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India outshines amid tough macros; Indonesia loss narrows

* RBA’s India business posted 20%/48% YoY growth in revenue/EBITDA (in line) in 3QFY24. Store addition was healthy (added 38 stores), with SSSG at 2.6% (est. 3.5%). Amid a tough demand environment, most QSR brands are expected to post muted growth metrics (SSSG, ADS). We believe RBA’s performance is better than its peers’. As the near-term industry demand outlook remains weak, RBA has lowered its SSSG guidance for FY24 to 3% from 6%; however, it has retained 8% SSSG guidance for the medium term.

* Despite a deceleration in growth metrics, RBA could improve Restaurant EBITDA margin (pre IND AS) to 12%, up 180bp on YoY and 150bp on QoQ. We do not expect such margin improvements for peers in 3Q.

* Indonesia business revenue rose 1% YoY (miss) to INR1.6b, largely due to store adds. Indonesia EBITDA loss narrowed to INR24m (est. loss INR76m and INR181m/INR72m in 3QFY23/2QFY24).

* We maintain our BUY rating on the stock.

Decline in Indonesia loss led to EBITDA beat

India business posted 20%/48% YoY growth in revenue/EBITDA (in line)

* India business revenue grew 20% YoY (in line) to INR4.5b, led by 16% YoY store adds and 2.6% SSSG (est. 3.5%).

* India business ADS improved 2% YoY but declined 7% QoQ to INR115k.

* The company added 38 stores and closed 1 store in 3QFY24 in India, taking the total count to 441 stores.

* RBA increased the BK Café store count in India to 334 from 275 in FY23 (76% of total BK stores), generating ADS of INR14k (12% of total ADS).

* India GP rose 22% YoY (in line) to INR3b and margins rose 70bp YoY/30bp QoQ to 67.1%, which could be due to lower RM costs and a better product mix.

* India ROM increased 41% YoY to INR543m and margins expanded 180bp YoY to 12.2%. Due to controlled GM&A, pre-IndAS EBITDA jumped 2x YoY to INR302m and margins rose 260bp YoY to 6.8%.

* India EBITDA increased by 48% YoY to INR708m, with margins at 15.9%.

* India loss narrowed to INR64m from INR112m/INR93m in 3QFY23/2QFY24.

Consol. business posted 15%/2.3x YoY growth in revenue/EBITDA (6% miss/12% beat)

* Consol. revenue grew 15% YoY to INR6b (6% miss), impacted by weak revenue growth in Indonesia business.

* Indonesia business revenue rose 1% YoY to INR1.6b, largely due to store adds (16% miss).

* ADS declined 1% YoY/7% QoQ to IDR17.8m.

* RBA added total 50 stores in 3QFY24, which included 37 BK stores in India and 13 Popeyes stores in Indonesia. The total store count went up to 628 (441/187 India BK/Indonesia stores). 30 January 2024 3QFY24 Results Update | Sector: Retail Restaurant Brands Asia 30 January 2024 30

* Consol. GP grew 16% YoY to INR3.9b, while margins rose 80bp YoY/20bp QoQ to 64.4%.

* Indonesia GP grew 1% YoY to INR900m, while margins declined 50bp YoY/60bp QoQ to 56.7%.

* A lower-than-expected Indonesia EBITDA loss led to a 12% beat in consol. EBITDA.

* Consol. EBITDA jumped 2.3x YoY to INR684m and margins expanded 730bp YoY/290bp QoQ to 15.3%.

* Indonesia EBITDA loss narrowed to INR24m (est. loss INR76m and INR181m/INR72m in 3QFY23/2QFY24).

* RBA achieved breakeven in Restaurant EBITDA in 3Q through cost optimization.

* As a result, the consol. loss narrowed to INR399m from INR559m in 3QFY23 (vs. est. loss INR458m).

* Indonesia loss stood at INR335m vs. INR447m loss in 3QFY23 and est. loss INR417m.

Key takeaways from the management commentary

* An increase in India restaurant traffic boosted SSSG. RBA has been seeing healthy traffic for the last three quarters.

* The management has maintained its GP margin guidance of 67% for FY24 and aims to achieve 69% by FY27.

* It has cut SSSG guidance by 300bp to 3% for FY24.

* Indonesia business was impacted by geopolitical headwinds (Israel-Palestine war). ADS declined 24% in 3QFY24, which was slowly building up and resulted in a 7% decline QoQ.

* The company is using a single-price menu strategy for its delivery business at attractive pricing and has increased its visibility on the platform. As a result, traffic in the delivery channels jumped almost 40%.

Valuation and view

* With an aggressive store addition outlook (18% CAGR), RBA is well placed to deliver a strong domestic growth. BK Café is likely to be a key growth driver going ahead. Along with rapid revenue growth, RBA is geared up to deliver EBITDA margin expansion, driven by a dine-in recovery, the addition of BK Café, and cost-saving initiatives.

* The near-term demand outlook looks weak, which may create pressure on growth metrics and margins during this phase.

* As more and more stores mature, improving contribution of new stores in the network would also support the margin recovery. Indonesia business should also witness a healthy revenue growth and margin expansion in the years ahead.

* We retain our BUY rating on RBA with our SoTP-based TP of INR140, premised on a Mar’26E EV/EBITDA (pre-Ind AS 116) of 35x/10x for its India/Indonesia business.

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