Multiple triggers to help Westlife Development maintain outperformance

Sales uptick in dine-in and delivery channels, new products and gradual royalty hikes are positives

With a return of just under 40 per cent over the last three months, Westlife Development has been the best-performing quick service restaurant (QSR) stock in this period. Going ahead, expectations of operational outperformance, new addition to its food portfolio, gradual increase in royalty rates (instead of sharper increase in the 2026-27 financial year or FY27) were some of the triggers for the rally. Brokerages have upgraded the earnings estimates of the company by 3-17 per cent for FY23 and FY24 to account for the improvement in multiple parametres.

After a strong performance in the June quarter (Q2FY23), the company is expected to maintain the growth momentum in FY23. Say analysts, led by Jaykumar Doshi of Kotak Institutional Equities, “Strategic initiatives (omni-channel, menu innovation and store reimaging) have driven the doubling of convenience channel revenues while also registering modest growth in dine-in topline versus pre-pandemic levels.”

The dine-in and convenience channel formats -- which include delivery, on-the-go and drive-through -- grew 14 per cent and 112 per cent, respectively, in Q2FY23 as compared to pre-pandemic levels in Q1FY20. The brokerage expects the company to sustain average daily sales of Q1FY23, at Rs 180,000, in the remaining quarters of FY23 -- including the September quarter -- notwithstanding seasonality. In addition to higher sales from convenience channels, what has enabled higher daily revenue (as compared to pre-pandemic period) is improved traction from McCafe, fried chicken and gourmet menu.

The company had surprised the Street in Q1FY23 with same store sales growth of 97 per cent year-on-year (YoY) and a three year compounded annual growth rate of 11-12 per cent. Robust like-to-like store sales growth resulted in improved operating leverage which, coupled with cost optimisation and higher productivity, enabled the company to report an improvement in operating profit margins. The metric improved by 111 basis points (bps) on a sequential basis, to 17.1 per cent in Q1FY23.

Prabhudas Lilladher Research believes that input cost pressures have peaked out and a 5 per cent price increase from May this year, will aid margin expansion in the coming quarters. Amnish Aggarwal and Harish Advani of the brokerage expect gross margin gains through pricing actions, improved mix and sourcing efficiencies. In addition to leverage from higher volumes, what should drive operating profit margins is rising store throughput and lower employee expenses and utility costs as a proportion of sales, they added.

Another positive for the company is expectation of gradual increase in royalty rates, as against sharp increase from FY27, to 8 per cent. Currently, royalty rates are at 4 per cent and will increase to 4.5 per cent in FY24 and are capped at 5 per cent for FY25 and FY26. If a gradual change materialises (rather than a 300 bps change in FY27), it should address a major investor concern and present upside risks to future profit margin estimates, says Kotak Institutional Equities.

At the current price (Rs 721.9), the stock is trading at 63 times its FY24 earnings estimates. While prospects remain sound, given the recent run up and target prices between Rs 750 to Rs 847, investors should await meaningful correction in the stock before considering it.