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Burger King India (BURGERKI) is one of the youngest and fastest growing players in India’s quick service restaurant (QSR) sector. It is focused on establishing and operating Burger King restaurants across India. The brand is globally popular for its signature product Whopper. BURGERKI offers its services via four channels – dine-in, takeaway, delivery and drive-thrus. We initiate coverage with a Buy rating and a TP of INR210.

Whopper of an Opportunity

Big shift in business model, aggressive expansion – Initiate coverage with Buy

BURGERKI offers an exciting investment opportunity in the Indian QSR space on account of the following factors:

* The large Indian Food Service Industry (FSI) is expected to deliver 9% CAGR over the coming years, and QSRs are best placed to tap this opportunity. With their high affordability, aspirational branding, higher convenience, scale benefits, and technological edge, QSRs are expected to grow at 19% CAGR over FY20-25E.

* Given that the unorganized segment has been severely affected by COVID-19, QSRs can make further gains due to their better hygiene standards and well-positioned alternate channels, especially delivery.

* BURGERKI’s “barbell” product strategy with focus on premiumization at the top end and value products at the entry level makes it well-placed to drive SSSG and margin expansion. The introduction of BK Café from 4QFY22 onwards will significantly elevate its SSSG and gross margin profile as seen in the case of WLDL’s McCafé.

* BURGERKI has an aggressive target of opening 700 stores by Dec’26 that will expand its network from the current 265 stores, thereby driving its system sales growth higher.

* We believe BURGERKI’s premium multiples are likely to sustain due to its strong growth profile. Initiate coverage with BUY rating and TP of INR210 (28x Sep’23 EV/EBITDA).

Huge opportunity in FSI for QSRs with established right-to-win

* The INR4.2t (USD58b) Indian FSI is expected to grow at ~9% CAGR over FY20- 25E. Within the FSI, the QSR segment valued at INR348b (USD4.7b) has clocked the fastest growth but constitutes just 8% of the FSI and 22% of the organized FSI. QSRs are expected to grow at 19% CAGR over FY20-25E.

* The advantages for QSRs include: a) high affordability; b) globally well-known and aspirational brands; c) different cuisines to cater to evolving taste of the youth that have been adapted to Indian tastes; d) benefits of scale and better sourcing; e) convenience and quick service; and f) technological edge over peers. Their products have high volume intensity and are amenable to prompt delivery.

* In the post-COVID world, where 30-40% of restaurants are expected to shut down permanently, QSRs are well-placed to grab share from other FSI segments as branded players command greater trust

BURGERKI’s “barbell” product strategy to improve SSSG and gross margins

* With its “barbell” strategy, BURGEKI is focusing on premium products at one end while raising the entry point at the other end (newly-announced Stunner menu). Simultaneously, it has built a laddered product portfolio to push consumers towards premiumization.

* BURGERKI’s signature Whopper range is priced upwards of ~INR140 which is much higher than the high volume entry level product price of ~INR45. This offers potential for premiumization-led topline growth and margins. BURGERKI’s gross margins at 65-66% are already close to those of WLDL (~66-67%) despite the absence of a coffee offering due to greater salience of its premium products.

* At the lower end, BURGERKI has recently introduced eight products under its Stunner Menu at price points of INR50/70 (veg/non-veg). This has raised the entry price point from INR45, making the products gross margin accretive. We expect these value products to boost its SSSG significantly.

Complementary BK Café business to drive SSSG and margins

* BK Café products, which will complement the core business, will increase volume throughput at the store level, thereby pushing the SSSG higher for BURGERKI. Additionally, due to high gross margins, we expect BK Café to add 500-800bp to BURGERKI’s overall gross margins over the next 4-5 years, as seen in the case of WLDL (up from 57% in FY14 to 65% in FY20).

* BK Café will be introduced from 4QFY22 onwards, and BURGERKI plans to have 75 BK Café outlets by Mar’23 (~20% of store network).

* The past experience of the company’s senior management in Tata Starbucks will also prove valuable in this venture.

Rapid store network expansion to drive system sales growth

* BURGERKI is required to expand its store network to 700 by Dec’26 from the current 265 which will drive its topline growth higher. BURGERKI’s network expansion is much faster than that of JUBI and WLDL which are typically expanding by ~8-10% every year.

* Its cluster-based approach towards expansion will further improve margins as the company’s logistics costs decline.

Capped royalty rate at 5% of sales offers comfort

* JUBI has the lowest royalty rate of 3% while both KFC and Pizza Hut have a royalty rate of 6.3% each. WLDL’s royalty rate is currently at 4%, but is set to see a staggered increase to 8% in FY27 and maintain those levels thereafter. Its looming high royalty rate remains a concern.

* BURGERKI’s capped royalty of 5% until 2039 offers comfort for margin expansion unlike WLDL where the tremendous efforts being made by the company to drive margin expansion will be offset by higher royalty

Valuation and view

* We expect all listed Indian QSRs – BURGERKI, WLDL and JUBI – to be significant beneficiaries of the strengthening tailwinds (led by COVID-19) in favor of QSR players. Among these, JUBI will remain the most profitable and efficient player over the next few years.

* However, BURGERKI will enjoy an attractive opportunity for both topline and margin expansion. This will be led by a big shift in its business model through introduction of barbell product strategy and BK Café. In addition, aggressive store network expansion and capped royalty rate will also be key drivers of EPS growth.

* We expect BURGERKI to register sales/EBITDA CAGR of 71%/286% over FY21- 23E (on a soft base) v/s 32%/38% for JUBI. Over FY21-26E, BURGERKI’s sales/EBITDA CAGR is expected to stand at 43%/110%.

* We believe BURGERKI’s premium multiples are likely to sustain on account of its strong growth profile. Initiate coverage with Buy rating and TP of INR210 (28x Sep’25 EV/EBITDA). Based on a three-year perspective, we arrive at a TP of INR365 per share (30% CAGR), assuming 25x multiple.

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