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Sapphire Foods IPO and the Indian QSR Industry: Facts, Stats, Opportunities and Risks

Aug 17, 2021 5:17 AM 4 min read

India Inc.’s IPO juggernaut continues unabated!

Sapphire Foods, one of the largest franchise operators of Yum! Brands in the country, has filed its DRHP with SEBI.

Interestingly, this comes only about a week after another franchisee operator - Devyani International - opened its own IPO. It also follows other listings in the Quick Service Restaurant (QSR) and food segment as a whole such as Burger King India and Barbeque Nation. Not to forget Zomato’s recent listing!

Fast Facts

  1. Sapphire’s offer involves a complete offer-for-sale of 1,75,69,941 equity shares by its shareholders.
  2. The Samara Capital-promoted company raised ₹1,150cr from PE firms NewQuest Capital Partners, Creador and TR Capital on Monday.
  3. As far as shareholding is concerned, currently, Sapphire Foods Mauritius holds a 46.53% stake in the firm followed by WWD Ruby (18.79%), Edelweiss Crossover Opportunities Fund (6.83%), Amethyst Pvt Ltd. (6.67%), QSR Management Trust (5.96%) and AAJV Investment Trust (0.14%).
  4. The shares are likely to be listed on the BSE and the NSE.
  5. SEBI could take up to two weeks to review the documents, following which the date of the IPO would be announced based on market conditions. 
  6. Link to DRHP


Macro and Money Matters

The omnichannel restaurant operator was set up in September 2015 by the acquisition of about 250 Pizza Hut and KFC stores in India and Sri Lanka (it also has operations in Maldives). As of March 31st 2021, it owned 204 KFC restaurants, 231 Pizza Hut restaurants and two Taco Bell restaurants.

FYI: Just like many of its peers in the highly competitive QSR segment, Sapphire Foods is a loss-incurring company. Its restated losses after tax for FY21, FY20 and FY19 were ₹998.97m, ₹1,592.47m and ₹694.04m respectively.


Indian QSR: An Overview

The QSR sector refers to restaurants designed for pay-at-the-counter food operations. It includes chain and standalone players (FYI: Chains commanded a 54% market share in the QSR segment in FY20). Besides Sapphire, other big QSR companies include Burger King India, Jubilant FoodWorks, Coffee Day Global, Tata Starbucks, Burman Hospitality, Jumboking Foods and Devyani International.

Besides the obvious differences between QSR outlets and conventional restaurants (operations, mode of payment, digitisation etc.), the product dynamics also vary. While North Indian and Chinese cuisines dominate the overall food services industry, burgers and pizzas command the largest share of the QSR pie. Going forward, however, Indian cuisine-selling QSR outlets are expected (pdf) to enjoy growing demand, albeit “international” offerings are likely to continue ruling the roost.


Indian QSR: Growth Drivers

Buoyed by urbanisation, a growing middle-class and a young population, QSR chains are rapidly expanding across India. The segment is expected to clock a CAGR of 23% until FY25. Its prospects are attracting significant interest from VC and PE firms including Everstone Capital, Goldman Sachs, India Value Fund Advisors and Samara Capital.

As can be seen in the chart above, the QSR segment has experienced robust growth in recent years estimated 15-year CAGR = 20%) vis-a-vis unorganised market (5%), organised standalone (13%) and restaurants in hotels (7%). No wonder then that investors are paying extra attention to this segment.

Of particular significance is the fact that the bulk of the market is still largely untapped. Fast-food chains account for less than 5% of India’s vast food services market (the global average is around 20%). Most QSR brands are concentrated in mega and mini metros - in particular, Delhi NCR and Mumbai. With tier-2 and tier-3 cities and towns up for grabs, the sector is ripe for rapid expansion.


Indian QSR and the Coronavirus

COVID-19 has been relatively kind on the QSR segment. True, the initial days of the pandemic wreaked immense havoc on the food services industry (it plunged 82% YoY in the first half of FY21). But over time, many players - especially the larger, deep-pocketed ones - managed to stage a strong recovery.

They were aided by their ability to scale their takeaway and delivery capabilities. The booming food delivery market enabled these restaurants to continue reaching a wider audience. And consumer preference for relatable brands and these companies’ already-high dependence on takeaway transactions helped the industry recover quickly from lockdowns and swiftly adapt to new realities.

The latter refers to social distancing, contactless dining, takeaways and cloud kitchens. Companies are experimenting with innovative product designs such as QR code-enabled Contactless Ordering (KFC), Vegan Launch (Domino's), Meal-in-Box (Barbeque Nation), Vending Machines (Chai Point) and DIY Meal Kits (Social).


The Bottom Line

Will investors embrace Sapphire’s IPO? Let’s compare with the listing of its peer, Devyani International. That became the eighth-most subscribed IPO of 2021 (so far), receiving 116.7 times more demand than the shares on offer as on the last day.

Evidently, investor sentiment seems to be largely bullish. Two earlier QSR debuts - Mrs Bectors Food and Burger King India - listed at premiums of 73.9% and 92% over their issue price respectively. Investing in Sapphire Foods carries the usual risks of investing in a fast-moving segment like QSR - there’s a lot of competition, reliance on foreign companies’ brands, and lofty spends on advertising and marketing are inescapable.

We’ve already seen how 2021 has been a busy year so far for Indian QSR. Given its penchant for reinvention and scope for expansion, it’s likely that greener pastures await the industry going forward.


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