The quick-service restaurant (QSR) industry saw muted demand in Q4 FY23, with most players reporting weak same store sales growth, but management commentary suggests that the worse is behind the sector, analysts at Jefferies said. “The first half of Q1 FY24 saw a sequential pick-up in demand due to seasonality, including summer vacation, festivals, IPL etc. However, a demand rebound is expected only by 2H FY24,” the foreign brokerage said in a report, based on the post-earnings management commentary of firms.
Noting that inflation has normalised on a high base across most inputs, including chicken, oil, wheat, packaging etc (except dairy), the report said prices are yet to come down, which can take up to 3-4 quarters.
Also Read: ICRA projects 20-25% growth for India's quick service restaurant industry in FY24
Pizza Hut and Dominos saw a decline in same store sales growth due to aggressive store additions and elevated competition in the category.
However, burger formats saw strong growth, and companies expect the momentum to continue.
Food delivery firm Zomato also witnessed a sequential slowdown, but management expects double-digit QoQ growth in 1Q.
Jubilant FoodWorks, which is the master franchisee of Domino’s Pizza in India, highlighted in its Q4 earnings call that demand remains stable and inflation has normalised on a high base, but food prices are yet to come down, which can take up to 3-4 quarters.
Average order values, however, declined partly on consumers cutting back on spending.
The financials
The company on May 17 reported a significant 59.5 percent decline in its consolidated net profit at Rs 47.5 crore from Rs 116.1 crore in year-ago period.
The company's revenue from operations grew 8.2 percent on-year to Rs 1,252.3 crore, while EBITDA, which measures its operating profitability, declined 12.9 percent to Rs 252.2 crore.
Jubilant Foodworks Limited: Should you bite into this QSR stock?
Devyani International, which operates brands like KFC, Pizza Hut and Costa Coffee, also pointed out that Inflation seems to be bottoming across inputs, including chicken, oil, packaging and wheat but not cheese.
The company expects demand to rebound in the consumption category in H2 FY24 as inflation wanes.
Its Q4 revenue growth was driven by a sharp 33 percent YoY increase in store count, while the same store sales growth was modest for the core brands (2 percent for KFC and -3 percent for Pizza Hut).
Sapphire Foods, one of the largest franchisees of Yum! Brands Inc in the subcontinent, had said demand was muted in the recent months, but also believes it is transitory and the company is continuing with store additions.
However, if the soft demand persists, it will recalibrate store opening plans, it added.
Barbeque-Nation Hospitality in its Q4 earnings call had shared that the macro environment has been tough in the recent quarters, resulting in muted demand.
However, the management is seeing early signs of improvement with month-on-month growth in revenues in April and May. It is also not seeing further inflationary pressures as meat prices have softened.
India's quick service restaurant industry is likely to witness 20-25 percent growth in the current financial year supported by demand uptick and increasing penetration driven by a rapid expansion of stores, ICRA said in a recent note.
Over the long-term, revenue growth shall be supported by factors like rising QSR penetration levels, a shift from the unorganised to the organised segment with a preference for branded quick service restaurant (QSR) players, given the hygiene and convenience factors (delivery over dine-in), etc.
"On the back of a robust industry revenue expansion of around 30-35 per cent in YoY terms estimated for FY2023, ICRA projects growth to moderate somewhat while remaining strong at 20-25 per cent in FY2024 on account of the demand uptick and increasing penetration driven by a rapid expansion of stores," the rating agency said.
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