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Lackluster performance to continue

We interacted with various QSR companies recently and found that the growth metrics remained challenging, leading to a weak operating print. These headwinds affected FY24 performance and similar pressures have been observed in 1HFY25. Factors such as competition among brands, higher store unit expansion during the last 2-3 years (much faster than the consuming class growth), and growing local players (led by aggregators) have adversely affected unit economics for most players.

*  In response, companies have implemented diverse strategies, focusing on product innovation, emphasizing value-for-money offerings to attract new customers, and enhancing consumer offers (free delivery, etc.) to increase eat-out frequencies. Despite these initiatives, the Average Daily Sales (ADS) did not improve (down 15- 20% from FY23 for most brands). While the delivery channel remained healthy, dine-in continued to face significant pressures.

*  We remain cautious on QSR recovery in the near term. Unlike other discretionary categories, we do not anticipate significant benefits from the festive period for QSR. While the ADS/SSSG bases have been favorable, we do not expect much underlying improvement in 2HFY25. Restaurant operating margins were under pressure, and we expect this to continue in the near term too. Jubilant FoodWorks appears to be outlier among QSR companies in the near term (driven by delivery moat), but its valuations are rich. Though dine-in companies are struggling, their operating growth metrics are likely to improve significantly once recovery begins. We reiterate BUY on Devyani, Sapphire, and RBA while NEUTRAL on Jubilant FoodWorks and Westlife Foodworld.

*  Subdued demand to continue – Despite weak FY24 and various initiatives by QSR companies in 1HFY25, growth metrics remained weak across brands. Sales was weak in Jul’24 due to the Shravan period and heavy rains across regions. While some improvements were noted in Aug’24, sales tapered off again in Sep’24 due to the Shraad period. Overall, 2QFY25 appears slower than 1QFY25, despite a favorable base. Further, despite efforts to boost footfall through promotions and menu innovations, demand has not seen any green shoots. A weak growth has been observed across markets (metros/tier2/tier3).

*  Aggressive store addition sustains competition – Despite the consumption slowdown, most QSR brands have aggressively increased their store count (FY19-FY24 average CAGR: 15%) to establish a stronger presence. While the momentum of store additions partially slowed down during 1HFY25, most companies still maintained their store addition guidance for FY25.

*  Delivery sustaining outperformance – The demand for dine-in services remained weak, while the delivery channel showed improvements as consumer traffic increased, driven by promotional offers and the extended monsoon season during the quarter. Delivery channels across brands have observed a significant difference compared to dine-in performance for most players during the past nine months.

*  Pressure on profitability – Gross margins are expected to remain healthy across brands with most companies anticipating YoY expansion. However, the unit economics remain weak on account of weak growth. Restaurant margins are expected to sustain pressure in the near term despite various initiatives implemented during the last 2-3 quarters.

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