Sapphire Foods IPO in progress: Should you subscribe to the share sale?

The initial public offering (IPO) of Sapphire Foods India, which operates KFC and Pizza Hut outlets, opened today. The firm has fixed a price band of Rs 1,120- Rs 1,180 per share for the IPO. The issue is expected to fetch Rs 2,073 crore for the company. The share sale will close on November 11.

A minimum of 12 shares comprising one lot can be applied for by spending Rs 14,160. One can apply for a maximum of 14 lots or 168 shares by spending Rs 1,98,240.

The company raised Rs 932.96 crore from 53 anchor investors on November 8. The company in consultation with merchant bankers has finalised the allocation of 79,06,473 equity shares to anchor investors, at a price of Rs 1,180 per equity share, as per the BSE filing.

Marquee investors who participated in the anchor book were the Government of Singapore, Monetary Authority of Singapore, Fidelity Funds, Abu Dhabi Investment Authority, Crestwood Capital Master Fund, Ontario Teachers' Pension Plan Board, Carmignac Portfolio, HSBC, Societe Generale, Morgan Stanley, Segantii India, and Affin Hwang.

The IPO is entirely an offer for sale (OFS) of 1,75,69,941 equity shares by promoters and existing shareholders. QSR Management Trust will sell 8.50 lakh shares, Sapphire Foods Mauritius Ltd will offload 55.69 lakh shares, WWD Ruby Ltd will divest 48.46 lakh shares and Amethyst will offer 39.62 lakh shares.

Additionally, AAJV Investment Trust will sell 80,169 shares, Edelweiss Crossover Opportunities Fund will offload 16.15 lakh shares and Edelweiss Crossover Opportunities Fund-Series II will divest 6.46 lakh shares.

The company has reserved up to 75 per cent of the shares for qualified institutional buyers (QIBs), 15 per cent for non-institutional buyers and the remaining 10 per cent for retail investors.

JM Financial, BofA Securities, ICICI Securities and IIFL Securities are the lead managers to the company's public issue. The equity shares of the company will be listed on BSE and NSE on November 22.

Sapphire Foods, an omni-channel restaurant operator and the largest franchisee of Yum Brands in the Indian sub-continent, is backed by marquee investors such as Samara Capital, Goldman Sachs, CX Partners and Edelweiss.

As of March 31, 2021, Sapphire Foods owned and operated 204 KFC restaurants in India and the Maldives, 231 Pizza Hut restaurants in India, Sri Lanka and the Maldives, and two Taco Bell restaurants in Sri Lanka.

Angel One has given a subscribe call to the issue.

"In terms of valuations, the post-issue FY21 EV/Sales works out 7.4x to (at the upper end of the issue price band), which is low compared to its peers Devyani International (FY21 EV/Sales -16.3x). Further, Sapphire Foods India has a better revenue per store compared to Devyani International. On the EBITDA front, the company is continuously showing improvement. Considering all the positive factors, we believe this valuation is at reasonable levels. Thus, we recommend a subscribe rating on the issue," said the brokerage.

 Choice Broking has given a 'subscribe with caution' call to the IPO.

"At the higher price band of Rs 1,180, the issue is valued at P/S of 7.4x which is discount to peers (Devyani international at P/S of 14.8x and peer average P/S of 12.8x. While valuation seems reasonable compared to peers, we are concerned about business profitability due to higher likelihood of continuing incurring losses in the coming fiscals. Additionally, the company has short operating history as it started franchise operations with YUM brands in 2015," the brokerage said.