With large appetite for growth, organised restaurants may see 15% CAGR till 2025

The Indian food service industry has had a roller-coaster ride in the past two years, with coronavirus-induced lockdowns disrupting operations, leading to huge losses in the initial months, followed by a period of high growth as the industry adapted to the new normal.

The Rs 4.2-lakh-crore industry is expected to grow by around 9 percent CAGR (compound annual growth rate) over FY20-25E on rising income levels, urbanisation, innovative offerings, higher internet penetration and growth in online food delivery and tech, a Motilal Oswal report has said.

The growth will largely be led by organised players, especially since 30-40 percent of restaurants in the unorganised space shut down due to Covid disruptions, the brokerage said.

This allowed organised players to increase market share, with their contribution rising to 38 percent in FY20 from 29 percent in FY15. This is expected to rise to 50 percent by FY25E, the brokerage said. It expects the organised food service industry to see 15.4 percent CAGR over FY20-25E.

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Hogging the pie

Within the space, the brokerage is betting on quick service restaurants (QSRs) such as Jubilant Foodworks (Domino’s), Westlife Development (McDonald’s), Devyani International (Yum Brands – Pizza Hut, KFC) and Barbeque Nation.

Over the past five years, quick-service and casual dining restaurants have seen the maximum growth at 19 percent CAGR each. Over the next five years, their growth is pegged at 23 percent and 19 percent, respectively, it said.

With 65 percent of Indian population below the age of 35 and rising income levels—middle-class population increased to 350 million in calendar year 2019 from 160 million in CY11—there are several positives for the space.

Even though Covid dealt a huge blow to the industry at its onset, branded players benefitted as consumers preferred to order food from restaurants with standardised and better hygiene.

Their revenues reached 90 percent of the pre-Covid levels, largely led by robust growth in deliveries, Elara Capital’s Senior Vice President Karan Taurani said.

Also read: We are striving to be the market leaders in fried chicken: Smita Jatia, MD, Westlife Development

QSR expansion spree 

The pandemic also gave QSRs the opportunity to optimise costs, especially high fixed costs of lease rentals by shifting to a variable lease model.

As several unorganised players could not survive, QSRs had more real estate at attractive prices at their disposal.

Jubilant FoodWorks, for example, increased its guidance for potential number of Domino’s stores from 2,000 to 3,000 and Westlife Development raised it from 800 to 1,000.

“We saw a big shift from unorganised to organised in the QSR segment, and there are only eight-10 large scalable players in this space in India. So, we believe there is still scope for the entry of more players, especially considering the growth opportunity in tier-2 and tier-3 cities,” Taurani said.

The best bites

Both Motilal Oswal and Elara Capital said their top pick in this space is Jubilant FoodWorks.

“Jubilant Foodworks is our top pick in the space because of its dynamic business model in an uncertain environment. They will continue to have a huge advantage versus peers, and gain market share. It also has an advantage in terms of scalability,” Taurani said.

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Motilal Oswal said Jubilant Food’s emphasis on success in delivery gives it a huge advantage over peers. “With the most efficient business model, JUBI has the best balance sheet, with a RoCE of over 20 percent for many years now (barring a blip in FY21 due to the COVID-19 outbreak),” the brokerage said. It has a “buy” rating on the stock with a target of Rs 4,850.

For Westlife Development, the brokerage has maintained a “neutral” rating, while Nirmal Bang Institutional has a “buy” rating on the McDonald’s west and south India franchise.

“We stand by our conviction about the company’s ability to bounce back faster than peers, and eventually achieve a sustainable high single-digit SSSG (same store sales growth) on the back of its focus on consistent growth in its sales per restaurant through the “All Day” menu, value platform, brand extensions, menu innovations, new category additions and sharp focus on customer initiatives,” Nirmal Bang said in a recent report. It kept its target at Rs 700.

Also read: Buy Devyani International; target of Rs 195: Choice Equity Broking

For Devyani International, Motilal Oswal initiated coverage with a “buy” rating and expects the company to record “aggressive sales growth and margin expansion”. “We expect sales to grow at 28 percent CAGR to Rs 40.8 billion and EBITDA margin to expand by 690 bps to 23.8 percent over FY20-24E,” the brokerage said.

The company has also been rapidly adding stores to its network, which is expected to increase to 607 in FY24 from 297 as of FY21—a CAGR of 27 percent.

Global brokerage firm Jefferies also recently initiated coverage on the stock with a “buy” rating and target at Rs 185. “With aggressive store adds and better economics, we forecast 37 percent FY20-24E EBITDA CAGR,” it reportedly said.

Even though there is a risk of Omicron variant leading to lockdowns, these companies have the ability to weather the disruption amid increased focus on online deliveries and the promise of better quality for consumers, say analysts.

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