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Best-in-class SSG performance leads to a big TP upgrade, maintain BUY

WLDL’s Q2 EBITDA was 5-6% higher than estimates, largely led by better revenues. WLDL reported a 3Y revenue CAGR of 13%, led by a best-in-class revenue/store CAGR of 9.3% vs. estimate of 7.5%. Inflation management was better than expected, as GM improved by 80bps vs. expectation of a 40bps decline. Unlike peers, WLDL was confident of maintaining its GM, led by 2% price hikes in Oct-22, better revenue mix, and supply-chain efficiencies. Factoring in a stronger SSG performance and allied margin benefit, we have increased our FY24/25E EBITDA estimates by 8-9%. WLDL is targeting accelerated expansion (200 store additions over the next 3-4 years), led by stronger growth in non-metros and traction in meals (gourmet burgers/fried chicken). However, we remain conservative with our expectation of 35-40 stores/year. Better margins also led to a ~400bps increase in our medium-term RoIC assumption to 40%, effecting a higher multiple at 29x Dec-24 EBITDA vs. 27x earlier. Maintain Buy with a revised TP of Rs910 (Rs720 earlier), led by earnings/multiple upgrade and 3M rollover.

Results summary: WLDL reported a 3Y revenue CAGR of 13%, led by 9.3% revenue/store CAGR and 3.4% store addition CAGR. Strong growth was led by sustained momentum in offpremise sales (23% CAGR) and strong pick-up in on-premise sales (8% CAGR). WLDL attributed stronger trends to improved presence in the meals category with gourmet burgers /fried chicken. While gourmet burgers have been rolled out to the entire network, fried chicken is currently in the southern market with 5-10 pilots in the western region. McCafé is now present in ~81% of the network, and WLDL sees ample scope to double its per-store café contribution with menu expansion. EBITDA margin improved by ~300bps to 13.4% (PreIndAS) vs. pre-Covid levels. WLDL took an additional price hike of ~2% in Oct-22, taking total price hike of ~6% for Q3 (YoY). Despite elevated milk and wheat prices, WLDL expects to maintain its gross margins with price hikes, better revenue mix, and supply-chain efficiencies.

Earnings call KTAs: 1) Fried chicken is gaining strong traction and WLDL is targeting Rs10mn contribution/store vs. Rs5mn currently. 2) WLDL offers Drive-Thru (DT) option in ~20% of its network. With the recent 120-second service guarantee, WLDL indicated higher DT orders vs. pre-Covid and plans to increase the mix of DT stores in the overall portfolio. 2) Store additions were impacted in H1 due to focus on the larger sized stores (~3,000 sq. ft.) and longer lease tenures (~25 years). However, WLDL maintained its FY23 target of adding 35-40 stores. 3) With better margins, RoIC has improved significantly for WLDL vs. pre-Covid. Payback period for a store is 4-5 years currently and should further shorten with improving RoIC. 4) With complete unlocking, McCafe has returned to pre-Covid levels. WLDL sees an opportunity to scale McCafe to 2-3x of current levels, led by menu expansion. In addition, desserts are a USD500-600mn market, but the focus is to scale other segments currently. 6) Total FY23 capex is expected to be Rs2.0-2.2bn. 7) Sales via McDelivery app saw faster growth at 1.7x vs. aggregators. Currently, delivery is available in 90% of the store network.

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