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Multiple levers to unlock growth

Growth to be driven by dine-in recovery, improved delivery, investments in technology and introduction of BK Café

As highlighted in our QSR thematic note published in Dec’21, COVID-19 has augmented the business opportunities for QSRs resulting in an optimistic outlook for all branded QSR players. Both delivery and takeaway channels were in focus over the last two years as the consumers developed new habits of food consumption. Even as dine-in revives, the contribution of delivery would be elevated than pre-COVID levels. COVID has, therefore, permanently shifted the QSR business model towards an omni-channel play. Restaurant Brands Asia (RBA; previously BURGERKI), being a prominent QSR player in India, is also expected to benefit from this shift. We maintain our positive view on RBA underpinned by the following factors:

RBA is tracking well on post-COVID recovery with its Average Daily Sales per store (ADS) in 3QFY22 (of INR114k) surpassing the FY20 level (of INR110k), driven by the upbeat festive season and elevated delivery channel sales. With ~50-55% of its stores being within malls and metros, the dine-in business is currently lagging in recovery but can rebound sharply as and when full mobility returns. The revival in dine-in business should also support its margins

RBA introduced the first BK Café in India in 3QFY22, ahead of its earlier guidance of 4Q. It had 18 BK Cafés by end of the quarter, on track to achieve the guidance of 75 BK Cafés by Mar’23. As indicated in our initiating coverage note on RBA, coffee is a strategic offering that will help drive volumes/realizations/SSSG/gross margin/EBITDA margin.

Both India and Indonesia businesses are well placed to deliver a strong double-digit sales growth along with marked margin expansion.

With RBA’s current multiples being cheaper than peers, we reiterate our BUY rating with a TP of INR150 (based on SOTP 36x/12x FY24E EV/EBITDA* for India/Indonesia, respectively). *pre-IND AS 116

Domestic ADS fully recovered beyond pre-COVID levels

RBA’s ADS revived in 3QFY22 to INR114k, above the FY20 level of ~INR110k, as normalcy started returning amid falling COVID cases/upbeat festive sentiment.

Recovery was also aided by the delivery channel sales that continued to be elevated than the pre-COVID levels.

While the revival was slower than other QSRs, mainly because of RBA’s high presence in malls and metros (~50-55% of store network), these outlets can rebound sharply once full consumer mobility returns/pent-up demand unlocks.

Higher contribution of Delivery also led to slow margin recovery due to weaker margins in the channel. As dine-in returns and delivery normalizes, margins should also improve gradually.

Introduced BK Café in India, earlier than guided

RBA introduced its first BK Café in India in 3QFY22, ahead of its earlier guidance of 4QFY22. It had 18 BK Cafés by end of the quarter, on track to achieve the guidance of 75 BK Cafés by Mar’23.

As indicated in our initiating coverage note on RBA, coffee is a strategic offering that will help drive volumes/realizations/SSSG/gross margin/EBITDA margin.

In the case of WLDL, gross margin improved ~800bp during FY14-20 significantly due to addition of McCafé.

Progressing well on several aspects

With a network of 294 stores at end-3QFY22, and 9/65 stores being under construction/in pipeline, respectively, RBA is well placed to reach its guided store network of 320 by Mar’22.

RBA’s value platform, reinforced by the Stunner menu, is seeing good traction. Once schools and colleges resume, these products should perform even better. Notably, despite value pricing, these are gross margin accretive and not dilutive

Investments in technology have continued with several features being added to the new app every quarter. RBA is striving hard to push one-third of its orders from the app in the medium term, from less than 10% currently.

India business to deliver strong growth

RBA’s India business is expected to deliver double-digit sales CAGR of ~39% over FY22-24 driven by: a) resumption of consumer mobility, b) recovery in dine-in business in malls and metros, c) introduction of BK Café, and d) store additions

Further, the EBITDA margin is likely to expand to 17.5% in FY24E from 12.4% (post-IND AS 116) in FY20 led by: a) gross margin expansion, b) addition of BK Café, c) recovery in dine-in business, and d) cost saving measures. As more and more stores mature, declining contribution of new stores in the network would also help reduce the margin drag.

Indonesia business well placed with equity infusion

RBA acquired 83.24% stake in PT Sari Burger Indonesia (Burger King Indonesia) from QSR Indoburger (66.48%) and PT Mitra Adiperkasa (16.76%). It also infused USD40m in Burger King Indonesia (BKI), thereby raising its stake to 88.61%.

BKI has a target to add 330 stores by CY26 from 176 stores as of Jun’21. The capex is likely to be funded through equity and internal accruals

RBA’s Indonesia business is likely to deliver ~39% sales CAGR over CY21-23E on: a) post-COVID recovery, b) store additions, and c) expected addition of BK Café.

Simultaneously, its EBITDA margin is likely to improve to ~20% in FY24E from ~12% (post-IFRS 16) pre-COVID, led by: a) gross margin expansion due to a shift towards chicken products from a portfolio that has a much higher proportion of lower-margin beef products, b) BK Café addition, c) normalization of A&P spends, and d) cost saving initiatives including synergies with India business

Valuation and view

With an already aggressive store addition outlook, RBA is well placed to deliver a strong domestic growth. BK Café is likely to be a key growth driver going ahead. Along with rapid topline growth, RBA is geared up to deliver EBITDA margin expansion driven by: a) dine-in recovery, b) addition of BK Café, and c) cost saving initiatives. As more and more stores mature, declining contribution of new stores in the network would also help reduce the margin drag. Indonesia business should also witness a healthy topline growth and margin expansion in the years ahead.

With the recent correction in its share price, RBA now trades at a significant discount to its QSR peers. We, therefore, retain our BUY rating on the stock with a TP of INR150 premised on an SOTP FY24E EV/EBITDA (pre-IND AS 116) of 36x/12x for India/Indonesia businesses, respectively. Since RBA is still in an early investment phase with low profitability, we value its domestic business at ~15% discount to JUBI’s target multiple over the next one year. As the India business profitability improves led by a) much lower store additions to existing store base, and b) recovery in sales of mall-based stores we are reducing the target (pre-Ind AS) valuations to 25x by FY26

With strong sales growth and simultaneous margin expansion, we expect a TP of INR260 for RBA on a three-year basis (at 39% CAGR), even after assuming a lower target multiple

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