QSR is missing the spice of demand uptick, while cost of adding stores stays high

According to Kotak, the slowdown in the QSR industry has turned out to be more prolonged than initially anticipated.

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Quick Service Restaurant (QSR) players could face difficulty in maintaining profit margins, and the environment in which the companies are operating still remains challenging, according to a note by Kotak Institutional Equities. The brokerage firm anticipates margins for QSR companies to stay under pressure in Q4FY24, weighed down partly by weak demand, and the cost of store additions.
The Kotak note estimates a decline in Same Store Sales for Jubilant Foodworks, Westlife Foodworld, Devyani International, Sapphire Foods, and Restaurant Brands Asia in the range of 2.5-15 percent in Q4FY24. The brokerage also slashed its FY25-26 EBITDA estimates for the sector by 3-12 percent citing continued weakness in the first half of FY25, with prospects of recovery only coming into play from the second half of the year.

Same Store Sales is a metric to gauge retail and QSR companies, and measures the amount of sales in the stores that have been operating for a year or more.

Kotak believes the QSR slowdown has turned out to be more prolonged than what was initially anticipated. Same store sales growth too is likely to stay subdued in Q4FY24, largely due to an early Ramdan which affected 20 days of business in the quarter as against 10 days in the year-ago period.

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Quick Service Restaurants (QSRs) had kept their store addition plans largely unchanged, hoping for a demand pick-up and looking at the long-term opportunity, the note added. However, aggressive store additions and a weak demand has dented their FY24 profitability. The Kotak note underscore that a moderation in store addition may be the need of the hour in the face of a challenging operating environment.

However, it remains to be seen if Devyani International or Sapphire Foods will opt to moderate their store additions, given the milestone-linked incentives as per their agreement with Yum Brands. Jubilant Foodworks on the other hand added fewer stores in FY24 than what it had guided earlier.

Though the Kotak Institutional note finds it difficult to predict a recovery, it believes the QSR industry could be toward the end of its downcycle. The note chose Sapphire Foods as its preferred pick within the QSR space citing reasonable valuations and lower risk to earnings, followed by Devyani International. Kotak has a 'Buy' call on Sapphire with a price target of Rs 1,730 and a 'Add' recommendation on Devyani International with a price target of Rs 178.

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