Short squeeze takes Burger King valuations way past McDonald’s in India

MUMBAI: Burger King Ltd has had one of the most spectacular listings in India’s primary market history. On the day of listing, it jumped 125% over its initial public offering (IPO) price of ₹60 apiece. This isn’t very unusual, as other IPOs this year, too, have seen valuations more than doubling on the day of listing.

But what makes Burger King stand apart is that it has risen about 30% in value since then, giving it a market capitalisation of ₹6,700 crore, nearly 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 those of Westlife’s, giving the impression that investors expect it to race past McDonalds in terms of revenues, at least in western and southern India.

But before jumping to any such conclusions, it must be noted that the massive rally in Burger King shares has partly been because of a short squeeze. Because the company didn’t have track record of profitability, only 10% of its issue size was reserved for retail investors, unlike the usual 35% quota for profitable companies. This has resulted in low free float for the stock.

What made matters worse is when some traders tried to short the company’s shares, valuation multiples rose far above those of Westlife. At the IPO price, Burger King was valued at 2.7 times FY20 revenues, a meaningful discount to Westlife’s valuation of 4.4 times annual revenues. On listing, the former’s valuations jumped to over six times revenues.

While this seemed like a ripe shorting opportunity, those taking naked short positions were in for a rude shock. For the most part on the two days after listing, Burger King shares rose the maximum permissible 20% and there were only buyers for the shares on the counter, with no scope for short sellers to exit their positions intra-day. Note that regulations don’t allow free price discovery except on the day of listing, and circuit breakers ranging from 5-20% apply on share price movement.

These naked short positions eventually had to be settled via the exchange auction process, with those with long positions making large gains at the expense of the short sellers. Ironically, those betting that Burger King shares had risen too fast too soon, just added fuel to the rally inadvertently. In intra-day trading on Wednesday, Burger King shares rose to as high as ₹213.8, and its valuation jumped to nearly 10 times revenues.

But in Wednesday’s auction process, which occurs mid-day, those with Burger King shares offloaded at a price of around Rs175 a piece, which has stopped the gigantic rise in the stock, at least for now.

Note that even now, the company’s valuations are nearly 8 times revenues, and its shares need to climb down another 45% or so to come on par with Westlife’s market cap to revenue multiple.

Of course, investors may end up valuing the company at higher multiples because of a lower base and higher growth prospects. But note that a large financial investor had valued the company’s shares 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 large premium for Burger King shares.