IGI Logo

Recovery trends in Jul’21 and Aug’21 are encouraging

* Despite dine-in restrictions due to the second COVID wave, BURGERKI delivered a strong 1QFY22 performance, led by the delivery channel. The recovery trends in Jul-Aug’21 continue to remain encouraging.

* The advancement of BK Café to 3Q from its previous guidance of 4QFY22 is a positive. As highlighted in our initiating coverage note, BK Café will be a key lever driving SSSG and margin. However, it will start having a meaningful contribution only in FY23.

* As states allow operations at Malls (55% of the stores are in Malls) and dine-in, BURGERKI will see significant improvement in its performance. Its recently launched Stunner menu has also gotten off to a good start. With the widening of the value platform and elevation of the entry point, the Stunner menu is expected to significantly aid BURGERKI’s performance.

* We continue to remain bullish on BURGERKI as: a) the Stunner menu enhances the value platform, while being gross margin accretive, b) the introduction of BK Café is expected to boost SSSG and margin, c) the strong network expansion, won’t materially impact ADS (average daily sales per store), d) its royalty rate is capped at 5% till CY39, while offering visibility on margin expansion, and e) it has reduced its rental expenses. We maintain our Buy rating with a TP of INR210/share (28x Sep’23E EV/EBITDA).

Strong recovery trends

* BURGERKI reported a sales growth of 289% YoY to INR1.5b.

* It opened five and closed no Burger King stores. Total store count stood at 270 stores at the end of 1QFY22.

* Gross margin rose 290bp YoY to 65.2%.

* Restaurant EBITDA stood at 10.7% v/s -47.3% in 1QFY21.

* EBITDA stood at INR15m as against a loss of INR250m in 1QFY21.

* EBITDA margin stood at 1% as against -64.9% in 1QFY21.

* Net loss stood at INR444m as against a loss of INR791m in 1QFY21.

Highlights from the management commentary

* Even as dine-in is gradually returning back to normal over the past two months, the recovery in delivery remains over 170%. ADS recovery in Aug’21 till date has been over 95% v/s FY20 levels.

* BURGERKI clocked a 130% QoQ sales growth in own app orders and over 1m app downloads in 1QFY22. Its goal is to have one-third of delivery orders from the BK app.

* BURGERKI is likely to open a few cafés in 3Q (for test marketing) v/s 4QFY22 guided earlier. It has mapped 75-100 restaurants for adding BK Cafés. All new outlets will have a BK Café.

Valuation and view

* We cut our FY22E EBITDA estimate due to a weak margin recovery, amid dine-in restrictions, and lower sales affecting operational leverage. Margin is well placed to recover with an improvement in sales. There is no change to our FY23E EBITDA estimate.

* We continue to remain bullish on BURGERKI as: a) the Stunner menu enhances the value platform, while being gross margin accretive, b) the introduction of BK Café is expected to boost SSSG and margin, c) the strong network expansion, won’t materially impact ADS, d) its royalty rate is capped at 5% till CY39, while offering visibility on margin expansion, and e) it has reduced its rental expenses. We maintain our Buy rating with a TP of INR210/share (28x Sep’23E EV/EBITDA).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer