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Good 4Q; retains store expansion target

4Q performance was robust with revenues up 6.3% (SSSG: +10.5%) on the back of (1) strong recovery in dine-in (70% of pre-Covid in Jan-21) and (2) continued growth momentum in the convenience channel (+42% YoY). Consistent cost optimization (rental benefit, vendor-led benefits, variable staff costs, etc.), drove EBITDA margin print of 11% (adjusting for special bonus for employees). Although dine-in is again impacted (in 1Q) across its core markets, strengthened convenience formats (delivery, drive-thru, takeaway and OTG) continue to perform well this time.

Despite near-term uncertainties, management sticks to store expansion target of 20-30 stores for FY22. Long-term benefits from expansion of food service market remain intact. Retain ADD with an unchanged TP of Rs450.

* Dine-in recovery drives a good quarter:

In 4QFY21, revenue and EBITDA rose 6% and 76%, respectively with same store sales growth of 10.5%. On a sequential basis, revenue was up 10% with dine-in recovering and convenience platforms remaining resilient. MDS reported highest ever monthly sales in March-21 (up 26% YoY in Q4FY21) while other convenience channels of Drive-Thru (+80% YoY) and OTG (3X growth in last nine months) scaled-up well.

* Maintains FY22 store expansion target:

Westlife added one store (T2 Terminal) in Q4 taking the total store count to 305 (42 cities). In FY2021, Westlife reduced its store-print by 14 stores on a net-basis (closed 19 and added 5) as part of its network optimisation initiative. A key positive is the company sticking to store expansion target of 20-30 store additions for FY22 with long-term real estate deals becoming more attractive for Westlife. It added just 4 McCafe stores in FY2021 as dine-in was impacted for most of the year.

* Benefit of leaner cost structure seen as revenues recover:

Better sourcing and cost optimisation led to Westlife report its highest-ever gross margin print of 66.5% (up 92/79bps YoY/QoQ) despite subdued performance of margin-accretive McCafe. The quarter had an impact of special bonus for its employees, adjusting for which comparable EBITDA margin expanded to 11.0% (9.1% on reported basis); ROM print of 16.4% was the highest in the last five years. While eventual recovery in dinein and McCafe will be margin-accretive, the benefit will be partly negated by inflationary RM pressure for the year.

* Valuation and risks:

We cut our FY22-23 revenue estimates by 6-8%; modelling revenue / EBITDA CAGR of 40 / 145 (%) over FY21-23E. Retain ADD with DCFbased target price unchanged at Rs450. Improved execution engine and accelerated share-gain potential (preference for hygiene) keep us positive. Key downside risks include sustained weak consumer sentiment impacting restaurant throughput and food aggregators impacting economics and profitability in food delivery.

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