Burger King IPO Analysis by GSN Invest

Disclaimer: This is not an investment recommendation but an explanation of the business model of Burger King along with an overview of its key financials. Please conduct your own diligence or consult an investment advisor before taking any investment decision.

Burger King came out with their RHP today, deciding on an IPO price band of Rs 59-60. The 13.5cr share issuance is a mix of an OFS of 6cr shares and a fresh issue of 7.5cr shares. The firm will raise a total of Rs810cr via the IPO.

A] The food service market

1. Understanding the opportunity - Income surplus, Time paucity

The drivers for the QSR opportunity are fairly well understood. India has a large (140cr+) fairly young (Median Age: 28.7) population. Women are increasingly entering the workforce, reflected in our drop in dependency ratio from close to 80% in the 1970s to less than 50% today. Our population is also increasingly moving to urban centers, with our urban population rising from 28% in 2000 to 34.5% at the end of 2019. Family sizes are also getting smaller (nuclearization) with our average household size dropping from 5.5 to 4.8. The resultant impact of this is we have a growing number of families that have a problem that suits the QSR industry quite well - a time deficit and an income surplus.

2. Sizing the opportunity- The Growing 4,236bn ocean!

With the story out of the way, lets get to the numbers. India's food service market is humungous at Rs. 423,600cr! Now, that we have your attention, lets split this further.

An overwhelming majority of this market is unorganized -59.5% (your roadside vendors and small stalls), followed by single standalone restaurants -28.4%. Restaurant Chains which Burger King falls under is merely 9.4% of the market!

While large portions of the unorganized and standalone market may remain out of reach of the chain restaurants, either because their customer base operates at a lower price point, or are in an area where it may not be feasible to open a restaurant, the size of the opportunity is still quite large!

More importantly the overall pie is also growing quite fast, up from 286500cr in 2015 to 423600cr today, a steady 8% CAGR. The restaurant chain market has grown substantially faster from 17500cr to 39700cr - a 18% CAGR!

3. The COVID Impact - What doesn't kill you!

Q1 and Q2 of this fiscal were understandably washout quarters for the food service industry, with people having to stay indoors due to the COVID lockdown. With the unlock beginning, things seem to be recovering relatively well, with Q3 expected to be at 50% of pre COVID levels and Q4 at 75%. This is of course, expecting no further severe lockdowns etc.

More importantly the increased concerns over safety is likely to shift the share away from the unorganized vendors towards QSRs are organized chains. The larger chains are also much more likely to survive the COVID induced hits, negotiating lease contracts and other major cost items better. The net result could be a mix much more in favour of the organized chains when things go back to normal.

B] Burger King India

Burger King entered the Indian market rather late, entering in 2015 vs Dominos & McD ('96 entry), Subway ('01) and KFC ('04). As a result its market share also lags its peers. Burger King India has a 5% value market share in India, behind market leader Domino's (21%), McD (11%), KFC(10%) and Subway (6%).

1. Revenue Growth - High teens store growth, Mid teens SSSG

There are two major drivers of growth in the retail/restaurant industry - how fast you can grow stores, and how much money you can make in each store.

Store Growth: From 12 stores in 2015, the firm has grown to 261 stores in Sep 20. The CAGR of 85.1% is relatively meaningless given the low base. What is more important is the 17-18% CAGR in store growth the firm will need to have to reach the 700 store limit that it has committed to the parent company by 2026.

Same store sales growth: Barring hits from bad policy decisions like demonetization, that will hopefully not be repeated, the top QSR chains in India have same stores sales growths of anywhere between 12% to 20%. When things go back to normal post COVID, it would be fair to assume similar growth rates to persist, atleast for the next 5-10 years.

2. Margin Growth

The restaurant business is a lousy one to be in with respect to profitability. Let's try to split the different cost heads and try to understand how they move - and more importantly, which ones are likely to remain relatively fixed as the firm grows - leading to a path to profitability.

Variable -

COGS(35%): Burger King operates at a Gross Margin of close to 65%, which has remained constant over the last few years. While the firm can possibly expect this item to come down marginally as it scales and gets better terms from its suppliers - the competitive nature of the industry with multiple low-cost QSRs, gross margins are unlikely to grow drastically.

Delivery Expense(6%): This is an extremely worrying trend going from 2% to 6% over the last 3 years. As more people consume indoors, the amounts chains have to spend on delivery will also continue to rise.

Ad Spend(6%): As a new entrant, Burger King has been more aggressive than its competition with respect to its sales and marketing budget. This is likely to continue for a year more years as the brand works to gain mind space in an audience that has become used to Dominos and MCD, but should come down long term to a more steady 5-6% of sales range.

Royalties(4%): Being the master franchisee of Burger King in India, the firm also pays a royalty fee to the parent. This has been close to 4% in the past, and is likely to stay in the 4-5% range going forward as well.


Rent & Utilities(12%): This is another major line item, at around 12% of sales. As the firm opens restaurants more aggressively in line with its target to reach 700, this is likely to increase, as sales in newly opened restaurants is generally low and ramps up slowly, while rent and utilities for the property are largely fixed.

Employee Spend(16%): Has remained relatively stable at close to 16% of sales. Can come down gradually as small pay hikes offset increases in efficiency of workforce.

Other Operating (7%): Other operating expenses including repairs, insurance, etc.

D&A (13%): Unlikely to decrease materially.

Post paring down the debt, margins should improve slightly, but it looks highly likely that margins will remain in the low single digits even post a recovery in FY22.

C] Valuation - While a 2.0x Sales valuation may look high, when compared to peers like Dominos and McD who trade at anywhere between 5-7x sales, the valuation looks a lot more reasonable. The current market covets growth, and when it is available at a reasonable valuation, it is highly likely to be good demand for it.

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