Burger King India coming with an IPO to raise upto Rs 810 crore

Burger King India

• Burger King India coming is coming out with a 100% book building; initial public offering (IPO) with face value of Rs 10 in a price band Rs 59-60 per equity share.
  Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on December 02, 2020 and will close on December 04, 2020.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 5.90 times of its face value on the lower side and 6.00 times on the higher side.
• Book running lead managers to the issue are Kotak Mahindra Capital Company, CLSA India, Edelweiss Financial Services and JM Financial.
• Compliance Officer for the issue is Madhulika Rawat.

Profile of the company

The company was incorporated as ‘Burger King India Private Limited’ under the Companies Act, 1956 at Mumbai, pursuant to a certificate of incorporation dated November 11, 2013, issued by the Registrar of Companies, Maharashtra at Mumbai (RoC). Subsequently, the company was converted into a public limited company, the word ‘private’ was struck off from the name of the company and consequently, a fresh certificate of incorporation dated September 25, 2019 was issued by the RoC, recording the change of the company’s name to ‘Burger King India Limited’.

The company is one of the fastest growing international QSR chains in India during the first five years of its operations based on number of restaurants. As the national master franchisee of the Burger King brand in India, it has exclusive rights to develop, establish, operate and franchise Burger King branded restaurants in India. Its master franchisee arrangement provides it with the ability to use Burger King’s globally recognized brand name to grow its business in India, while leveraging the technical, marketing and operational expertise associated with the global Burger King brand. The globally recognized Burger King brand, also known as the ‘Home Of The Whopper’, was founded in 1954 in the United States and is owned by Burger King Corporation, a subsidiary of Restaurant Brands International Inc., which holds a portfolio of fast food brands that are recognized around the world that include the Burger King, Popeyes and Tim Hortons brands. The Burger King brand is the second largest fast food burger brand globally as measured by the total number of restaurants, with a global network of 18,675 restaurants in more than 100 countries and U.S. territories as at September 30, 2020.

The company’s master franchisee arrangement provides it with flexibility to tailor its menu to Indian tastes and preferences, as well as its promotions and pricing. Its customer proposition focuses on value leadership, offering its customers variety through innovative new food offerings at different day parts, catering to the local Indian palate, offering a wide range of vegetarian meal options, and its taste advantage and flame grilling expertise. This enables it to grow its customer base by attracting customers looking for everyday value and giving them opportunities to access its brand for the first time. This also increases the frequency and occasions when customers can visit its restaurants, which drives footfalls and same-store sales. This has driven footfalls and same-store sales in its restaurants and enabled it to become one of the fastest growing QSR brands to reach 200 restaurants among international QSR brands in India during the first five years of its operations.

Proceed is being used for:

Funding roll out of new company-owned Burger King Restaurants by way of:

• Repayment or prepayment of outstanding borrowings of the company obtained for setting up of new Company-owned Burger King Restaurants; and
• Capital expenditure incurred for setting up of new Company-owned Burger King Restaurants.

General corporate purposes.

Industry Overview

The Indian food services market has gained strong momentum in the last decade due to changing consumer consumption patterns that have seen an increase in the tendency to eat out that had not traditionally been a feature of Indians’ lifestyle. This has ensured a constant growth of the Indian food services market, which has evolved considerably since the 1980s, when the number of organized brands operating in the country was negligible and the market was widely dominated by smaller unorganized players. A noticeable shift began in 1996 with the opening up of QSR such as McDonald’s, Pizza Hut and Domino’s Pizza, followed by Subway, KFC, Burger King, Haldiram’s, Moti Mahal and Taco Bell, among others. The Indian food services market is classified into two segments, organized and unorganized, based on three key characteristics: accounting transparency, organized operations with quality control and sourcing norms, and outlet penetration. Any food services outlet that does not conform to these parameters is considered to fall within the unorganized segment, which primarily includes dhabas, roadside small eateries, hawkers and street stalls. By contrast, food services outlets that conform to these parameters fall within the organized segment and can be subcategorized as chains (domestic or international outlets that have more than three restaurant outlets across the country) or standalone outlets.

The food services market in India has shown consistent growth since Fiscal 2015 and was estimated at Rs 4,236 billion in Fiscal 2020. The food services market in India is projected to grow at a CAGR of 9% over the next five years and is expected to reach Rs 6,505 billion by Fiscal 2025. In Fiscal 2020, the biggest segment of the food services market was the unorganized market, which accounted for Rs 2,519 billion (59% of the food service market), followed by the organized standalone segment, the chain market and restaurants at hotels, each accounting for Rs 1,203 billion, Rs 397 billion and Rs 116 billion, respectively (28%, 9% and 3% of the food services market, respectively). In terms of geographical distribution, Delhi and Mumbai, the two mega metros in India, contributed a total of 21.9% of the total revenue of the food services market in Fiscal 2020, while the six mini metros contributed approximately 20.8% of the total revenue of the segment during the same period. In addition, the food services market has expanded beyond the mega and mini metros with an increased presence of QSR and CDR in Tier I and Tier II cities, driven partly by a lack of quality real estate in mega and mini metros, increased competition in these cities as well as higher disposable incomes paired with high aspirational value of the younger population. Tier I and Tier II cities have emerged as new urban powerhouses with higher disposable incomes clubbed with high aspirational values of the youth, fuelling growth of food service.

