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For QSRs, Q2FY23 EBITDA was marginally lower by 2-7% vs. street’s expectations, except WLDL, which delivered 6% beat to EBITDA estimates. The miss was primarily driven by elevated wheat/cheese prices, which led to a 100-300bps decline in gross margins across KFC/PH/Domino’s formats. Positive surprise for WLDL was driven by best-in-class SSG performance, as annualized revenue/store grew by ~37% over FY20 (vs. 2-18% for other QSRs). Palm oil prices have moderated, while wheat/cheese prices still remain higher YoY, which should relatively benefit burger/chicken chains vs. pizza chains, in our view. Store additions remained robust with 88/76/42 additions for DIL/ JUBI/Sapphire in Q2 but were slower for WLDL/BK at six stores. However, FY23 targets were retained across players. For H2FY23, we expect strong momentum in DIL/WLDL to continue with 35-65% EBITDA growth, while JUBI/Sapphire are expected to deliver ~15% EBITDA growth. JUBI’s growth would be lower due to relatively slower topline growth and margin decline, while Sapphire’s performance will be affected by high-base in Sri Lanka (expect 50%+ EBITDA decline in H2 for Sri Lanka vs. a ~15% decline in H1).

Notably, Q2 performance for QSRs is in line with our medium-term expectations of midteens revenue CAGR for the QSR industry and market-share loss for pizza QSRs vs. chicken QSRs. Our analysis of quarterly trends for listed QSRs [75-80% of the western QSR space in India: Technopak] suggests that: 1) the QSR industry has seen strong growth, with a 3Y CAGR of 14.4% (H1FY23 annualized vs. FY20). With incremental contribution from new stores/SSG in H2, we estimate a healthy 3Y CAGR of ~17% in FY23 for listed QSRs; 2) within QSRs, brand KFC has gained 430bps revenue share from Domino’s, while PH/BK have gained ~100bps each. We continue to favor DIL/ WLDL/Sapphire vs. JUBI, as we expect these players to deliver a stronger 41-61% EBITDA CAGR vs. 22% for JUBI, over FY22-25E. [Note: Restaurant Brands Asia (BK) is not under active coverage and any reference to estimates for BK is Bloom estimates]

KFC gains as Domino’s sheds more than its pandemic gains: Based on Q2 revenue, KFC has gained 430bps share and BK/PH have gained 100bps each at the cost of Domino’s. WLDL has completely recouped its lost share after unlocking, despite a 300-bps loss in store count share. Share gain for KFC has been led by an increase in store-count share, as rev/store performance was more impacted due to non-veg abstinence days in Q2. Between PH and Domino’s, PH gained ~400bps revenue share in Q2, led by a ~300-bps increase in its store-count share. However, Domino’s continues to focus on increasing its SSG with a new loyalty program (cheesy rewards), faster deliveries (<20 minutes), and new launches, while PH has improved its menu affordability and expanded the addressable market with its foray into the entry-level pizza segment (Rs79-149; Flavor-Fun pizzas).

Strong dine-in recovery drives best-in-class SSG for WLDL: WLDL and BK completely recouped their revenue share lost during the pandemic. Despite the ~300-bps drop in its storecount share due to slower store additions, WLDL regained its revenue share with industryleading growth of ~37% in annualized rev/store vs. pre-Covid vs. 2-18% for other players. The stronger performance in WLDL was led by recovery in dine-in, continued delivery-sales, and strong traction in gourmet burgers/fried chicken. WLDL’s focus remains on accelerating its store-count growth with 35-40 additions expected in FY23 and 200+ in the next 3-4 years. We expect SSG performance for WLDL to be better, led by further ramp-up of McCafe and traction in the meals segment through gourmet burgers/fried chicken.

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