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We anticipate AUV & margins to rebound in FY25

Westlife Foodworld Ltd. (WFL) 4QFY24 topline was in-line with our expectation having known the ongoing demand environment and external issue impact. SSSG was down 5% versus our expectation of 6.5% decline. Gross margins remained stable despite pressure from value platform. There was a positive surprise on operating margins, due to cost efficiency measures. Company is confident of rebounding to earlier margin profile once volume recovers. It has also not changed its store expansion target of 45-50 additions in FY25 with a focus on South India, Smaller towns and Drive Thrus. Post our initiation, the stock has delivered ~17% return in less than two months. We now assign a target multiple of ~28x on FY26 EV/EBITDA, arriving at a revised target price (TP) of Rs1,030. Maintain BUY.

4QFY24 Result Highlights

* Headline performance: Topline grew by 1.1% YoY to Rs5.6bn (vs. est. 0.5% growth to Rs5.6bn) as SSSG was down -5% YoY (vs. our est. -6.5%). Adj. EBITDA came in at Rs771mn (vs. est. Rs716mn). The Company reported APAT of Rs12mn.

* Gross margin was down ~180bps YoY to 70.2% (-10bps QoQ; vs est. of 70.4%). Rise in employee cost as a % of revenue (up 140bps YoY) along with higher other expenses as a % of revenues (up 130bps YoY) meant that Adj. EBITDA margin came in at ~13.7% (vs our est. of 14.3%). Pre-INDAS Op. margin stood at 8.7%.

* Restaurant operating margin (ROM) came in at 19.4% versus 24.5% in base quarter largely account of operating deleverage and marketing spends.

* Store additions: Added 17 stores during the quarter and added 41 stores during the year bringing the total store count to 397.

* FY24: Revenue and EBITDA grew by 5% (SSSG down 1.5%) and -3.8% respectively. Gross margin is up ~230bps YoY to 70.3% while EBITDA margin stood at 15.8% (-140bps YoY). APAT came in at Rs756mn vs Rs1.2bn in FY23.

Key Conference Call Highlights

(1) Eating out trends remained broadly stable on a sequential basis in 4QFY24. External issue impact to go away in couple of quarters. (2) The company expects to maintain the current gross margins levels in near term. Once volume improves, operating margins will rebound to earlier levels. (3) Management has maintained its target of 45-50 store additions in FY25 with a focus on South India, Smaller towns and Drive Thrus.

View & Valuation

With expectation of industry volume improvement in FY25, we are building 8.8% SSSG CAGR over FY24-26E. This, along with aggressive store expansion (to open 200+ new restaurants in the next 3-4 years) should lead to 15.5% revenue CAGR over FY24-26E. The margin profile has improved for WFL as AUV has crossed the Rs60mn+ mark, leading to favorable operating leverage except for the last few quarters. As volume recover, operating leverage will rebound. This, along with cost savings and consistent but modest gross margin improvement (led by stable input costs and mix+pricing), will support EBITDA margin expansion (building ~200bps expansion over FY24-26E). EBITDA thus growing at ~23 CAGR over FY24-26E. At CMP, the stock is trading at ~28x/24x FY25E/FY26E EBITDA (post IND-AS 116). Expect volume improvement in FY25 (post 1QFY25) leading to better operating leverage, aggressive store expansion, market share gain focus, improving return ratios and a formal dividend policy in place, we believe WFL commands better valuation than earlier years. Post our initiation, the stock has delivered ~17% return in less than two months. We now assign a target multiple of ~28x on FY26 EV/EBITDA, arriving at a revised TP of Rs1,030 (Rs940 earlier). Maintain BUY rating.

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