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Lack of any near-term trigger drives rating downgrade to REDUCE

We are downgrading WESTLIFE to REDUCE (from Buy), due to lack of near-term triggers and ~7% run-up over the last 1M. Q4 results were weak, with 5% SSG decline and 330bps fall in EBITDA margin. In our view, earnings de-growth is expected to continue in H1FY25 as mis-information around the brand still persists. Though we like Westlife’s aggression in store expansion (45-50 in FY25 vs. 40 in FY24), its digital traction, cost optimization, and thrust on drivethroughs, we keep our guard up due to its muted near-term SSG and need for higher marketing spends. We cut FY25E/26E EBITDA by 13%/4% on near-term challenges and downgrade our rating to REDUCE (from Buy) with revised down TP of Rs875/share (33x FY26E EBITDA). Faster SSG recovery remains a potential upside.

Weak SSG show amid demand/external issue tantrums; sequential pickup sets tone for FY25:

WESTLIFE reported a weak but in-line performance, with flat sales in Q4, led by 5% decline in SSG and offset by 11% store network expansion. Though the magnitude of external issues has reduced, concerns are likely to persist in H1FY25. Westlife is focusing on value-meals and marketing campaigns to arrest the SSG decline. Among channels, ‘On-premise’ declined 2% due to negative sentiment and misinformation around the brand. However, the ‘Off-premise’ channel grew an encouraging 8%. WESTLIFE has added 17/40 stores in Q4/FY24, in line with its guidance of 40-45 additions in FY24. Vision 2027 remains intact, with 45-50 store expansion guidance for FY25. McCafé’s/EOTF penetration further improved to 91%/74% of its network at Q4-end vs. 87%/62% YoY. Gross-margin dip of 170bps (due to a one-off incentive in the base) and lower fixed-cost absorption amid muted demand caused a 330bps dip in EBITDA margin to 8.7%. However, gross margin for full-FY24 improved by 40bps to 70.3%, led by optimization of food, paper and distribution costs, despite focus on value meals and a one-off in base-FY23.

Earnings-call KTAs:

1) Q4 witnessed stable informal eating-out trends; however, misinformation around usage of cheese and negative brand sentiment in select community impacted SSG for Westlife. Management expects the pain to persist in H1FY25. 2) WESTLIFE’s timely launch of its ‘Real Food Real Good’ campaign, to tackle fake cheese related news, has put it on a trust-building journey in impacted communities from Q3. 3) Whie SSG for FY24 was negative at 1.5%, guest count growth was positive for Westlife in FY24. 4) Traction in new launch in the McCafé brand extension, along with Lotus Biscoff, has been encouraging. 5) Westlife is seeing positive traction in its Digital sales (70% of overall sales) and is leveraging data for improving ordering frequency. However, the balance 30% sales (more so in the dine-in channel) are seeing challenges due to negative sentiment. 6) App user conversion trend to becoming a ‘My McDonald’ loyalty member is heartening, as the membership offers a free food-item after every four orders. 7) Depreciation is likely to remain at 7.5-8% of sales in FY25. 8) Despite nearterm challenges, Westlife’s Vision 2027 remained intact and targets Rs40-45bn sales with 18-20% post Ind-AS EBITDA margin. 9) The FY24 margin drop was largely attributed to negative leverage, continued investments in store openings, marketing spends, and a one-off in FY23. 10) Capex for FY25 is expected to be in the Rs2-2.5bn range with 30- 35% of new store openings to be in the drive-through format. Among regions, South remains a focus market, with better viability of share gains and under-penetration.

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