"We are facing new challenges everyday," RBI Governor Shaktikanta Das said after the interest rate hike this week. The RBI and central banks the world-over are fighting inflation, which is taking big bites out of everyone's wallets.
While this hurts most of the economy, one consumer facing industry is not that worried.
In this week’s Analyticks:
- Fast food, growing fast: Quick service restaurants are growing, and making big expansion plans
- Screener: Companies trading at cheaper valuations compared to peers
Let’s get into it.
Customers are queuing up at quick service restaurants
Analysts often say that “pizza is recession proof". When money is tight, fast food wins over restaurant meals, as more people become cost-conscious while eating out.
Quick service restaurants (QSR) not only saw a swift revenue recovery in FY22 after the pandemic, they also sustained their margins. They were able to pass on price increases quite easily onto consumers.
In April 2022, QSR chains hiked prices by 3-6% to manage their input price inflation. Despite menu prices increasing, demand was robust in April and May, helped by cricket season and the Indian Premier League, and the onset of summer vacations.
And it's not just delivery. Restaurant Brands Asia (earlier Burger King India) also saw average daily dine-in sales recover to 96% of pre-Covid levels in May 2022, while average daily sales in delivery grew by 46% over May 2019 levels. Quick service restaurants have clearly evolved to become multi-channel fast-food businesses.
Leading QSR chains like Jubilant Foodworks and Devyani International plan to add 500 stores on an average in the next two years, to leverage these emerging trends.
The pandemic disrupted same-store sales growth in Q4FY22
Although QSRs witnessed healthy double-digit YoY revenue growth in Q4FY22, their revenues fell sequentially as the third pandemic wave hit business for the first 4-6 weeks of the quarter.
The third Covid wave also impacted same-store sales growth (SSSG) for QSR chains. The SSSG for all chains moderated sequentially, with KFC and Pizza Hut franchisees owned by Devyani International witnessing very low growth (2-3%) in Q4FY22.
Interestingly, the like-for-like (LFL) growth for Jubilant Foodworks slowed to 5.8% in Q4FY22 from 7.5% levels in Q3FY22. Both Jubilant and Devyani International saw YoY revenue growth of 20%+ on a company level, but lower sales growth for each existing store in Q4FY22. New store additions clearly drove Q4FY22 sales growth for both companies.
Restaurant Brands Asia’s net losses increased 3X QoQ to Rs 67 crore in Q4FY22 due to poor performance of the newly acquired unit i.e. Burger King Indonesia.
Chicken dishes a big bet as chains see non-vegetarian customers as majority
If there is one product area where QSRs are pinning their hopes on, it is chicken-based offerings. According to Devyani International’s management, nearly 70% Indians are non-vegetarian, while menus right now tilt more towards vegetarian items. In southern and eastern India, the proportion of non-vegetarians in the population is over 94%.
As a result, Westlife Development is planning to aggressively market its popular McSpicy Chicken burger, given the fact that this product added incremental sales of Rs 50 lakh per year per store for the company in FY22. It also introduced McSpicy Chicken in a few stores in western India to gauge the response.
Jubilant Foodworks also saw a strong response for the four stores of its fried-chicken chain Popeyes’, which it launched in Bengaluru back in Q3FY22. Now, the company is planning to launch 250-300 stores of this franchisee in the next 4-5 years. Clearly, the competition will be hotter with KFC, McDonald’s and Popeyes all vying for a higher wallet share of its non-vegetarian customer.
Finding new (and old) customers in small towns
Two years of the pandemic caused lakhs of salaried professionals to head back to their hometowns, as work from home became a reality. Companies sensed their lack of intention to return to crowded metros. Hence, Indian IT services and engineering companies are planning to open more offices in tier-2 and 3 cities to retain their employees.
This is one of the reasons that QSR chains plan to enter smaller cities through store expansions. In fact, some companies are seeing encouraging results already. Westlife Development saw stronger sales momentum in new stores launched in Vellore, Bhilai and Bilaspur, than at those in metro city stores.
Another reason behind QSRs’ aggressive store expansions is reducing their distance to customers, to increase sales via the delivery channel. Devyani International is planning to expand its store count by over 50% to nearly 1,300 in the next two years to achieve this. The company guided for single digit SSSG for KFC (4-5%) and Pizza Hut (7-8%) in FY23 - clearly, the focus is to raise sales at the company level rather than store level.
Consensus estimates from Trendlyne’s Forecaster shows that revenues of the QSR players are expected to be higher by nearly 33% YoY in FY23 backed by robust consumer demand and store additions.
Now all eyes are on the execution of these plans, and whether the tier-2 and 3 cities actually drive the next phase of growth for QSRs.
Screener: Companies that grew at a decent rate and are trading at affordable valuations vis-à-vis their peers
In this week’s edition, we bring you a list of companies that maintained a double-digit growth trajectory in FY22, but are available at a discounted price on the bourses.
This screener throws up 76 companies in total and 18 companies within the Nifty 500 that are trading below the industry PE and P/BV (price to earnings and price to book). Power utility NTPC features in this list. Its top line grew at 15%+ in FY22 backed by higher power trading revenues. It has plans within the renewable power space of setting up projects worth 60 GW.
IT companies like Tech Mahindra and Zensar Technologies are also trading at a significant discount to their peers. Although these companies witnessed healthy QoQ revenue growth of 4-5% in Q4FY22, margin pressure has persisted. In the past month, foreign brokerages like JP Morgan and Nomura downgraded the Indian IT sector on the back of slowing revenue growth momentum, fear of recession in the US and pricey valuations.
Gas companies like GAIL and Indraprastha Gas also appear in this list. These companies maintained a robust growth momentum in FY22. However, a sharp spike in gas prices have cast a shadow on their profit margins in the near future.
You can find some popular screeners here.
