Westlife Development: Patient investors may consider for growth post FY22

Strong growth in convenience format, margin improvement would support financials

The Westlife Development stock has been under pressure since its March highs of Rs 535 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 (Q4), the ongoing April-June period is unlikely to be good due to these lockdowns impacting demand. But beyond that, there is hope of a better growth trajectory.

In the near- to medium-term, 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 in Q4. This coupled with 10.5 per cent same store sales growth led to a 6 per cent YoY and 10 per cent sequential growth in sales in the March quarter.

Though the store count fell by 14 in FY21, Westlife is proceeding with its store expansion target with an intention of adding 20-30 stores in FY22 and gaining from the attractive long-term real estate rates.

The positive from the street or investor’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 gain will be partly offset by inflationary raw material pressure for the year.

While a more resilient cost structure is a plus, given near-term headwinds and significant presence in dine-in for Westlife, analysts at Motilal Oswal Securities have cut their FY22 sales and operating profit estimates by 20-25 per cent. Those at Emkay Global, too, have cut their revenue and Ebitda estimates by 14/21 per cent for FY22, and expect the company to post an adjusted net profit of less than Rs 1 crore, after a loss of Rs 104 crore in FY21.

However, significant growth is expected thereafter in FY23 with Emkay estimating revenue to rise by 23 per cent and net profit by 566 per cent, over FY19 levels.

It is likely that the Street is now looking beyond the near-term pain. The stock, which was up about a per cent a day after the results on May 13, has since added to the gains, taking the total to 9.5 per cent.

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, patient investors with some risk-appetite can consider the stock on dips.