Amid long road to recovery, QSR stocks have an edge over multiplexes

Discretionary spending may take 15-20 months to reach FY20 levels; delivery-model and market share gains to support QSRs, while attracting footfall will be a challenge for multiplexes

Against the backdrop of the lockdown hurting discretionary demand and its consequent impact on consumer behaviour — moving away from dine-outs and crowded places, such as malls and cinema theatres, experts believe a recovery to the FY20 (pre-Covid-19) levels could take at least 15-20 months. However, within the discretionary space, too, expectations are that quick-service restaurants (QSRs) may see a faster recovery than multiplexes.

The Street, too, believes so, given the outperformance of QSR stocks, such as Jubilant FoodWorks and Westlife Development, vis-à-vis multiplexes like PVR and Inox Leisure, since the start of lockdown on March 25.

According to Madan Sabnavis, chief economist at CARE Ratings, “The fear among consumers with respect to outside food and going to public places will continue for some time, so the recovery for discretionary segments would be slower.” However, the delivery channel of QSR players should help them fare better in terms of recovery and multiplexes would be last on the priority list, he adds.

Naveen Kulkarni, chief investment officer at Axis Securities, who has a negative view on the discretionary space, including multiplexes and QSRs, also expects the latter to see faster recovery.
 

Jubilant FoodWorks — the Indian franchisee of Domino’s Pizza — during its Q4 earnings call on May 20 highlighted that recovery in the delivery business in small cities has reached the pre-Covid-19 levels. QSRs could also gain market share from local players.

Varun Singh, analyst at IDBI Capital, says: “The current environment has offered a good opportunity to branded companies in organised QSRs, which operate through open kitchen to gain market share from unorganised and cloud-kitchen players, as they will provide trust (safety and hygiene) to customers.” The risk from ever-rising competition from Zomato and Swiggy is likely to subside as people will prefer known and branded companies.

However, pressure on organised QSRs' dine-in business (about 40 per cent revenue) and demand recovery from big cities, which are most affected by Covid-19, will continue and is be a monitorable. Second, higher input costs may hurt margins, as passing on these may not be easy in the current conditions.

For multiplexes, where there is no alternative to attracting footfall, the recovery is expected to be much slower. “The biggest challenge (post lockdown) would be to win the confidence of our customers, and help them overcome their inherent concerns,” says Alok Tondon, chief executive officer at Inox Leisure.

An April-end report of Emkay Research estimates key revenue segments (ticket collection, and food & beverages; over 80 per cent of the top line) to decline by over 55 per cent in FY21. The domestic brokerage, which has downgraded PVR and Inox Leisure stocks to 'hold', expects footfall and ad revenues to reach the pre-Covid levels by FY22 because of delayed recovery. Lower capacity utilisation can also hurt earnings.

 

Jinesh Joshi, analyst at Prabhudas Lilladher, says: “Lower occupancy amid social distancing would keep overall utilisation level down.” Inox's management, too, agrees that social distancing would be the need of the hour whenever operations resume, and would impact occupancies. Joshi thus foresees around 20-25 per cent reduction in capacity utilisation in the near term, even as he believes that the long-term structural growth story of multiplexes remains intact.

Moreover, likely shortage of content (as movie production is on hold amidst lockdown) and competition from OTT (over-the-top) or digital channel would also hurt prospects. If the recent trend of a few new movie releases going to OTT picks up, it could have implications on their long-term prospects too.

The higher component of fixed costs (rentals, wages) is also a worry for both these segments. While the players are negotiating rent, and both multiplexes (PVR and Inox) have invoked force majeure to save on this front, it will be difficult to protect their profitability once they re-start their operations, say analysts.