Extended Covid lockdowns to dent Westlife's dine-in segment revenues

Strong growth in convenience format, margin improvement would support financials

The Westlife Development stock will remain under pressure in the near term as multiple states have extended their lockdowns. Westlife runs the McDonald’s chain in the western and southern regions where severe restrictions have hampered the dine-in segment revenues.

After a robust March quarter, the dependence on the convenience format is expected to increase in the current circumstances with more orders being fulfilled through delivery, drive through, takeaway and on-the-go channels. The convenience format accounts for 55 per cent of revenues while the rest is accounted for by the dine-in segment.

While dine-in recovered to 70 per cent of pre-Covid levels in January, convenience format registered a 42 per cent growth. This coupled with 10.5 per cent same store sales growth led to a 6 per cent sales YoY with sequential growth at 10 per cent.

Though the number of stores fell by 14 in FY21, it is proceeding with its store expansion target and intends to add 20-30 outlets in FY22 even as it hopes to gain from attractive long-term real estate rates.  

The positive from the street’s perspective is the leaner cost structure and gross margin expansion led by recovery in volumes and cost optimisation initiatives. While gross margins at 66.5 per cent were its highest ever, restaurant operating margins hit a five year high of 16.5 per cent. The progress on this front however depends on how input costs shape up. Analysts at ICICI Securities say while eventual recovery in dine-in and McCafe will be margin-accretive, the benefit will be partly negated by inflationary raw material pressure for the year.

While a more resilient cost structure is a positive, given the near term headwinds and significant presence in dine-in for Westlife, Motilal Oswal Research has cut their FY22 sales and operating profit estimates by 20-25 per cent. The stock was up about a per cent in a volatile trading session. While most brokerages believe that structural opportunity in the fast food segment remains and Westlife should benefit as recovery takes hold, given the current situation and valuations, investors should await a meaningful correction before considering the stock.