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Strong store addition offset by SSS decline

Q4 revenue down 1.1% YoY; same store sales dip 5% YoY

Westlife Foodworld (WLDL IN) reported Q4 sales of INR 5,623mn, down 6.3% QoQ/1.1% YoY, in-line with our estimates of INR 5,586mn. This was due to a decline of 5% YoY in same stores sales (SSS). The on-premises business decelerated 2.4% YoY, while off-premise grew 6% YoY. Delivery business contributed 43% to the overall revenue. In FY24, sales grew by 5% YoY to INR 23,918mn, driven by 11.2% YoY growth in store count as SSSG decelerated 1.5% YoY.      

SSSG to recover in H2FY25; expect FY25E store addition at 40    

We expect strong SSSG recovery in H2FY25, with annualised SSSG of 2.5% YoY in FY25. Off-premise sales may continue to see faster growth as compared with on-premise, whereas lower price hikes may affect overall revenue growth in FY25. Store additions remain strong – WLDL added 17 net new stores in Q4 and 40 (highest ever) net new stores in FY24. We expect WLDL to add 40 net new stores in FY25E, leading to a store growth of 10.1% YoY.

Competitive intensity in the burger category remains high, with the presence of Burger King and multiple local players (Burger Singh, Good Flipping Burger, Boss Burger). This may strain SSSG apart from other macro issues (FDA cheese probe in outlets in West India and negative sentiment due to Israel-Hamas war). Medium term, we do not foresee high single-digit SSSG as per guidance, as most growth levers have plateaued (fried chicken offerings have been introduced and McCafé penetration reached 91% of stores). Menu innovation and adoption of new menu offerings may be future SSSG drivers (versus expectations).     

Valuations: Maintain Reduce; TP unchanged at INR 880

Expect gross margin to be stable for most QSR players, including WLDL as inflation pressures have cooled off. We do not foresee sharp inflation in the near term. But EBITDA margin improvement may be a challenge due to: 1) higher competitive intensity, 2) value-based offerings, and 3) volatile demand environment. Expect EBITDA margin to improve 60bps in the next two years, leading to FY24-26E EBITDA CAGR of 13.2%. The stock has yielded a mere 7% return in the past six months. We continue to believe valuations are expensive at 34.9x FY26E EV/EBITDA (pre-IndAS). A better SSSG with improving EBITDA margin may drive a valuation re-rating. We cut FY25E/26E revenue estimates 1.3%/1.1%, factoring in lower SSSG and EBITDA estimates 9.9%/8.5% on lower margins. We introduce FY27E estimates and roll over to June 2025E TP of INR 880 (unchanged). We maintain Reduce on 34x one-year forward EV/EBITDA (pre IndAS).

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