Sales growth to double Jubilant FoodWorks, Westlife Development margins

Improving operating leverage will boost profitability over next 3 years

Despite their better performance over the last year, India’s largest, listed quick service restaurant (QSR) stocks — Jubilant FoodWorks (Jubilant) and Westlife Development (Westlife) — still have more legs to run. While Jubilant (which operates the Domino’s franchise) has tripled in value, Westlife (which runs the McDonalds stores) has added 55 per cent to its shareholder wealth.
 
The reason for the optimism has been an uptick in the growth of same- store sales (SSS) that the top chains have experienced over the last few quarters. Led by higher volumes growth, SSS growth for the Indian operations of Domino’s, KFC, Pizza Hut and McDonalds in Q3 and Q4 has been 15 per cent each. This has been on the back of demand growth and lower prices, following the implementation of the goods and services tax.
 
The managements of Jubilant and Westlife are optimistic about SSS growth, given their low penetration, expansion of activities and strong presence in cities.

The western fast-food segment, at about $2 billion, is just 8 per cent of the Indian QSR market, and 2 per cent of the overall eating-out industry.
 
It is in this context as well as banking on its expansion plans and the recent launch of new products that Westlife dropped clear hints of doubling its revenue and margins at somewhere between Rs 20 billion  and Rs 25 billion and 13-15 per cent by FY2022, respectively. Its FY18 revenues and margins stood Rs 11.3 billion and 7.5 per cent, respectively. Analysts at IIFL Institutional Equities observe upside risks to this guidance, given the strong 16 per cent growth in SSS in FY18, and the double-digit SSS growth predicted for FY19.

 
In addition to leverage and operational efficiencies, margin gains for Westlife are expected on increasing shares of more-profitable coffee (McCafe) and delivery (McDelivery) businesses and through menu innovation. 
 
Similarly, analysts remain bullish about Jubilant's growth potential as it achieved multi-year high year-on-year SSS growth of 26.5 per cent in the March quarter, while the figure for FY18 stood at 14 per cent. The strong volume-led SSS growth is also expected to boost margins.
 
Analysts at Macquarie expect Jubilant's margins to expand on the back of operating leverage (higher volumes) and cost control. Margins, which improved by over 500 basis points, year-on-year, in FY18 to 15 per cent, are seen rising to 18.6 per cent by FY20.
 
At the current prices, Jubilant and Westlife trade at the enterprise value to an operating profit of 23 times and 34 times FY20 estimates, respectively. Given the potential for sustained high growth, long-term investors can make reasonable returns.