MUMBAI: Burger King Ltd had one of the most spectacular listings in the history of India’s primary market. On the day of the listing, it jumped 125% from the initial public offering (IPO) price of ₹60 each. This is not very unusual, as other IPOs this year have also seen valuations more than double on listing day.
But what sets Burger King apart is that it has since risen about 30% in value, giving it a market cap of ₹6,700 crore, almost the same as Westlife Development Limited, which holds the master franchise for McDonalds in western and southern India.
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Burger King’s revenues are roughly half of Westlife’s, giving the impression that investors expect it to outperform McDonalds in terms of revenues, at least in western and southern India.
But before jumping to any such conclusion, it should be noted that the massive rally in Burger King stock was partly due to a brief squeeze. As the company did not have a track record of profitability, only 10% of its issue size was reserved for retail investors, as opposed to the usual 35% stake for profitable companies. This resulted in a floating low for the stock.
What made matters worse was when some traders tried to shorten the company’s stock, valuation multiples rose way above Westlife’s. At the IPO price, Burger King was valued 2.7 times FY20 revenue, a significant discount from Westlife’s valuation of 4.4 times annual revenue. At the time of listing, the former’s valuations jumped to more than six times its revenues.
While this seemed like a mature shorting opportunity, those taking naked short positions were faced with a sharp shock. For the most part in the two days following listing, Burger King shares were up 20% maximum allowable and there were only buyers for the shares over the counter, with no possibility for short sellers to exit their positions during the day. Note that regulations do not allow free price discovery except on the day of listing and circuit breakers ranging from 5-20% apply to the movement of the share price.
These naked short positions eventually had to be settled through the exchange auction process, with those with long positions making large gains at the expense of short sellers. Ironically, those betting on Burger King stock had risen too fast and too soon, they simply added fuel to the rally inadvertently. In intraday trading Wednesday, Burger King shares rose to ₹213.8 and its valuation jumped to nearly 10x revenue.
But during Wednesday’s mid-day auction, those with Burger King shares were dumped at a price of around Rs175 a piece, which stopped the stock’s giant surge, at least for now.
Note that even now, the company’s valuations are nearly 8 times the revenue and its shares have to drop another 45% or so to be on par with Westlife’s market cap for the revenue multiple.
Of course, investors may end up valuing the company at higher multiples due to a lower base and higher growth prospects. But note that a large financial investor had valued the company’s stock at a third of its current levels in November, at a time when Westlife’s valuations were only about 10% lower. In terms of relative valuation, little has changed in the past month to justify a sudden high premium for Burger King stock.