Why Westlife could outperform Jubilant FoodWorks in the near term

All QSR majors, however, will face margin pressures given rise in food prices, analysts say

The quick service restaurant (QSR) industry has been one of the few service sector plays to have been less impacted on the sales performance front due to the Covid pandemic as compared to other contact-based sectors. Even within the food sector, QSR chains were able to outperform and gain market share on the back of a sharp growth in the delivery segment and expansion.

While the organised standalone segment posted a 55 per cent revenue dip in FY21, the QSR chain segment (Jubilant FoodWorks, Westlife Development, Devyani International and Sapphire Foods) declined 21 per cent y-o-y on revenues. Say Karan Taurani and Jayalaxmi Gupta of Elara Securities, “In India, store growth has revived to pre-pandemic levels, led by rapid expansion plans, taking advantage of the pandemic and aided by favourable deals with landlords. This has augured well for larger players versus small companies.”

While all QSR chains benefitted, Jubilant was a major gainer given its edge in the delivery segment and the 45 per cent-plus growth rates for the segment during the peak of the pandemic. Though the trend has been similar in FY22, some brokerages believe that going ahead companies with a larger share of the dining segment such as Westlife Development could see more traction on a lower base and revenge consumption.

Vishal Gutka and Binay Shukla of PhillipCapital India expect Westlife Development to outperform Jubilant FoodWorks given that 40 per cent of Westlife’s stores are in malls and supermarkets which will benefit the most from improving mobility. This coupled with value offerings, new product introductions and aggressive expansion favour the McDonald’s franchise. They believe it is time to switch from Jubilant to Westlife as the latter should report better operating performance over FY21-24 with revenue and operating profit growing 34-94 per cent as compared to Jubilant’s 24-26 per cent over the same period.

While dining will grow faster in the near term, some analysts believe that delivery too will register healthy growth. Say analysts at Motilal Oswal Research, “Both delivery and takeaway channels were in focus over the last two years as the consumers developed new habits of food consumption. Even as dine-in revives, the contribution of delivery would be elevated than pre-Covid levels. Covid has, therefore, permanently shifted the QSR business model towards an omni-channel play.”

Though the share of delivery sales for Jubilant was at 60 per cent and should revert to the same levels as the situation turns normal, the burger market (Westlife) is moving towards higher delivery proportion and the rate of delivery is higher by 10 per cent in a post covid scenario, says Amnish Aggarwal, director - research at Prabhudas Lilladher. He expects Westlife to outperform Jubilant over a three to five year period with the outperformance driven by higher delivery sales even as dining-in comes back to normal.

Another company which could do well is Restaurant Brands Asia (Burger King). Analysts at Nirmal Bang Research believe that on a sequential basis, demand momentum for QSR companies should improve especially for Burger King India business. Its 3-year annual same store growth momentum has improved further from Q3FY22 to Q4FY22, as the brand has the highest exposure to malls, which have seen stark improvement in footfalls.

All QSR majors, however, will face margin pressures in the near term given the rise in prices of food such as cheese, oil, wheat and milk. March quarter operating profit margins could fall about 200 basis points for the listed QSR pack though volume growth could offset some of the impact.

While QSR companies have corrected from their 6-month highs due to expensive valuations and market correction, brokerages remain bullish about their prospects with the key triggers being sustained pick up in sales and steady store expansion.