Burger King India: Growth strategy, margin expansion key to stock rally

Shares of Burger King India have been underperforming on the bourses for some time now. They surged 2.8 per cent on Friday, to Rs 134.2 per share on the BSE, but were still close to its 52-week low level of Rs 126, hit on May 5, 2021. In comparison, the BSE Sensex ended 0.1 per cent down at 57,200.

Over the past six months, Burger King India has underperformed the benchmark S&P BSE Sensex and other peers by falling 25.34 per cent, ACE Equity data show.

In comparison, the BSE Sensex and the BSE 500 indices jumped nearly 9 per cent and 8 per cent, respectively, during the period. Peer firms Jubilant FoodWorks and Westlife Development, on the other hand, were down 11.6 per cent each.

Source: ACE Equity
Note: Devyani International and Sapphire Foods' performance is since listing in Aug and Nov, respectively.

And the long-term road for the Quick Service Restaurant (QSR) player may not be an easy one, say analysts.

The company recently posted its December quarter (Q3FY22) results and brokerages have either downgraded the stock by a notch or have reduced their target price.

Analysts at ICICI Securities, for instance, have demoted the stock from “Buy” to “Add” due to concerns on capital allocation (outside India) and relative better-placed peer firms.

"We stay believers in Burger King as a short-term cyclical recovery play. However, lingering doubts and questions about long-term remain, refraining us to prefer it from a basket of (six) listed restaurant plays," said Manoj Menon, research analyst at the brokerage in a co-authored note with Aniket Sethi and Karan Bhuwania.

They have cut their FY23 EBITDA estimates by 8 per cent; modelling revenue / EBITDA CAGR of 54 / 181 per cent over FY21-24. Moreover, they have revised the target price to Rs 150 from Rs 200.

Improved execution engine and accelerated share-gain potential keeps us positive but downside risks continue to weigh, including delays in store expansion plans and increased competitive intensity in north and east markets.

In Q3FY22, BK India reported narrowing of net loss to Rs 15.15 crore compared to a net loss of Rs 29.02 crore during October-December period of the previous fiscal year. Its revenue from operations was up 71.51 per cent YoY to Rs 279.89 crore.

However, a section of analysts believes the company’s operating performance was weaker-than-expected in a few areas such as dine-in average daily sales (ADS) recovery, which was at 78 per cent (versus FY20), was weak, and pre-Ind AS EBITDA margin, at about 4 per cent, was a bit subdued.

EBITDA margin (reported basis) was mere 30bps higher than Q3FY20 levels despite gross margin having expanded 140bps.

"To reach a healthy level of profitability, Burger King India still needs 400-500bps incremental margin gains. Moreover, its success on this metric would remain the key factor for stock performance in our view," noted analysts at JM Financial. They have cut the target price on the stock to Rs 145 from Rs 155 but have maintained “Hold” rating.

On their part, the management intends to support margin growth by obtaining economies of scale which helps leverage logistics cost; clocking recovery in dine-in sales (presently at 78 per cent of pre-pandemic levels) that would help enhance overall throughput provided it does not have a cannibalising impact on delivery sales; and scaling up of BK Café across stores.

Jaykumar Doshi, analyst at Kotak Institutional Equities, along with Sushruta Mishra and Umnag Mehta have also trimmed their EBITDA margin expectations and have cut FY2023-24 EBITDA by 7-14 per cent.

"We are baking 225 BK Cafes by FY2024, contributing Rs 110 crore to FY2024 sales. BKIL offers high growth potential but has a relatively weak return on capital (RoCE) profile (store-level RoCE is less than 20 per cent) among QSRs. Capex intensity and store-level payback period of 5-6 years also weighs on valuations. We arrive at face value of Rs 147 (from Rs 161) implying 28X FY2024E EV/EBITDA," they said.

Nirmal Bang, too, highlighted Burger King has seen a lagged recovery, compared to peers, in the last few quarters because of its Dine-in centric model (pre-covid ~70 per cent of the brand’s revenue came from Dine-in) and 55 per cent mall-centric portfolio.

"Though the performance is improving now with the reopening of the economy, Burger King brand can establish itself in the Indian QSR space over the long-term if it executes its strategy well," the brokerage said.

Those at Prabhudas Lilladher, too, expect a turnaround in performance in FY22 and have marginally lowered their target price to Rs 220 from Rs 241.

Recovery in the mall portfolio, improvement in margin trajectory, performance of value strategy 2.0 and execution of the store expansion plans are the key monitorables in the near-to-medium term, analysts said.

Moreover, with the acquisition of BK Indonesia also now approved by shareholders, sustaining historical growth rates and steady margin improvement here would also be eyed, they added.