Sustained volume gains at McDonald's a key trigger for Westlife stock

Margins could improve further on operating leverage and cost optimisation

The gradual opening up of stores and uptick in convenience platforms led to a 55 per cent sequential growth in revenues for Westlife Development. The company, which operates the McDonald’s restaurants in West and South India, indicated that there has been 85-90 per cent recovery compared with pre-Covid levels in February.

Convenience platforms comprising McDelivery, drive through, and on-the-go options saw a recovery of 120-125 per cent of pre-Covid levels, while recovery in dine-ins is pegged at 75 per cent. The latter segment saw a slow recovery in the quarter, given the unlock process in October in Maharashtra and the imposition of night curfew in some states.

Led by higher sales and stable operating costs, operating profit was in the positive territory at Rs 33 crore, compared with a loss of Rs 10 crore in the September quarter. Margins, too, recovered to 10.2 per cent. The company highlighted that at 13 per cent margins for December were better than the year-ago margins of 10 per cent, even though revenues were 20 per cent lower.

Higher volumes, especially in the dine-in segment, as the vaccination drive improves confidence will be the key driver of margins. Cost optimisation efforts across the chain and improvement in product mix with an increasing share of higher margin products are the other profitability triggers.

While the margin improvement is a positive, the Street will keep an eye on improving same store sales, higher growth in transit and mall locations, given the near shutdown of public transport and muted footfalls in malls. Further, trajectory of occupancy at theatres, too, would be critical to volume growth at those locations.

Though the long-term trajectory is positive, given falling competitive intensity and shift to larger branded players, the consistent revenue and margin uptick would be critical for the stock to sustain its 20 per cent gains since the start of November. Investors could add the stock for their long-term portfolio on corrections.