Hi Everyone,
The company IPOed recently and it operates Pizza Hut, KFC and Costa Coffee under non-exclusive arrangement in India, Nepal and Nigeria. It has its own brand South Indian Food brand Vaango. Pizza Hut and KFC are brands of Yum, Yum also has Taco bell which as of now the company does not has. Non exclusive rights means other than DIL, Sapphire Foods (IPO open next week) and one other company also has rights to operate Yum brands in India but the territory are exclusive and there are defined rules around it. The company mentioned till now they have not faced any issue related to territorial expansion. The company is promoted by a well seasoned entreprenuer Mr. Ravi Jaipuria who is promoter of Varun beverages as well. Earlier Yum foods was part of Pepsico group and their relation started from those times.
It opened first Pizza Hut store in Jaipur wayback in 1997. Below is the store count and sales contribution:
| Brand | Stores | Sales Contribution |
|---|---|---|
| KFC | 264 | 57% |
| Pizza Hut | 297 | 26% |
| Costa | 44 | 2% |
| International | 35 | 10% |
| Vaango | 50 | 5% |
It is very clear that KFC is the star brand and somehow they have been a laggard in Pizza market compared to Dominos. They are reworking their strategy with smaller and more delivery oriented stores, reducing capex and opex and drive menu innovation. Costa has been a roller coaster ride, initially it showed lots of promise but the performance slowed down and they closed lot many stores recently and reworked the terms of trade at airports etc. Vaango is more airport/food court oriented brand and will remain so with no large investments going in there.
KFC
The management mentioned they have rights for East and South market which has 93% non veg population compared to North and West which has 50% and hence they have large addressable market.
In North they have rights for Delhi NCR, Lucknow, Agra, J&K, Ladakh. In west they have rights for Rajasthan, Goa and Mumbai airport. Store count has doubled from 134 in FY19 to 264 in Q4FY21.
Pizza Hut & Costa
For PH they have rights for entire India except TN. Store count has remain largely stagnant from 268 in FY19 to 297 in Q4FY21, however company has guided for aggressive expansion going ahead. For Costa they are present in 8 states and 1 UT. Store count has shrunk from 67 stores in FY19 to 44 in Q4FY21.
In total 54% of the stores are in top 10 cities. Region wise contribution is 42% in North,31% in South, 19% in East and 8% in West.
Business Mix and profitability
| Brand | GM % | Brand Contribution Margin | Avg Daily Sale |
|---|---|---|---|
| KFC | 70% | 23% | Rs. 1.2 Lacs |
| Pizza Hut | 76% | 15% | Rs. 0.42 Lacs |
| Costa | 79% | 30% | Rs. 0.27 Lacs |
| International | 65% | 10% | NA |
As we see KFC is the biggest contributor to profitability at EBITDA level, hence higher the KFC sales/stores better will be the profitability of the company. PH GM % is comparable to Jubilant but the ADS is nearly half implying peoples’ preference for Dominos compared to PH or the restaurant are yet to achieve desired maturity profile. I expect this to improve significantly in future and should lend a big boost to topline. Costa is a highly profitable segment, but there are challenges in business model and now the parent owners have also changed, so will have to see how this pans out in future.
If we listen to management they have guided for 200 stores addition every year, no split at franchisee level but it will largely be KFC and Pizza Hut. I have not put SSSG since it has been all over the place for all QSR player due to Covid. The management mentioned they will be in line with industry for PH which i assume should be between 3-5%. Both KFC and PH has 6.3% as royalty fee payout and Costa has 6% and they are bound to spend 6% on marketing. I am not sure but i guess it is close to 5.5% for Jubilant, pls correct me if i am wrong. There is some initial fee of 50K USD for each store of KFC and 27K USD for PH and post 10 years a renewal fee at half rate. Similar to other QSR operators the company is net working capital negative which is a big positive for this otherwise capex heavy industry. The management also guided they will not need any debt or equity funding for next 4-5 years of growth and internal accruals should be sufficient. Post IPO proceeds company is net debt free.
The company is heavily dependent on Zomato and Swiggy for delivery since they do not have their own fleet and do not plan to have the same in near future as well which is quite opposite of what JF,BK and McD are focussing on. The management rationale is they intend to first build significant density of stores before investing in delivery ecosystem. I am not sure about this since BK also has similar number of stores and they are ramping up their delievry ecosystem heavily. To me this is a big risk and provides aggregators undue advantage to bargain on margins and commision. One standout point is company tries to open a KFC and PH in near vicinity to ensure supply chain efficiency and better rental negotiation. Also company has moved to revenue sharing rental agreements for many of its new stores , rate is around 10-12% of revenue, this in my opinion is a very good deal, if i remember correctly rent is around 12% of revenue for a store so until a store matures the rental outflow will be low which will help preserve capital till business scales up specially for DIL where they are planning to open 200 new stores every year and it will take some time for these stores to generate sufficient sales.
Q2FY22 Update
The company demonstrated solid performance and posted revenue of 516 Cr with 71% GM and 25% EBITDA margin and turned PAT positive. Just to give the growth perspective company did 1500 Cr sales in FY2020 (pre Covid). The company also added 68 stores in the quarter, 25 for KFC and 34 for PH and has added 178 stores in last 12 month, so they are executing as guided. ADS for PH has increased to 0.45 lacs which is encouraging.
Investment Rationale
KFC and PH are large recognized brands in QSR space which itself it growing and has huge market size. The promoter group has experienced and seasoned professional in foods business. The expansion plan is quite elaborate and mostly be funded through internal accruals with good profitability.
With modest SSSG projection and expansion plan, 5000 Cr revenue is a good possibility by FY25 and at 10X P/S it can be a 50000 mcap company which is a 3X from current price.
Risk
- Issues with Swiggy/Zomato on delivery sales
- Competition with Sapphire food on territorial expansion
- Scale up of Pizza hut is critical which has been a laggard compared to Jubilant
- Absense of own delivery network and app which provides brilliant consumer data analytics
Disclosure - Not invested, plan to do as soon pending points in research are completed.
