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A well-rounded performance with improvement across metrics

Westlife’s superior performance (over last few quarters) is an outcome of (1) good delta from product-mix improvement (vs peers) – commendable but long due efforts, (2) consequent ‘organic’ improvement in AOVs requiring lower price hikes (maintaining the value positioning well) and (3) permanent beneficiary of a higher base-level demand of convenience demand. We believe Westlife of today is a result of great execution (a real turnaround when compared to say ~8 years back). It was not in the top-tier of ‘great executor’ back then. The journey has been long and it’s all adding up now.

It reported a good 2Q with revenue growth of 13% on 3-year CAGR basis and healthy store throughput trends. This was led by continued good performance in off-premise formats (+88% growth over pre-Covid) with dine-in also growing well (up 24%). Improved gross margins (levers of product mix and price hike benefit) and operating leverage benefit led to good ROM print of 22.7%.

Apart from McCafe, the new drivers of (1) Gourmet Burgers (strong premiumisation potential), (2) Fried Chicken (in south market), and (3) scale-up of convenience channel (one of the best execution on scaling-up omni-channel) are driving big gains. The plan is to accelerate store expansion and add 200+ stores over next 3-4 years. We remain long-standing believers. However, we downgrade to ADD from BUY with a revised target price of Rs850 given the recent run up in stock price (+83% in last six months, Nifty up +12%).

* Continued strong top-line performance: Westlife reported a good quarter with revenue growth of 49% YoY (and +6% QoQ) to Rs5.7bn. Annualised revenue per store came in at Rs67.5mn vs Rs53mn in 2QFY20. Management highlighted that (1) growth was broad-based across store formats with mall stores improving pace sequentially, (2) on-premise grew 96% YoY and 24% over pre-covid level, (3) offpremise continues to do well and is now 88% above pre-covid level. We note that Westlife has taken another price hike of ~2% in October.

* RoM of 22.7%: Gross margin expanded 74bps YoY (+120 bps QoQ) to 65.5%. We believe the price hike are lower than the food and paper inflationary pressure and the margin expansion has come on the back of (1) continued recovery in McCafe, (2) robust growth in meals led by premium burgers and fried chicken (highlighted), (3) full-quarter benefit of price increase. Impact of higher staff costs was more than offset by operating leverage (benefit) and cost optimisation measures – ROM was up 105bps QoQ to 22.7%. Given QSRs are typically value-focused, the target is to maintain operating margins without passing entire inflationary pressure though multiple levers.

* Valuation and risks: We increase our earnings estimates by 14-6% for FY23- 24E; modelling revenue / EBITDA CAGR of 31 / 61 (%) over FY22-24E. Downgrade to ADD (from BUY) with DCF-based revised target price of Rs850 (was Rs640). 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 likely higher competitive intensity in near term.

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