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Aggression on store additions a welcome change

* WLDL delivered better than expected SSSG and sales growth, led by continued strong momentum in the convenience platform, while dine-in was affected by COVID-related restrictions. As these restrictions are being lifted, WLDL would see much better sales performance going forward. This is because the convenience channel continues to remain elevated, despite a recovery in dine-in, as per recent trends. This bodes well for both sales per store and margin performance.

* While gross margin was higher than expected, EBITDA margin was slightly below our expectation. This is not a concern as a recovery in sales would bring back margin in the quarters ahead.

* The management sees an enhanced opportunity for organized players and forecasted a potential of 1,000 McDonald’s stores (up from 800 previously). This is in line with our analysis, as stated in our initiating coverage note. It has guided at aggressive store additions of 30-40 annually from FY23 onwards, up from 20-25 in recent years. This is a welcome move, especially as competitor Burger King is on an aggressive store addition spree.

* With an enhanced market opportunity and an aggressive outlook, we raise our target multiple for WLDL to 25x Sep’23E (from 23x previously). While its peers are trading at substantially higher multiples, WLDL's 27.8x FY23E EV/EBITDA multiple is not cheap in light of the scheduled royalty rate increase to 8% in FY27. We maintain our Neutral rating.

Sales better than expected; margin disappoints

* WLDL reported a sales growth of 176% YoY to INR2.6b (est. INR2.3b).

* SSSG stood at 183% YoY (est. 165%).

* WLDL neither opened nor closed any McDonald’s stores, resulting in 305 stores at the end of 1QFY22. It added seven McCafés, taking the total count to 231.

* Gross margin rose 860bp YoY to 65.4%.

* EBITDA stood at INR25m (est. INR117m) v/s a loss of INR423m in 1QFY21.

* Restaurant Operating Margin stood at 9.8% v/s -26.2% in 1QFY21. EBITDA margin stood at 1% (est. 5%) v/s -45% in 1QFY21.

* Net loss stood at INR334m (est. a loss of INR383m) as against a loss of INR605m in 1QFY21.

* Mr. Akshay Jatia has been appointed as Additional Director to the board of directors.

Highlights from the management commentary

* The organized market is seeing tailwinds. With an enhanced opportunity, WLDL sees potential for 1,000 restaurants (up from 800 stores mentioned earlier). It is targeting 20-25 store openings in FY22 and will accelerate it to 30-40 annually thereafter.

* McDelivery continued to rally and grew 198% YoY and 36% QoQ. Sales from McDelivery touched a new high in Jun’21, despite the easing of dining restrictions. This implies there is no channel cannibalization.

* WLDL is focusing on the Fried Chicken category, which has a market size of INR50b. It recently launched McSpicy Fried Chicken and aims to generate INR5m sales per store annually from this category.

Valuation and view

* With the convenience platform performing strongly, the impact on dine-in due to the second COVID wave has been substantially mitigated. There are no material changes to our FY22E/FY23E sales estimate. In view of the lower than expected margin performance, we cut our FY22E/FY23E EBITDA estimate by 17.6%/1.2%.

* With an enhanced market opportunity and an aggressive outlook, we raise our target multiple for WLDL to 25x Sep’23E (from 23x previously). While its peers are trading at substantially higher multiples, WLDL's 27.8x FY23E EV/EBITDA multiple is not cheap in light of the scheduled royalty rate increase to 8% in FY27. We maintain our Neutral rating with a TP of INR540 (25x Sep’23E EV/EBITDA).

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