Analysts recommend to selectively buy-the-dip in QSR stocks; here's why

In the past six months, QSR-companies like Devyani International, Jubilant Foodworks, Restaurant Brands Asia, and Sapphire Foods, have tanked up to 26 per cent

Tepid discretionary spends, along with decelerating demand in an inflationary environment will continue to weigh on performance of quick-service-restaurant (QSR) players in the near-term, said analysts. However, they expect demand sentiment to revive in the medium-to-long term as inflation starts to taper. 

"As we expect inflation to peak, and trickle down in the later part of this year, we expect QSR companies to reap benefits in the medium-to-long term. Lower raw material prices, better operating leverage, and prudent cost management, can potentially drive profitability for these companies," said Narendra Solanki, Head Fundamental Research – Investment Services at Anand Rathi Shares & Stock Brokers.

Analysts at ICRA, on the other hand, projected top QSR players to add nearly 2,300 stores between FY23-25, with an estimated capex of around Rs 5,800 crore, twice than the levels seen in pre-Covid-19 era, driven by growing per-capita GDP and penetration into smaller towns.
 

Meanwhile, in the past six months, listed QSR-companies like Devyani International, Jubilant Foodworks, Restaurant Brands Asia, and Sapphire Foods, have tanked up to 26 per cent, as against 0.6 per cent rise in the S&P BSE Sensex.

Solanki of Anand Rathi said that this underperformance was due to increased margin pressure in the previous quarters, amid elevated raw material prices, and higher operating costs.

In the October-to-December quarter of fiscal year 2022-23 (Q3FY23), sales growth moderated across QSR players, with negative-to-low-single digit same-store sales growth (SSSG) on a year-on-year (YoY) basis. Ebitda (earnings before interest, tax, depreciation, and amortisation) margins, too, lowered in the range of 160-456 basis points (bps) YoY in the December quarter.

Going ahead, analysts at HDFC Securities expect continued weakness in discretionary demand to lower average daily sales (ADS), and SSSG for QSRs in the January-to-March period (Q4FY23) as well.

"We expect Jubilant Foodworks, Devyani International, and Sapphire Foods to witness SSSG fall in the range of 1 per cent to 8 per cent year-on-year (YoY) in Q4FY23. Inflationary raw material basket, too, is likely to contract gross margins of these QSR players up to 250 basis points (bps)," they wrote in a result preview analysis.

Sneha Poddar, AVP, research analyst at Motilal Oswal, too, sees subdued growth in Ebitda (earnings before interest, tax, depreciation, and amortisation) margins, due to lower SSSG, and inflation in poultry, dairy. However, Poddar expects aggressive store expansion, and lower base to drive sales up to 20 per cent YoY in the March quarter.

Investment rationale

From an investment perspective, analysts remain bullish on QSRs' long-term outlook as valuations turn favourable after it underwent sharp correction, and therefore, recommend investors to selectively buy the dip.

Preeyam Tolia, Senior Research Analyst of Axis Securities picks Westlife Foodworld among the QSR universe as an attractive 'buy' due to the company's steady financial performance over the past few quarters. 

Sneha Poddar of Motilal Oswal, on the other hand, selects Devyani International for long-term, given KFC's strong brand equity, expected gradual turnaround in Pizza Hut, strong network expansion, and overall healthy profitability.