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Westlife’s 1QFY24 earnings print was broadly inline with our expectations. Revenue growth was driven by healthy SSSG (+7%) and it is most likely to be ahead of peers in QSR space, in our view. While overall consumption trends remained soft; however, Westlife through its multi-channel/multi-day-part presence and initiatives around portfolio (new launches/Mcsaver value range) has been able to successfully navigate the same. Gross margins surprised positively yet again benefiting from stable input costs, cost efficiencies & pricing flowthrough and management does not foresee any material inflationary pressures in the near term. In terms of outlook, management reiterated its guidance of high single digit SSSG and remains confident of 40-45 store additions in FY24, notwithstanding lower store additions in 1Q. Also after several years, Westlife announced dividend of INR 3.45/share, as part of its strategy to drive shareholder value indicated in its Vision 2027. With execution machinery in place, we believe it is well placed to achieve its Vision 2027 and given the superior execution, we expect premium valuations to sustain. We remain constructive on the stock. Maintain BUY.

* Inline quarter, SSSG performance remains healthy despite challenging consumption trends: Westlife’s revenue grew 14.2% yoy (SSSG: 7%) to INR 6.1bn, tad below our expectation. Store count was up 9.1% yoy, as quarter witnessed net addition of 4 stores (total store count stood at 361). Average sales per store saw growth of 4.5% yoy (+9.4% qoq). TTM average sales per store stood at INR66.9mn (+1% qoq). The growth was largely driven by increase in footfalls in dine-in channel, continued growth in McCafe, initiatives around value portfolio (launch of McSaver value range) and product innovation (Piri Piri McSpicy, Jain Friendly Menu). In terms of channel mix, Dine-in format (incl takeaway) saw healthy average sales per store growth of 8% yoy while convenience channel sales per store was muted (-0.4% yoy). While store additions were muted for the quarter, management remains confident about accelerated store addition going ahead, targeting 40-45 gross addition in FY24 as highlighted in its Vision 2027 guidance to scale up restaurant network to 580-630 stores.

* Gross margin delivery remains ahead of expectation: Westlife’s GPM (excl processing charges) surprised positively with expansion of 234bps yoy to 70.5% – management cited benefit of stable input cost basket, cost optimization and earlier pricing actions. On qoq basis, margins were down 82bps on account of one time volume delivery incentive (benefit passed on by vendors to company given the higher volume delivery) in 4QFY23. Store level staff costs were up 29% yoy while royalty increased by 50bps. As a result, restaurant operating margins improved by c.120bps yoy to 18.7%. This along with 48% yoy growth in corporate G&A expenses resulted in comparable EBITDA (pre-IND AS) increasing by 17.5% yoy with margin of expansion of just c.36bps to 12.8%. However, on sequential basis, store level staff cost & corporate G&A expenses normalised, resulting in c.100bps+ qoq expansion in pre-IND AS EBITDA margins. Reported EBITDA was up 19.2% yoy at INR 1.04bn, broadly inline with our estimate. We expect execution on profitability to continue and bake in mid-teen margins by FY26E.

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