Pros and strengths

Exclusive national master franchise rights in India: The company is the national master franchisee of the Burger King brand in India, with exclusive rights to develop, establish, operate and franchise Burger King branded restaurants in India. Its master franchisee arrangement, which expires on December 31, 2039, provides it with the ability to use Burger King’s globally recognised brand name to grow its business in India, while leveraging the technical, marketing and operational expertise associated with the global Burger King. Its master franchisee arrangement also provides it with flexibility to tailor its menu, promotions and pricing to the Indian tastes and preferences while meeting Burger King global quality assurance standards. It also provides it with flexibility over its vertically managed and scalable supply chain, and it receives the support of BK AsiaPac though its supplier approval process in selecting each of its suppliers. Its sub-franchise rights also provide it with the additional flexibility to sub-franchise restaurants in locations where access to direct ownership of restaurants may be restricted due to the type of location, such as in airports and certain shopping malls where one party directly owns all the outlets.

Strong customer proposition: The company offers a customer proposition that enables it to attract customers and drive footfalls at its restaurants. The key pillars of its customer proposition include its value leadership, variety, a wide range of vegetarian offerings, taste advantage and flame grilling expertise. It has a wide variety of 18 different vegetarian and non-vegetarian burgers covering both value and premium offerings. It prices the majority of its burgers using incremental pricing, in which its burgers are priced at increments of Rs 5 to Rs 20, helping its customers to upgrade to higher value burgers more easily. While its core strength is burgers, it continuously strive to enhance its customer experience by providing variety across its food offerings, including burgers, wraps, rice, beverages, sides, snacks, shakes and desserts across different day parts, including breakfast, lunch and dinner, and snack times and late night. From time to time, it also creates limited time offerings, such as its Boss WHOPPER, which drive excitement and appeal for its premium customers. The strength of the Burger King brand has been built in part on its flame grilling expertise, and each of its restaurants has this capability, for which it imports specially designed patented broiler equipment.

Brand positioned for millennials: The company has positioned its brand to target the large and growing millennial population in India. In Fiscal 2020, approximately 60% of Indians eating out are millennials, which represent the age group from 15 to 34 years old. India has a large number of millennials, and the millennial population in India has grown from 418 million in Fiscal Year 2011 to 447 million in Fiscal 2020. This trend is expected to continue as India’s population continues to grow, the number of millennials that form part of India’s working-age population increases. The company connects with millennials, many of whom are just entering the workforce, through its value leadership and strong entry menu at attractive price points. It also connect with millennials through its advertising and marketing campaigns, both on television and social media, its in-restaurant design and messaging, and the packaging of its products. Its approach to advertising and marketing focuses on the millennial lifestyle and the way of life of this large and growing age group.

Vertically managed and scalable supply chain model: The company benefits from a vertically managed and scalable supply chain model in which it individually negotiates with and actively manage its suppliers of ingredients and packaging materials. The exclusive national rights and flexibility that its master franchisee arrangement provides it means that it has significant control over the purchasing of its ingredients and packaging materials. Substantially all of the ingredients used in the preparation of the food it serves in its restaurants are purchased locally from known suppliers that comply with Burger King food quality standards. It also receives the support of BK AsiaPac through its globally defined and thorough approval process for suppliers for purposes of compliance with international audit norms and food quality standards when selecting each of its suppliers. It also has multiple suppliers for most of its key ingredients, enabling it to generate competitiveness among its suppliers with the aim of obtaining the best procurement price. It also benefit from certain of its suppliers being global suppliers that source large volumes of ingredients and packaging materials, which helps it obtain more competitive pricing.

Risks and concerns

Rely significantly on master franchise, development agreement: The company is the national master franchisee of Burger King in India and rely significantly on its master franchise and development agreement dated November 19, 2013 entered into with BK AsiaPac and its Promoter, as amended by the first amendment to the Master Franchise and Development Agreement dated November 12, 2014 and further amended by the second amendment to the Master Franchise and Development Agreement dated October 31, 2019 and the third amendment to the Master Franchise and Development Agreement dated November 18, 2020, which expires on December 31, 2039. The Master Franchise and Development Agreement provides it with the exclusive right and license to develop, establish, operate and franchise Burger King restaurants in India, as well as to use and permit the sub-franchisees to use the Burger King Marks and the Burger King System in India (collectively referred to as the Development Rights). The company is required to operate each Company-owned Burger King Restaurant in accordance with the Company Franchise Agreement and it enters into a unit addendum to the Company Franchise Agreement with BK AsiaPac for each Company-owned Burger King Restaurant.

