Street ignores recovery hurdles faced by pricey McDonald's India franchise

Continued pressure on dine-in sales may hurt growth

Despite the impact of Covid-19 on the June quarter (Q1), the stock of Westlife Development, the India franchise of McDonald’s, has gained 3 per cent after its results were announced last Thursday, outperforming the Sensex’s one per cent fall. Good business recovery, along with additional stores becoming operational after the lockdown (since end-March), helped improve sentiment. However, analysts are advising caution.

The firm saw around four-fold improvement in June sales vis-à-vis April, as the number of operational stores rose to 263 , versus 119. Its convenience platforms such as McDelivery, take-out, and Drive Thru are either above or near pre-Covid levels. While this offers a breather, pressure on the firm’s dine-in business, which accounts for around half of revenue, along with muted store expansion are key recovery hurdles, which some analysts believe leave little comfort at the current valuation.

“Although the commentary on recovery in convenience formats sounds promising, we expect pressure from the weakness in its core dine-in business and high operating leverage structure,” analysts at ICICI Securities said in their Q1 report. According to them, long-term benefits from expansion of the food services market remain intact. However, medium-term weakness limits the ability for store expansion, which is integral to the current fair value. The brokerage has maintained a ‘hold’ rating.

 

 

The stock, which has surged 28 per cent from its March lows, currently trades at 29 times its FY22 estimated enterprise value-to-Ebitda, about 24 per cent higher than the 23 times of Jubilant FoodWorks. The latter earns around two-third of its revenue from delivery/takeaways, indicating relatively faster recovery for the pizza maker. Vishal Punmiya, analyst, Nirmal Bang, downgraded the Westlife stock to ‘accumulate’ from ‘buy’ after the run-up.

Analysts believe that consumers would be reluctant to go to crowded public places for some time even after the economy is completely opened. Around 74 per cent of Westlife’s stores are located in metros such as Mumbai, Pune, Ahmedabad, etc, which are hit by the pandemic. This, along with social distancing norms, will delay the recovery in the dine-in business.

Top line pressure and weak operating leverage, in turn, would take a toll on Westlife’s operating profit margin and overall earnings. In Q1, 75.4 per cent year-on-year drop in revenue to Rs 94 crore, led by 54 per cent decline in same-store sales (excluding stores that were shut) resulted in an Ebitda loss of Rs 57.7 crore and loss before tax of Rs 76.8 crore. This was despite cost efficiency measures, including rent re-negotiation. The firm had reported PBT of Rs 8.5 crore in the June 2019 quarter.