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* The quick-service restaurant (QSR) sector has been an underperformer in the last four years and the aggregate market cap of listed QSR companies has declined by 20% during FY22-26, with the last 12 months seeing a ~25% correction. The entire QSR universe represents a market cap of INR670b, with India revenue of ~INR200b and India store network of more than 6,600. New stores added in the last four years account for over 40% of total stores (>65% of FY22 store count). However, the faster rollout has affected the unit economics of the QSR sector. We expect the store addition pace will be slower to 10-11% over FY27-28 vs. 15% over FY22-26. As a result, we believe store unit economics might not see any more deterioration.

* The sector had faced similar challenges in FY13-17, when aggressive expansion met with weak demand and same-store sales deteriorated (Exhibit 23:). A recovery then came from a familiar playbook of slower expansion, value offering, menu innovation, digital engagement and focus on unit economics of existing stores. We expect a similar turnaround possibility, with early signs of recovery visible in improving SSSG and profitability. Operating margins are currently lower than the FY19 level (significantly lower than the FY22 levels). We believe a margin recovery will be driven by price hikes, better throughput from new stores added in recent years, and improving SSSG.

* Listed QSR companies operate one of the largest consumer retail networks in India with 6,627 stores, far exceeding the total store network of Trent, Titan Jewellery and Avenue Supermarts (Exhibit 37:). Despite operating a 5- 6x larger store network than the leading organized retailers and generating revenue comparable to Trent’s, the listed QSR universe trades at a fraction of their valuation. Although weaker unit economics warrant a discount, we believe the current valuation captures these concerns. Any improvement in profitability metrics will drive up the valuation quickly for QSR companies.

* We retain BUY on Devyani International, Restaurant Brands Asia (RBA) and Sapphire Foods. Given a 35% correction in its stock price in the last 12 months, we upgrade Jubilant FoodWorks (JUBI) to BUY from Neutral.

India QSR - Recap of last five years

* Aggregate revenue of QSR operators in India has increased to INR195b at a 15% CAGR during FY22-26 (13% in FY19-26), reflecting healthy consumption trends. Their aggregate store count in India has expanded at a 15% CAGR during FY22-26 (14% in FY19-26) to 6,627 (2,725 in FY19), indicating a healthy store expansion trajectory.

* However, due to faster store rollouts, network supply has exceeded consumer growth, which has led to cannibalization among brands and started impacting store unit economics. Average daily sales (ADS) and same-store-sales growth (SSSG) have declined significantly. Aggregate EBITDA (pre-Ind As) has clocked a mere 7% CAGR over FY22-26 (10% in FY19-26); it was even weaker after FY23, down ~6% during FY23-FY26 (from INR19b to INR18b)

Weak operating performance; demand not an issue

* In our widespread consumer coverage universe, a compendium of ~60 consumer companies with a combined revenue of >INR6t in FY26, the QSR segment has posted the second-highest revenue CAGR of 13% over FY19-26 after Jewelry (24%). The consumer universe has registered an 11% revenue CAGR.

* QSR CAGR looks even healthier given

(1) no price hike support

(2) more focus on value offerings impacted AOVs (suggesting customer footfall growth will be more than the revenue CAGR of 13% )

(3) actual consumption growth (no support of trade pipeline filling). Thereby, looking at aggregate growth, we do not believe QSR had demand issues. Unit economics was impacted by faster store rolloutdriven excess supply.

Valuation correction mitigates risk

* The aggregate market cap of QSR companies has corrected by 20% during FY22- FY26, with the last 12 months witnessing a ~25% correction. The entire QSR universe is available at a market cap of ~INR670b, with India revenue of ~INR200b and India store network of >6,600 stores.

* The sector has witnessed a valuation correction following weak profitability over FY23-26. Going forward, valuation multiples are likely to be driven more by the improvement in SSSG, store productivity and earnings delivery rather than by store expansion alone. Since the sector has been witnessing sequential improvements in earnings for the past two quarters, we believe a gradual rerating in valuations is likely.

* Given a 35% correction in stock price over the last 12 months, we upgrade JUBI to BUY from Neutral with a revised TP of INR625.

* We maintain BUY on Devyani (TP INR160), Sapphire (TP INR245) and RBA (TP INR125).

* We maintain Neutral rating on Westlife and United Foodbrands (UFB) with a TP of INR550 and INR775.

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