Depends in part on continued international success, reputation of Burger King brand globally: As the exclusive national master franchisee of the Burger King brand in India, the company’s success is to a large extent directly related to the success of the Burger King brand globally, including the financial condition, advertising programs, new product development, overall quality of operations of Burger King Corporation and its subsidiaries and the successful and consistent operation of Burger King restaurants outside India and its other franchisees in other countries. The ability of the Burger King brand to compete effectively internationally depends upon the success of the management of Restaurant Brands International Inc., its activities in other countries, the success of its advertising programs and the success of its other franchisees. It has no control over the management or operations of Restaurant Brands International Inc.’s businesses or its franchisees. As a result, a variety of factors affecting the Burger King brand that are beyond its control could have a material adverse effect on its business. It also cannot assure you that the Burger King Brand will be able to compete effectively with other well-established international QSR chains in other countries or globally.

Rely on single third-party distributor: The company rely on a single third-party distributor, Coldex, which provides it with logistics services in each of the regions it is located in across India, including the procurement of ingredients and packaging materials, primary logistics from supplier facilities to distribution centres, warehousing and inventory management and secondary logistics to its restaurants. The services that its third-party distributor provides to it are critical to its supply chain and its ability to manage supply chain risk and distribution costs, as well as maintain control and traceability over its products. It also intends to utilize its third-party distributor’s logistics infrastructure as part of its strategy to penetrate new markets in key metropolitan areas and cities across India.

The QSR industry in India is competitive: The QSR industry in India is competitive. It competes primarily with international QSR chains operating in India, such as McDonalds, KFC, Domino’s Pizza, Subway and Pizza Hut, as well as local restaurants in the QSR segment. It generally competes on the basis of product and service quality, price and location, and the industry is often also affected by changes in consumer tastes, economic conditions, demographic trends and consumer disposable income. These international QSR chains have been introducing food products that cater to India specific palate while maintaining their core offerings; for example, Domino's now offers wraps and KFC offers rice bowls in India. Its ability to compete depends on its ability to develop and launch new products, effectively market and advertise its products and respond to and appeal to consumer preferences, including with respect to the value, variety and quality of its products.

Outlook

Burger King is the India's fastest growing quick service restaurant chains. It is the second largest fast food burger brand with having 216 Burger-King restaurants and 8 Sub-Franchised Burger King restaurants. It has an exclusive right to establish, develop, and operate Burger King branded restaurants in India. A key focus of the company’s business is promoting and maintaining operational quality, a people-centric culture and effective technology systems that enable it to optimize the performance of its restaurants, enhance the customer experience it offer and contribute to its growth. The company benefit from a vertically managed and scalable supply chain model in which it individually negotiate with and actively manage its suppliers of ingredients and packaging materials. Its management team also includes former senior employees who have significant work experience in the food and beverage industry, retail and major fast moving consumer goods brands. On the concern side, demand for company’s products may decrease due to changes in consumer preferences and food habits, which could have a material adverse effect on its business, results of operations, and financial condition. It is dependent on the adequate and timely delivery of quality ingredients, packaging materials and other necessary supplies and if its suppliers fail to provide it with sufficient quality and quantities of ingredients, packaging materials and other necessary supplies, its business, results of operations and financial condition could be adversely affected.

On the performance front, the company’s total income decreased by Rs 2,737.14 million, or 64.35%, from Rs 4,253.68 million in the six months ended September 30, 2019 to Rs 1,516.54 million in the six months ended September 30, 2020, primarily due to the impact of the COVID-19 crisis and the temporary closure of a number of its restaurants across India due to the lockdown related restrictions on its business operations commencing from at end of Fiscal 2020, as well as reduced store-level operations, including reduced operating hours and dining closures in line with GoI guidelines, which resulted in a significant decrease in customer footfalls at its restaurants given the lockdown, a significant decrease in same-store sales and a significant slowdown in the growth of its restaurant network. Besides, the company’s total income increased by Rs 2,026.99 million, or 31.47%, from Rs 6,441.30 million in Fiscal 2019 to Rs 8,468.29 million in Fiscal 2020, primarily due to the increase in the number of the company-owned Burger King Restaurants during most of Fiscal 2020.

The company intends to continue to build on its value leadership in order to drive footfalls and increase same-store sales in its restaurants. It plans to do this by continuing to drive menu architecture to offer quality products that are not only tailored to Indian taste and preferences, but also to provide substantial value at attractive price points. It intends to continue to actively manage the unit economics of its business and achieve economies of scale through operational leverage in order to drive further cost efficiencies and expand its margins.