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Encouraging recovery trends and margin outlook

* Westlife Development (WLDL) delivered in line sales growth as convenience channels drove the overall recovery, while dine-in witnessed a sequential improvement. With an upbeat consumer sentiment and 97% recovery to pre-COVID levels in Dec’20, the company is poised to deliver a positive sales growth from 4QFY21 on a soft base.

* Gross and EBITDA margin delivered a positive surprise in 3QFY21. As the RM outlook remains benign and cost savings on operating expenses are likely to be sustainable, margin are likely to improve further as sales revive.

* Valuations at 22x FY23E EV/EBITDA are at a discount of ~10% to JUBI and seem fair as WLDL’s recovery has been delayed owing to a higher dependence on dine-in. Maintain Neutral.

Sales in line, margin surprise positively

* In 3QFY21, WLDL posted a sales decline of 24.9% YoY to INR3.3b (in line).

* SSS decline was 24% YoY (v/s our estimate of a 20% decline).

* It closed 10 McDonald’s stores and opened three new stores, taking the total store count to 304 stores at the end of 3QFY21. It added three McCafés taking the total count to 227.

* Gross margin fell 30bp YoY to 65.7%.

* Restaurant operating margin (ROM) came in at 15.4%, down 210bp YoY.

* EBITDA declined 38.3% YoY to INR437m (v/s our estimate of INR172m).

* EBITDA margin declined 290bp YoY to 13.5% (v/s our estimate of 5.2%).

* Adjusted PAT loss stood at INR41m (v/s our estimate of -INR318m).

* There was an exceptional gain of INR41.9m due to partial write back of provisions taken in 4QFY20.

Highlights from the management commentary

* Compared to pre-COVID levels (Feb’20), overall recovery stood at 75-85% in Oct-Nov’20 and 97% in Dec’20, despite the night curfews and seating restrictions.

* Dine-in sales recovered to 70-75% of pre-COVID (Feb’20) levels in 3QFY21, with a MoM improvement. Recovery in the convenience channel stood at 120-125% of pre-COVID levels and at 106% YoY. Convenience channels are not cannibalizing dine-in sales.

* Most of the cost savings are sustainable in nature. Therefore, operating margin should improve as sales grow going forward.

* Around 25-30% of restaurants are expected to be shut or operating at suboptimal levels due to COVID-19.

Valuation and view

* With a MoM improvement and business back to 97% of pre-COVID levels in Dec’20, we expect WLDL to deliver positive sales growth and SSSG from 4QFY21 onwards, especially on a soft base.

* QSR players would continue to benefit as 25-30% of the restaurants continue to languish or have shut down due to the COVID-19 outbreak.

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