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On the right track; good recovery play

Burger King reported a decent quarter in terms of revenue (down 24% QoQ) and gross margin print (+65%). Focus continues on strengthening (1) delivery platform (including own app), (2) value offering (Stunner Menu) and (3) store expansion. Consumer response (to innovation in Whopper range) appears good with 1 in every 3 orders having a Whopper.

We see multiple short-to-medium-term tailwinds: (1) likely sharper revenue recovery (once consumption normalize) given the over indexation of mall stores, (2) young store maturity provides operating leverage and (3) addition of BK Café as incremental growth. Key risks are (1) BKI may go-through a steep learning curve of expansion (and some potential failures) in tier-2/3/4 cities and (2) potentially higher competitive intensity in north, east India. Maintain BUY.

* In-line revenue print. BKIL reported revenues of Rs1.5 bn in Q1FY22, down 24% QoQ (Q1FY21 revenue of Rs385 mn). We note that while BKIL’s revenue decline is lower than WLDL’s (down 28% QoQ), the same needs to be seen in the context of WLDL’s better recovery in Q4. Management highlighted that (1) delivery channel saw good traction with Q1FY22 ADS (delivery) 57% higher than FY20 level and (2) good recovery in July with easing restrictions – recovery in West has been good, followed by South, East and North (key geography of BKIL though).

* Gross margins continue to be robust. BKIL reported gross margins of 65.2% in Q1 (+290 bps YoY but down 40 bps QoQ). We note that (1) BKIL has set up most of its supply chain from scratch to avoid paying premium to existing QSR vendors, (2) has good flexibility in menu innovation and pricing. With the new Stunner Menu, (Rs 50 for veg and Rs70 for non-veg) BKIL has strengthened its value focus; the communication for the premium range (Whopper) also continues.

* Focus on BK Café and store expansion. In the previous quarter, BKIL had announced the plan to launch BK Café by Q4FY22. It has initiated consumer research on recipes and menu. It is looking to ramp-up the café offering to 75 stores by March-23. In terms of store network, BKIL added 5 stores in Q1FY22 (EoP store count of 270) with plans to ramp-up network to 320 in FY22E (13 under construction and 21 under pipeline) and 470 in FY24E. We note that competitive intensity in the QSR market will rise with most of the players indicating a quicker ramp-up.

* Valuation and risks: We increase our FY23 revenue estimates by 3%; modelling revenue / EBITDA CAGR of 71 / 329 (%) over FY21-23E. Retain BUY with DCFbased target price of Rs200. Improved execution engine and accelerated share-gain potential (preference for hygiene) keep us positive. Key downside risks are delays in store expansion plans and increased competitive intensity in north and east markets.

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