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Still in the early days of QSR marathon

Our bullish investment thesis on Westlife Development (WLDL) rests on three pillars: 1) Superior unit economics – about 30-40% higher revenue per store – relative to peers; supported by value pricing and strategies aimed at increasing in-store visits and offering complementing menus. Recent initiatives on digital could provide a further fillip. 2) Comparison with Domino’s highlights a 3x store roll-out potential – offering a long visibility into penetration-led growth. We expect mid-teen revenue growth for several years with an upside risk. 3) Our relative analysis of a peer at a similar scale throws a strong case for a 500bps upside in EBDITA margins. Higher unit economics should lead to industry-leading ROEs as high upfront overheads get more corralled with scale. The pandemic has already reset the cost curve lower, commensurate with a 20% lower revenue. Net net, we expect revenue/EBDITA CAGRs of 10%/20% through FY24, and importantly, similar growth continuing well beyond that as well. ROE should see a sharp improvement to midteens. We are initiating coverage with a Buy rating and a Jun’22E TP of Rs600, based on 32x Jun-23E EV/EBITDA (backed by our long-term DCF analysis). Key risk: Delay in full unlocking may pose risk to our SSG recovery assumptions.

* Powerful brand franchise with a long growth runway: McDonald’s leads global QSRs with 38k restaurants, and enjoys superior unit revenues vs. peers, thanks to its value proposition and wide portfolio/brand extensions. With full unlocking, WLDL will likely outperform, led by digital initiatives, convenience channels and dine-in recovery. In addition, even as WLDL operates only in the South and West (S&W) region, the region accounts for 65% of QSR revenues. Comparison with Domino’s (~800 stores in S&W) highlights a 3x store expansion potential. WLDL’s expansion approach has been disciplined (network scale up 50% in FY15-20) to limit store closures. However, rising profits/FCFs and attractive QSR outlook may drive an acceleration.

* Margins are suboptimal; expect strong gains with scale and cost reset: In the past five years, WLDL’s operating margins expanded 700bps to 9%, driven by product mix changes and cost efficiencies. Margins are still sub-optimal in spite of higher sales and gross profit per store vs. peers. Comparison of overhead costs vs. peers and relative analysis of JUBI at similar scale throws a strong case of 500+bps margin expansion at higher revenue scale. Cost-structure reset in the pandemic has also been impressive, reaching pre-Covid-19 margins on 20% lower sales. We forecast WLDL to reach mid-teen EBITDA margins by FY24 (+600bps gain over FY20-24E).

* Poised for sustainable growth and profitability turnaround; initiate with Buy: We estimate WLDL to record sales/EBITDA growth of 10%/20% in FY20-24E, despite the Covid-19-induced disruption in FY21 (16% sales CAGR ex-Covid). We assume a full recovery in sales/store in FY22E and a 9% CAGR in FY22-24E. WLDL’s highly scalable franchise and improving profitability make it an attractive long-term bet. We value WLDL at 32x Jun-23E EBITDA, yielding a TP of Rs600.

* Faster store expansion is an upside risk: Our DCF assumptions w.r.t. expansion may be conservative at 32 stores/year over the next 20 years. Growing profits/FCFs may drive upsides. Assuming faster store additions at a 9% CAGR (last 10 years) will increase the fair value by 14%.

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