Devyani International IPO subscribed 7 times on Day 3 so far; issue to close today

The issue by the operator of Pizza Hut, KFC, and Costa Coffee stores, received bids of 78,75,06,885 shares compared with the 11,25,69,719 shares on offer.

The IPO is being sold in Rs 86-90 price band. Last heard, the unlisted stock was commanding a grey market premium of Rs 64.

Since the largest franchisee of KFC, Pizza Hut, and Costa Coffee is a loss-making firm, analysts are valuing it on metrics such as EV/Ebitda and EV/sales, and largely have a subscribe rating on the issue. Some of them even suggest subscribing for listing gains.

Ventura Securities has initiated coverage on the stock with a ‘subscribe’ rating for long-term investing. This brokerage has a target of Rs 149.8 based on 59.9 times the estimated FY24 EPS. It represents a potential upside of 66.4 per cent over the upper limit of the price band over a period of 18-24 months.

“We expect Ebitda to grow to Rs 932.9 crore by FY24. Reduction in interest expense due to part repayment of debt from issue proceeds and the improved operating profitability is expected to help Devyani become profitable in FY23. By FY24, we expect net earnings to grow to Rs 301.7 crore. Operating cash flow is expected to increase to Rs 463.6 crore by FY24 from Rs 239.6 crore reported in FY21. Consequently, return ratios RoCE and RoE are set to expand to 15.8 per cent and 29.1 per cent respectively by FY24 from the current negative levels,” Ventura said.

Antique Stock Broking finds Devyani’s valuation in-line with Westlife and at 30-35 per cent discount to Burger King and Jubilant Foodworks. “We recommend subscribing to the issue as valuation is justified due to increase in consumer preference for branded QSRs, value/unique proposition (fried chicken for KFC), and improving profitability with higher focus on delivery model and smaller store formats,” it said.

The IPO is valued at 62.8 times FY21 EV/Ebitda that Reliance Securities said looks reasonable compared to its listed QSR peers

(McDonald’s) and Burger King.

The fast-food culture under QSR is expected to flourish in India due to an increase in the working-class population and continued urbanisation, it said.

“We note that the business model of QSR is quite impressive as each restaurant franchise starts generating significant RoE at restaurant level once it reaches utilization level of over 90 per cent that bodes well for long-term investors. Additionally, the superior cash flow generation ability of the business offers comfort. Hence, we recommend subscribing to the issue,” it said.

Devyani has opened 40-50 stores across its brands in the last 2-3 quarters and expects to sustain this momentum. For the next 2-3 years, it wants to follow a small store format for Pizza Hut.

The company managed to open 43 stores in June quarter, while it opened 109 stores across core brands in the second half of FY21.

The financial performance has been tepid for the company, which has further got impacted in FY21 due to the pandemic. So far, the company has recorded losses in the last three financial years.

“However, the company intends to improve its unit performance, which would aid better margins. Considering the current market sentiments, investors may subscribe for listing gains,” Religare Securities said.