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Sluggish performance; not unwinding in near term

* Westlife Foodworld (WLDL)’s sales grew 1% YoY to INR5.6b in 4QFY24. Its sales were hit by a 5% decline in same-store sales (est. -6%). Off-premise business grew 8% YoY, led by delivery and drive-thrus, while on-premise dropped 2% YoY. Demand challenges and fast store additions by the industry over the last three years continued to hurt the growth metrics.

* WLDL added 17 new stores (+11% YoY) and entered two new cities in 4Q. Its store expansion spree will continue as management guides 45-50 new store additions in FY25, with a focus on South India, smaller towns, and drive-thru stores.

* Due to muted growth, the restaurant operating margin (ROM; post-IND-AS) contacted 510bp YoY and 310bp QoQ to 19.4%. Weak operating margin was further hit by higher depreciation (due to store additions). PBT plunged 93% YoY in 4QFY24.

* The QSR industry has been witnessing weakness in growth metrics, leading to a sharp deceleration in the margin profile (a typical trend in QSR during the downcycle). Demand recovery is still uncertain in the near term. PBT margin was 6.6%/4.0% for FY23/FY24; we model a gradual recovery in margin to 5.9%/8.0% in FY25/FY26. Reiterate Neutral with a TP of INR775 (based on 60x FY26E EPS).

Weak SSSG dents operating performance

* Muted sales growth: WLDL reported sales growth of 1% YoY (est. 4%) to INR5.6b led by 11% YoY store additions. Same-store sales declined 5% YoY in 4QFY24 (est. -6%). Average sales per store dipped 5% YoY to INR63m (annualized) in 4QFY24

* Weakness in margin sustains: GM contracted 180bp YoY to 70.2% (est. 70.6%). It was broadly stable sequentially (70.3% in 3QFY24). EBITDA margin (post-IND-AS) contracted 280bp YoY/230bp QoQ to 13.7%. (est. 15.0%). Similarly, ROM contracted 510bp/310bp YoY/QoQ to 19.4%.

* Decline in EBITDA/PBT/APAT: EBITDA declined 16% YoY to INR771m (est. INR867m) due to operating expenses. PBT dipped 93% YoY to INR20m (est.INR97m). PAT declined 96% YoY to INR8m (est. INR91m).

* In FY24, net sales grew 5% YoY, while EBITDA/PBT/PAT declined 4%/36%/38%. The same-store sales declined 1.5% YoY in FY24.

Key takeaways from the management commentary

* The guest count rose in FY24 due to effective consumer engagement strategies aligned with changing consumer preferences.

* WLDL’s western stores are more affected due to the cheese issue. However, there is a marginal improvement in the stores, but the impact has not gone away completely.

* Currently, it has not taken any price increases due to softness in the market, but historically, it has taken 3-5% price hikes. Going forward, it will take annual price increases that will cover up the inflation.

* The company has guided 15-18% operating margin (Pre-Ind-AS) and 18-20% operating margin (Post-Ind-AS) in the medium term.

* WLDL aims a high single-digit SSSG growth by FY27. It targeted INR40-45b revenue by FY27.

Valuation and view

*  WLDL has been aggressive on store additions, which was not the case historically. The current demand environment is not conducive to aggressive expansion. Therefore, the benefits of the same will be back-ended.

* The QSR industry has been witnessing weakness in growth metrics, leading to a sharp deceleration in the margin profile (a typical trend in QSR during the downcycle). We do not see any near-term respite in demand.

* Reiterate Neutral with a TP of INR775 (based on 60x FY26E EPS).

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