Sapphire Foods IPO: All You Need To Know

Sapphire Foods India Ltd., the local partner of Yum! Brands, will launch its three-day initial public offering on Tuesday, more than two months after the world’s biggest restaurant operator’s other India franchise operator listed on the bourses.

Business

Incorporated on Nov. 10, 2009, Sapphire Foods has non-exclusive rights to operate restaurants under three of Yum’s brands: KFC, Pizza Hut and Taco Bell in India, Sri Lanka and Maldives.

As of June 2021, the company owned and operated 209 KFC restaurants in India and Maldives, 239 Pizza Hut restaurants in India, Sri Lanka and Maldives, and two Taco Bell restaurants in Sri Lanka.

The company is also pivoting to increasing delivery and takeaway sales.

“Through our digital stores, we're able to optimise our restaurant assets across multiple revenue channels such as delivery and takeaway to derive efficiency for long-term sustainable growth,” it said in its red herring prospectus.

In FY21, income from takeaway and delivery services was at Rs 551.88 crore or 68.8% of its total restaurant sales. That compares with Rs 409.5 crore, comprising 43.2% of total sales as of March 2019-end.

The company said it would consider smaller formats for new restaurants to reduce rent, one of its main costs.

As of June, it had 7,020 permanent employees and 36 consultants and contractual employees. The company has attracted marquee investors such as affiliates of Samara Capital, Goldman Sachs, CX Partners, Creador and Edelweiss.

Financials

Sapphire Foods has reported negative cash flows for the three months ended June 2020 and 2021, and financial years 2019, 2020 and 2021.

“...and we may have negative cash flows in the future,” the company said.

The company was Sri Lanka’s largest international quick service restaurant chain by revenue in FY21 (Rs 190 crore representing 35% of the total market revenue) and number of stores operated as of March 2021 (68 restaurants representing 39% of the total number of outlets in the market).

During the three months ended June, the company had posted a net loss of Rs 26.4 crore on a turnover of Rs 313.93 crore as against a loss of Rs 75.17 crore on a turnover of Rs 136.18 crore a year ago.

Peers

Sapphire Foods competes with Jubilant FoodWorks Ltd. (operator of Domino’s Pizza and Dunkin’ Donuts stores in India), Westlife Development Ltd. (operator of McDonald’s outlets), Burger King India Ltd. and Devyani International.

Risks

• The Covid-19 pandemic has substantially affected the restaurant business as well the suppliers of key raw materials. This, coupled with increased competition among global QSR chains, may continue to affect cash flows and overall financial condition of the company.

• Expects competition from existing and potential competitors to intensify. It “may suffer uninsured losses or experience losses exceeding its limits”. The company may have to make payments to cover the uninsured losses.

• May incur additional indebtedness, which could affect its ability to obtain future financing or pursue growth strategy. As of June 2021, the company had Rs 95.23 crore of aggregate outstanding term loan from banks (secured) and bank overdraft (unsecured), comprising Rs 93.39 crore of term loan from banks and other financial institutions (secured), and Rs 1.85 crore of bank overdraft (unsecured).

• The company is required to obtain various licences and permits for its operations in India, Sri Lanka and Maldives. Failure to obtain or renew any or all of these licences could adversely impact the business.

• While the core strength of the company is chicken for KFC, pizza for Pizza Hut and tacos for Taco Bell, it has been trying to enhance customer experience by providing variety across food offerings. But there is no assurance that these measures would be viable in the long run.

• It’s dependent on arrangements with Yum for its KFC and Pizza Hut stores that comprise a significant chunk of its business, and a termination or inability to renew these arrangements will have a material adverse effect on its business, results of operations and financial condition.