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WLDL’s Q2FY24 print was below our estimates; revenue/EBITDA grew 7.4%/1.0%, yet PAT cut by 29.0% YoY. Management alluded, off high base (+48.5% growth) it was resilient performance amidst challenging environment. Despite continued weakness in eating-out trends WLDL saw 1% SSSG. Robust Omni-channel strategy aided by Shravan special menu and McSpicy fried chicken with Jr. NTR campaign saw 7% growth in On-premise and Offpremise channel. McDelivery app download stood at +28mn led to 14% rise in MAU reflecting 67% digital-led sales. TTM average sales/store grew to Rs66.5mn (+7.0%) YoY. Gross margin expanded to 70.1% (+560bp), reflecting ROM at 22.1% (-60bp). With higher employee cost (+14.4%), other expenses (+22.3%) and royalty payment (+20.8%), EBITDA margin cut to 16.2% (-103bp). WLDL guided for mid-single digit SSSG with 40-45 store addition in FY24E. With ~18-20% EBITDA margins it aims to build meals leadership using pricing interventions and relevant menu innovation. We tweak our earnings and retain ADD, with a revised DCF-based TP Rs954 (implying 28.7x avg. FY25E/FY26E EV/EBITDA).

Robust Omni-channel strategy healthy revenues and 1% SSSG

WLDL reported Q2FY24 revenues at Rs6.1bn (+7.4%) aided by increased guest counts driven by, (1) innovation – Shravan special menu in key markets, (2) robust Omni-channel strategy, (3) 7% growth in Dine-in/delivery sales, (4) 1% SSSG, and (5) faster growth in metro towns compared to non-metros. That said, McDelivery app download now stood at +28mn driving 14% growth in MAU setting average sales/store to Rs66.5mn (+7.0%) YoY. Management said its unique business model catering to various market segment across dayparts committed to building meals leadership yielding good success. In Q2, WLDL added 9 restaurant taking total count to 370 spread across 59 cities. We note till date 88% stores (327) offer McCafe portfolio while EOTF format in now introduced in 237 (74% stores). Company aims to add 40-45 new stores in FY24E evenly spread across metros and small towns adding more Drive-thrus (now 71).

Menu innovation with 59% contribution from dine-in sales lift gross margins to 70.1%

WLDL’s gross margin expanded to 70.1% (+560bp) yet ROM margins lowered to 22.1% (-58bp), led by, (1) higher SG & A costs and (2) 59% contribution from dine-in sales (+7%). Despite higher employee cost (+14.4%), other expenses (+22.3%) and royalty payment (+20.8%), EBITDA margin cut to 16.2% (-103bp). WLDL expects lowering milk/cheese and chicken inflation, and effected 5% price hike in Apr’23, could help the company +100bp EBITDA margin expansion to +18% and also driven by strong operating leverage. Though management aspires to deliver mid-single digit SSSG in FY24 with premiumisation and innovation efforts could also led to margin expansion in our view.

Valuation and risks

As argued in our recent QSR Thematic report we strongly believe WLDL’s multi-category, multichannel and multi-daypart strategy driven by 3D’s (digital, delivery, drive-thrus) holds lot of potential to lift volume sales with double digit SSSG. Despite revised royalty rate at 4.5% (consider as business expenses) we expect WLDL could deliver long-term value creation for the investors in our view. Noting lower than expected revenue/earnings in 1HFY24, and continued inflationary pressure, we cut earnings for FY24E/FY25E by 11.0%/11.4% and introduce FY26E earnings and retain ADD rating with a revised DCF-based TP of Rs954 (implying avg. EV/EBITDA of 28.7x FY25E/FY26E). Key risks to our call: prolonged food inflation to reflect weakness in demand, rising inflation in key RM/PM and severe competition in chicken portfolio from organized/ unorganized players

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