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Piramal Enterprises
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A lot’s happening in the QSR (Quick-Service Restaurants) space.

The stock of Jubilant Foodworks witnessed heavy selling amidst large volumes last week after Pratik Pota resigned from the post of CEO and whole-time director. During his tenure of 5 years, the stock generated almost 10X returns before starting a downtrend in October 2021.

Despite a steep fall in the stock price over the last 5 months, Jubilant Foodworks is trading at 78 times of its annualized 9MFY22 earnings.

Although the stock always enjoyed premium valuations historically, now it remains to be seen how it tackles fierce competition and rising inflation under the new leadership. If the company manages to maintain its growth and profitability momentum, the market reaction may improve.

As you might be aware, Jubilant Foodworks runs the exclusive master franchisee of Domino’s Pizza in India and other neighbouring countries, such as Sri Lanka, Bangladesh and Nepal. It also operates Dunkin’ Donuts and Popeyes restaurants. And has its own brands, such as Hong’s Kitchen and a Biryani brand, Ekdum.

Do such large companies depend so heavily on just one person? Markets seem to have given the cold-shoulder to HDFC Bank as well after Aditya Puri’s retirement.

Well, not everybody’s flocking to the exits. In fact, many multinationals are eying to grab a share of the Indian consumer’s wallet.

Tim Hortons, a Canadian QSR, has recently announced its India debut. The company will launch its first store in the country’s capital, New Delhi. It aims to expand to 300 locations in various parts of the country over the next 10 years.

Tim Hortons has a presence in 13 countries and operates more than 5,100 restaurants at present.

India being one of the fastest growing economies of the world is said to be in a sweet spot to witness a high-consumption growth in future. Favourable demographics offer further tailwinds.  But is it a bumpy road ahead for QSR companies, given the rising inflation in agri-commodity prices globally besides intensifying competition and a potential weakness in the consumer sentiment?

A quick glance at the financials of some of the prominent listed QSRs suggests that the path to high profit growth is distant and difficult. Except for Jubilant Foodworks, no other QSR company has clocked stable double-digit profit margins so far.

Even Tata Starbucks which operates 246 stores in 19 cities is only EBITDA positive and yet to breakeven at PAT level although very close to it, as per the latest quarterly disclosures.

Tata Starbucks started off with its large format stores back in 2012. Nonetheless, the company is still experimenting with different store formats and expanding to more cities to identify the true potential of the brand.

Restaurant Brands Asia Limited (Erstwhile Burger King India) has witnessed an impressive jump in the top line on a Year-on-Year basis in 9MFY22 but it is still making losses.

You see, Indian markets are a tough terrain indeed!

Balancing between expansion and profitability

Domino’s Pizza, which is Jubilant’s mainstay, has ~1500 restaurants spread across the country and has been aggressively growing its footprint. Over the last 5 quarters, the company has added ~50 outlets every quarter on an average.

We all know delivery and takeaways from QSR brands grew during the pandemic. But Domino’s continues to ride the success of these channels even now. In Q3FY22, the delivery sales of Domino’s was 128% of the delivery sales in FY20 and the takeaway sales were 148% vis-à-vis those in FY20. Dine-in sales dipped to 72% though.

Now that the fear of the pandemic and potential waves has started receding, it remains interesting to see if the dine-in growth accelerates. If the brand maintains high growth rates in delivery and takeaways and revives dine-in revenues, the per-store revenue might show a remarkable improvement.

Revenue-per-store holds the key from the profitability stand point assuming costs remain under control.

If you add back depreciation to net profit, the financial conditions might appear slightly better. Then too any investment in a QSR company must be made for a long term.

Unlike Domino’s, which sells taste-at-affordable-prices, Tata Starbucks sells experience-at-premium-prices. Any premium brand such as Tim Hortons coming to India will have to compete with the likes of Tata Starbucks.

Cost structures of QSRs leave almost no room for error

For QSRs, material costs as a percentage of revenue broadly range from ~22% to ~35%. Other expenses account for 35%-40%. Employee costs are relatively stable in the range of 12%-18%.

It’s noteworthy that the material cost of Jubilant Foodworks in 9MFY22 was the lowest amongst the listed QSR companies at 22%. Westlife Development reported the highest material cost of 35% in 9MFY22. It will be interesting to watch how these companies handle food inflation without changing price points.

Amongst the newly listed QSRs, Devyani International, the largest franchisee of Yum Brands in India, is expanding rapidly. It serves Indian consumers with popular brands such as KFC, Pizza Hut and Costa Coffee. As reported by the company, it’s already utilized the IPO proceeds to repay loans and expand its network.

As a result, the finance cost of Devyani International dropped from Rs 123 crore in 9MFY21 to Rs 95 crore in 9MFY22. Moreover, the company turned profitable as well. Devyani International opened 192 new restaurants in 9MFY22.

In a nutshell

As global liquidity is expected to become scarce, companies with expensive valuations (including startups) are expected to feel the heat. In this context, rapidly expanding QSRs which are on a firm footing on profitability parameters might continue to find a place on the investor’s radar.

What do you think? Will QSRs make you quick bucks? Do let us know by leaving a reply in the comments section. And if you thought this story was interesting, do share it with your friends and acquaintances.

You may also like to read: Can Piramal Enterprises grow as per its guidance?

 

 

Disclaimer

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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