to develop, establish, operate and franchise Burger King branded restaurants in India as a master franchisee. BKI grew at a faster pace in the last five years by mainly leveraging the disruption at McDonalds franchise in North India. The company has a well-defined restaurant rollout plan to open 700 restaurants across geographies by 2026. The proceeds from the IPO would be sufficient to open 190 new stores until 2023.

Investment Rationale

Competitive edge to higher deliveries, small size stores

We believe companies with a higher proportion of deliveries and takeaway would benefit from expansion of food delivery companies (Zomato, Swiggy). Moreover, higher proportion of deliveries would benefit in terms opening small size stores that would eventually rationalise the lease cost. BKI is well positioned to benefit from the expansion of food delivery apps in smaller cities and towns. The company would be able to open smaller stores that would be largely deliveries and takeaways stores. This would reduce the operational, lease & other related cost attached to larger stores. The average size of a Burger King Store is 1300-1400 sq ft that is almost half of an average McDonald's store (2600-3200 sq ft).

Several unorganised smaller joints close down

With the grave impact of lockdown on the restaurant industry, the smaller unorganised restaurants have been negatively impacted by adverse working conditions, increased operational cost and trust deficit with unbranded restaurants. Hence, many local restaurants have closed down in the last eight months. This would eventually benefit branded QSR chains in general & Burger King, specifically, given its relatively newer presence and aggressive expansion plans at various locations.

Priced at EV/S of 2.9x FY20 (post issue) on upper band

Benefiting from reduced competition from unorganised smaller local restaurants due to Covid related disruptions and expansion of food delivery businesses, the company is well positioned to expand its footprint in India. We believe BKI would be able to capture the growth largely aided by changing habits of eating out/ordering outside food. The company was quick to scale up its operating margins to double digit in the last two years. However, it is still making a loss at the bottomline level due to high depreciation provision. We have a SUBSCRIBE recommendation on the stock. At Rs. 60, the stock is available at 2.9x FY20 EV/sales (post fresh issue).

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Source: Equity Bulls

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