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Second COVID wave dampens near-term outlook

* Westlife Development (WLDL) delivered in-line SSSG, but lower-thanexpected sales growth, with just one new store addition in 4QFY21 and only five in FY21. Furthermore, the dine-in channel (45% of sales in 4QFY21) was still below normal levels. However, strong performance from the convenience channel is a positive.

* Gross margin (GM) expansion through volume recovery, channel optimization, and supply chain initiatives is encouraging. The recovery in McCafé would further support the GM. EBITDA margins were below expectations, with a one-time employee bonus and salary reversals putting pressure. Nevertheless, the company’s efforts on fixed cost reduction should aid margins going forward.

* While we like the structural outlook for WLDL, the near-term challenges due to the second COVID wave would lead to an overhang on the stock. The higher salience of the dine-in channel would delay normalcy. Valuations of 22.7x FY23E EV/EBITDA are at a ~9% discount to JUBI and do not leave scope for an upside. Maintain Neutral.

Weaker-than-expected performance

* In 4QFY21, WLDL’s net sales grew 6.3% YoY to INR3.6b (est. INR3.8b).

* SSSG was reported at 10.5% YoY (in line with estimates).

* WLDL opened one new McDonald’s store in 4QFY21.

* Gross margins were up 90bp YoY to 66.5%.

* Restaurant operating margins (ROM) were up 560bp YoY to 16.4%.

* EBITDA grew 28.8% YoY to INR468m (est. INR536m).

* The EBITDA margin expanded 230bp YoY to 13.1% (est. 14.2%).

* Adj. PAT loss stood at INR65m (est. profit of INR55m).

* FY21 sales/EBITDA declined 36.3%/78.1% YoY. Adj. PAT loss for FY21 stood at INR1b vis-à-vis profit of INR93m in FY20.

Highlights from management commentary

* A 90% recovery was seen in dine-ins and an accelerated performance from the convenience channel (which grew 42% YoY). WLDL did not see any drop in convenience channel sales even as dine-in sales recovered in 4QFY21.

* The convenience/dine-in channel accounted for 55%/45% share in the quarter. In-store sales were only 70% of pre-COVID sales (Jan’20).

* WLDL lowered its fixed costs significantly in FY21. Its new cost structure is now more resilient to volatility.

Valuation and view

* While the ongoing second COVID wave is affecting the retail business across the sector, the higher salience of WLDL’s dine-in channel would delay recovery. We cut our sales estimates for FY22/FY23E by 20%/12.5% and EBITDA estimates by 25.9%/10%.

* Although we like the structural opportunity for WLDL, near-term challenges would prove an overhang. Valuations of 22.7x FY23 are at a ~9% discount to JUBI and do not leave scope for an upside. Valuing the stock at 21x FY23 EV/EBITDA (~15% discount to JUBI), we achieve TP of INR400. Maintain Neutral.

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