Business

Saturday October 10, 2009

India beckons for KFC

By CECILIA KOK


IT is common knowledge that most consumers in India are vegetarians by tradition, with regular meat-eaters comprising less than 30% of the country’s population.

As such, the question would arise as to whether KFC Holdings (Malaysia) Bhd’s (KFCH) ambition to expand its operations in India would bear fruit.

“Why not?” an analyst asks, pointing out that the company’s move to customise its menu to suit local taste should put such questions to rest.

At a recent press conference, KFCH chairman Tan Sri Muhammad Ali Hashim said the group’s KFC outlets in India would have a 30% vegetarian menu to cater to vegans.

KFCH is the franchisee of the KFC chain of restaurants in Malaysia, Singapore and Brunei. The group also operates the home grown Rasamas chain of restaurants, the Ayamas kiosks, and the Kedai Ayamas chain of convenience stores, besides being active in a variety of supplementary businesses such as sauce and poultry production and processing.

In April, KFCH was given the rights by Yum! Restaurants (India) Pvt Ltd – the franchisor of KFC restaurants in India – to open and operate KFC restaurants there.

Given the limited scope for expansion in its existing markets, it is just a natural progression for KFCH to look elsewhere. And by setting its sights on one of the largest markets in the world, that is India with a population of 1.1 billion, the company will have good prospects for organic growth, say analysts who have been following the counter.

KFCH has already announced its target to have 20 KFC outlets in major cities in India by the end of next year.

It would begin by opening the first two outlets each in the cities of Mumbai and Pune, which have a combined population of 26.6 million, by the end of this year. This will be followed by a second KFC outlet each in the same cities in January.

Untapped potential

With only 52 KFC outlets currently operating in the whole of India (under other local franchisees), compared with around 450 outlets in Malaysia (under KFCH), the large Indian market is considered largely untapped. It has been reported that there are only three KFC outlets in Mumbai and two in Pune, and these are owned and operated by Yum! and other local franchisees.

While analysts favour KFCH’s venture into India, they do not expect to see any significant returns within these few years.

In fact, KFCH’s management had earlier announced that it expected its operations in India to post losses of up to RM2mil next year, before breaking even in 2011.

Even though the subsequent years may see positive returns to its Indian investments, an analyst says their contributions to the group’s bottom line are unlikely to “wow” investors.

He explains that while revenues from its Indian operations are likely to be high, given its huge market size, margins are expected to be tight due to the high cost of operations there.

To put that into perspective, the analyst explains that the average cost of operating an outlet in India amounts to US$500,000 (RM1.69bil) per year, compared with the average cost of RM800,000 per year for an outlet in Malaysia.

Nevertheless, another analyst considers it as still early days to judge the potential return on KFCH’s investments in India.

“It takes time to churn out earnings. Even so, we maintain our stance that it is the right move to expand its operations in India for the long-term growth of the company,” she explains, adding that she does not expect KFCH’s Indian ventures to be a drag to the group’s overall financial results in the interim period.

Solid performance

Despite the economic slowdown, KFCH managed to post considerably solid performances during the first two quarters of the year.

For its second quarter (2Q) ended June 30, 2009, KFCH posted an operating profit of RM44.9mil on revenue of RM561.4mil. Both figures represented a growth of 3.9% and 6%, respectively, from the same period last year.

For 1QFY2009, the group’s operating profit and revenue stood at RM40.9mil and RM526.6mil respectively, compared with RM40.1mil and RM495.6mil in the same quarter last year.

KFCH’s existing operations overseas (Brunei and Singapore) have been consistently contributing around 10% to the group’s operating profit and between 18% and 19% to group revenue.

Meanwhile, although the local market may seem to be reaching its saturation point for KFCH, the group plans to open 30 more KFC outlets in the country next year, involving a total investment of RM15mil. Its expansion in Malaysia is focused on smallish towns, the East Coast, Sabah and Sarawak.

After having opened 15 new outlets in the country during the first half of the year, KFCH seems to be on track to meet its target of 40 new outlets in Malaysia this year.

In terms of the number of fast-food outlets in the country, KFCH is already a leader commanding around 35% market share. The group’s local expansion programme is obviously a strategic move to strengthen its market leadership in the country.

In general, KFCH is a fundamentally sound company, given its strong market leadership domestically, and potential growth opportunities overseas, according to analysts.

It is a safe stock, they say, as KFCH’s business model is recession-proof and the company has in fact proved its resilience amid the current economic slowdown. Its share price even managed to stage an uptrend and outperformed the general equity market at the height of the global market meltdown in the fourth quarter of last year.

The counter closed at RM7.80 on Thursday. Of the eight research houses polled by Bloomberg, six have a “buy” call on KFCH, while one calls for “hold” and another calls for “sell”. The average target price for the counter is RM8.15 per share.

Still, there are some lingering concerns among investors.

For one, KFCH is not a strong dividend play, despite its healthy net cash position. Its dividend yield has been averaging at 3%, compared to what is justified as a strong dividend play at a yield rate of 5% and above, according to an analyst.

As at June 30 this year, KFCH had a net cash balance of RM78.3mil, down from RM98mil as at the end of last year and RM140.3mil as at the end of 2007.

KFCH’s declining cash balance over the past two years is mainly attributable to its acquisition of land and properties, which it had earlier said was for the expansion of its ancillary businesses, especially poultry farms.

Most of the acquisitions were done through related party transactions involving the subsidiaries of state investment arm Johor Corp (JCorp), such as Sindora Bhd and Damansara Realty (Johor) Sdn Bhd.

JCorp holds an indirect interest of 50.25% in KFCH through QSR Brands Bhd and QSR Ventures Sdn Bhd. Lembaga Tabung Haji is the second largest shareholder in KFCH with a stake of 20.55%.

According to analysts, the concern among investors is that those related party transactions do not seem to benefit shareholders much. On top of that, there is always the pressing issue of transparency when it comes to related party transactions.

They add that such transactions could be one of the main factors that could cap the upside potential of KFCH counter going forward, despite the positive fundamentals that the company boasts.


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