Hardcastle Restaurants Private (HRPL) is the master franchisee for West and South India operations of McDonald's Restaurants. In a proposed scheme, the company will become a direct subsidiary of Westlife Development (WDL) by June-July 2013 and will focus solely on the MacDonald's operations.
HRPL reported a compounded sales growth of 38.1% over FY09-FY12, fuelled by strong same store sales (SSS) growth and new store additions. Going forward, the stock is likely to witness significant re-rating given the strong outlook for the company.
HRPL's EBITDA margin has improved from 2.5% in FY09 to 12.3% in FY12, due to higher same store sales (SSS) growth. Going forward, analysts believe this metric is likely to expand due to multiple margin levers.
One, the company’s backward integration efforts have enabled it to keep its input procurement costs at 50-80% lower than inflation levels.
"In FY11, HRPL faced potential margin pressure from food inflation. However, it maintained prices at reasonable levels, increasing them by just 3.5% and held up gross margin. Strong supply chain controls enabled the company to take price hike well below inflation levels. We expect EBITDA margin to increase by 180 basis points to 14% in FY15 from 12% in FY12 led by favorable store mix and improving product mix", says Hemant Patel Executive Director – Consumer at Axis Capital.
Secondly, higher stores utilization and strong SSS growth will push margins as well as return ratios.
The company's strategy is to expand by adding new restaurants. Given the increasing trend of eating out amongst Indian consumers and the value product offerings of MacDonald's, the scope for scalability is significant.
Amit Jatia, Vice Chairman, Westlife Development, says, “While times are tough right now, we are using the time to expand and open more restaurants. We believe that a bulk of the potential is in six core cities for us namely Mumbai, Pune, Bangalore, Chennai, Hyderabad and Ahemadabad. So we are saying that 60% plus store openings will be in these six core cities. In FY15 we should be anywhere between 250 restaurants from about 155 currently."
The company is also considering to launch MacDonald's branch extensions McCafe (coffee-house-style outlets) and 24x7 (stores that are open 24 hours on seven days a week) which will add to growth and improve profitability.
"We are working with the government to change regulations so that we can bring our brand extension 24/7 to India. Mac café is also in the pipeline and we have a 3-5 year window for these brand extensions", says Jatia.
Valuation and outlook:
HRPL has nil working capital and strong cash-flow generating business model. Its zero debt balance sheet is also a strong positive. Given WDL's strong cash flow generation, expansion via stores additions and robust financial prospects make it well poised for re-rating, believe analysts.
"HRPL is amongst the fastest growing McDonald’s restaurant franchisees in the world with average same store sales (SSS) growth of 16% over the past five years. We value HRPL at Rs 4,500 crore based on DCF, which implies 4.5 times FY14 estimated Enterprise Value (EV)/Sales and 34.6 times EV/EBITDA. On Price/Earnings, HRPL trades at 62.3 times FY14 estimated earnings", says Varun Lohchab, FMCG analyst at Religare Capital Markets.
Analysts expect SSS growth of 12-14% over FY12-15 which is likely to drive compounded annual revenue growth of 35-38% over the same period. Low competitive intensity and under-penetrated market will enable the company to hold on to its strong SSS growth trajectory. This coupled with higher store adds will improve MacDonald's overall market share from 13% in FY12 to about 19% in FY20.
While Jubilant Foodworks (JFL) business model is slightly different from that of WDL, analysts believe WDL deserves to trade at valuations similar to JFL given the high growth potential of the company.
“HRPL revenues are 53% of JFL revenues, while net profit is 41% of JFL’s. JFL enjoys a market cap of Rs 7,313 crore, while WDL’s market cap is only Rs 1,363 crore. The massive gap in valuation indicates that there lies a huge potential for WDL’s stock to re-rate”, says Abneesh Roy, FMCG analyst at Edelweiss Securities.
