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Demand trends encouraging; expect faster recovery

* Our interaction with management indicates strong traction in convenience channel sales, led by consumer shift to dominant brands & digital initiatives. Dine-in is currently impacted but faster recovery is expected vs. FY21 on easing restrictions and increasing vaccination.

* Expansion plans are intact at 25-30 store additions in FY22 despite second wave-led lockdowns. Ramp-up of Mc-Café network (present in 80% stores currently) and scale up of new products (fried chicken/gourmet burgers) ahead offer relatively better SSG outlook.

* WLDL was able to achieve pre-Covid margins in H2FY21 despite lower sales, driven by structural cost savings. It continues to work on further rental optimization and other cost efficiencies, and expects a much better margin profile upon full recovery.

* Faster recovery in dine-in can drive stronger SSG and margin gains for WLDL. With improving profitability and inexpensive valuations vs peers, the stock offers attractive upside potential. Maintain Buy with TP of Rs630 (32x Sept-23E pre-INDAS EV/EBITDA).

Strong traction in convenience channels to reduce lockdown impact:

WLDL indicated stronger traction in the convenience channel, with 90%+ stores being operational (~290 stores vs. avg. ~200 stores in Q1FY21) despite the lockdown as consumers continued to opt for delivery from well-established brands. Convenience channel (50% sales contribution preCovid) was up 40% in Q4, with dine-in recovering to 90%.

While the dine-in channel is impacted by restrictions in Q1, stronger sales growth in the convenience channel should result in a 60-70% sales recovery (vs. pre-Covid level), in our view. Own app sales are also gaining traction, with high-double digit contribution to digital sales (vs. low-single digit earlier). With ongoing vaccination, WLDL expects a quicker recovery led by faster dine-in recovery than the first unlock (75%/90% dine-in recovery in Q3/Q4FY21 post opening up in Oct’20).

Expansion plans remain intact:

Management maintained its store addition target of 25-30 stores in FY22E, with plans to further scale up Mc-Café to the remaining network in next 2-3 years. Currently, Mc-Café is present in ~230 stores out of total 305 stores. Newly introduced products such as fried chicken in South India and gourmet burgers in Maharashtra are gaining traction and will be extended to the remaining network, driving higher unit sales.

Margin gains likely to continue post Q1:

Rental contracts are being further optimized and some rebates are expected in Q1. Commentary remains positive on cost efficiencies, and WLDL hopes to see results from Q2 as sales normalise. Margin gains were impressive as it reached near pre-Covid margins in H2FY21 despite lower sales. Cost savings were broadbased, with employee & other occupancy costs falling ~30% in FY21 (vs. 35% sales decline).

Attractive valuations vs. peers; maintain Buy:

We expect sales/EBITDA growth of 10%/20% in FY20-24, and faster recovery can drive upsides. Large penetration opportunity, improving profitability and valuations at discount to peers make it an attractive long-term bet. We value WLDL at 32x Sept-23E pre-INDAS EBITDA (vs. Jun-23E) with a TP of Rs 630.

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