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05-08-2024 11:24 AM | Source: Yes Securities Ltd.
Buy Westlife Foodworld Ltd For Target Rs.1,030 By Yes Securities

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Westlife Foodworld Ltd. (WFL) 1QFY25 topline was in-line with our expectation but there was a miss on Same-store sales growth (SSSG). SSS was down 6.7% YoY (vs est. of -4.5%), impacted by subdued in-store business, though the off-premise segment saw positive SSS. GM improved ~60bps sequentially despite pressure from value platform led by cost optimization and benign input costs but operating deleverage along with higher spend on campaigns impacted op. margins. EBITDA margin thus stood at 13% (pre-INDAs at 8.1%) and ROM stood at 19.1%. While we remain cautious for 2QFY25 but are also confident that Westlife will rebound to earlier margin profile (even with increased royalty rate) once volume recovers, which is expected in 2H. We roll-forward to Sep’26E EBITDA and assign a target multiple of ~25x, arriving at an unchanged target price (TP) of Rs1,030. Maintain BUY.

1QFY25 Result Highlights

*  Headline performance: Topline grew by 0.3% YoY to Rs6.2bn (vs. est. 1.5% growth to Rs6.2bn) led by SSS decline of 6.7% YoY (vs. our est. -4.5%). EBITDA came in at Rs799mn (vs. est. Rs844mn). Reported profit stood at Rs45mn vs est. of Rs59.7mn.

* Off-Premise business (~42% mix) grew by 6% YoY while On-Premise (~58% mix) business declined 3% YoY.

Gross margin was up ~20bps YoY to 70.8% (+60bps QoQ; vs est. of 70.2%) because of cost optimization and lower input costs partly offset by product mix changes. Rise in employee cost as a % of revenue (up 110bps YoY) along with higher other expenses as a % of revenues (up 240bps YoY) meant that EBITDA margin came in at 13% (vs our est. of 13.5%). Pre-INDAS Op. margin stood at 8.1%.

Restaurant operating margin (ROM) came in at 19.1% versus 23% in base quarter impacted by operating deleverage and higher royalty costs.

Store additions: Added 6 stores in 1QFY25 bringing the total store count to 403.

Key Conference Call/PPT Highlights

(1) Eating out trends improved sequentially hinting to a likely improvement in business environment. Expect gradual improvement in business, particularly in 2HFY25. (2) 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 2HFY25, we are now building 7.6% 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 14.4% 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 operating environment has been unfavorable impacting on-premise business to a higher extent. 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 ~190bps expansion over FY24-26E). EBITDA thus growing at ~21% CAGR over FY24-26E. At CMP, the stock is trading at ~30x/24x FY25E/FY26E EBITDA (post IND-AS 116). Expect volume improvement in FY25 (in 2HFY25) 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. While we remain cautious for 2QFY25 but are also confident that Westlife will rebound to earlier margin profile (even with increased royalty rate) once volume recovers, which is expected in 2H. We roll-forward to Sep’26E EBITDA and assign a target multiple of ~25x, arriving at an unchanged target price (TP) of Rs1,030. Maintain BUY.

 

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