Due to weak industry demand, quick service restaurant (QSR) operators have been having a hard time in recent quarters. Unfortunately, for investors in these stocks, the September quarter (Q2FY24) is unlikely to bring much cheer.
Adding to the woes of muted demand, is the restricted consumption of non-vegetarian dishes during Q2 owing to the longer religious period—Shravan and Adhik Maas.
Sure, store additions would offer some comfort to revenue growth. But with same store sales growth (SSSG) expected to be under pressure, broadly, negative operating leverage would weigh on the Ebitda margin.
On the SSSG front, the KFC portfolio is likely to perform a notch better than pizzas in line with the trend seen in Q1. Channel checks by Motilal Oswal Financial Services show the pain in the pizza category extended during Q2 as consumer spending shifted to burgers and other categories, possibly due to down-trading.
For Devyani International Ltd, the brokerage estimates the KFC portfolio to clock 1% SSSG in Q2, while that of Pizza Hut (PH) would be in the red. For perspective, in Q1, Devyani’s KFC and PH portfolios saw SSSG of –0.9% and –5.3%, respectively. Sapphire Foods India Ltd, which has KFC and PH portfolios, is also likely to put up a similar show. On the other hand, Westlife Foodworld Ltd (operating McDonald’s) and Restaurant Brands Asia Ltd (operating Burger King) are expected to see SSSG of 5% each in Q2, according to Motilal Oswal. In Q1, the metric stood at 7% and 3.6%, respectively.
Shares of the above-mentioned QSRs are up by 8-18% in 2023 so far. A strong show in Q3 aided by the festive season and the ongoing ICC Cricket Men’s World Cup may improve sentiments. But it may be prudent to exert caution. “With superior control of KFC, we expect it to recover faster with limited downside risk. But PH recovery is uncertain, both on growth and margin,” said analysts at HDFC Securities in a report on 10 October.
Overall, given high inflation impacting consumer wallets, HDFC Securities does not expect growth recovery any time soon. In this backdrop, investors should watch how margins play out.
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Updated: 12 Oct 2023, 09:50 PM IST