Devyani International Limited (DIL) and Sapphire Foods India Limited (SFL), two major QSR players, have a significant valuation gap. Let’s enquire why.
Both of them engage in the same business, franchisees of Pizza Hut and KFC stores in India. Let’s find out why.
When we looked at their operational profitability, their EBITDA levels were at par.
The first metric where they differ is how much profit each company generates on its equity. Devyani International is much more efficient than Sapphire Foods.
While Sapphire has fewer stores than Devyani, it has more assets per store. This has led to higher fixed assets for Sapphire. In turn, company incurs heftier depreciation costs.
But you might be wondering why Sapphire, a franchisee with fewer stores, has comparable fixed assets to that of Devyani. For this let’s look back in time.
Yum! Brands franchised its stores to various small operators and one larger operator (Devyani International). The brand clubbed all of them to set up Sapphire Foods in 2015.
Most of the extra capex went into refurbishing its legacy stores, the ones run by small operators earlier. This led to higher depreciation.
While the current valuation gap can be attributed to Sapphire's low profitability ratios, there's a chance of it narrowing down.
As the capex thrust peaks out, profitability may rise, leading to Sapphire bridging the gap.