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Weak trends persist; hopes pinned on H2; retain REDUCE

We retain REDUCE on WESTLIFE and Jun-25E TP of Rs875, due to a lackluster Q1 (9-10% EBITDA miss) and sequential SSG moderation (-6.7% vs. -5% in Q4). Despite a weak Q4 base, lower sequential pickup at 11% in Q1 (vs. 13- 14% historically) points to the demand environment remaining sluggish. With strengthening of its value platform (Rs69 combos), WESTLIFE remains hopeful of an SSG turnaround in H2 which though is already built-in, and a pent-up surprise would only motivate investors in our view. ‘Vision 2027’ target of delivering Rs40-45bn sales at 18-20% EBITDA margin is intact, but delivery at the lower-end is more likely, given near-term challenges. We like Westlife’s aggressive store-expansion drive, digital investments, and differentiated dinein experience, but would await a better entry point before turning constructive again. EBITDA estimate is trimmed 2-3%, to factor-in the Q1 disappointment

Weak SSG drags profitability; recovery hopes remain pinned on H2:

WESTLIFE reported flat topline in Q1 – 2-3% weaker than street/our estimates. The flattish print was due to a 6.7% decline in SSG, offset by the ~12% network expansion. We believe the additional pain of external issues persists as sequential pick-up at 11% is lower vs. historical levels of 13-14%. Among channels, ‘On-premise’ declined 3%, while ‘Offpremise’ channel delivered better growth at 6%. WESTLIFE has added 6 stores in Q1, and expansion pace is expected to accelerate as FY25 guidance to add 40-45 stores was maintained. McCafé’s/EOTF penetration improved to 92%/75% of its network at Q1-end vs. 87%/62% YoY. Gross-margin marginally improved by 20bps to 70.8%, on account of moderating input costs/supply-chain efficiencies. Despite the GM improvement, lower fixed-cost absorption and muted trends caused a 470bps dip in EBITDA margin to 8.2%.

Earnings-call KTAs: 1) Q1 saw continued demand challenges, led by weak macros and impact of external factors; WESTLIFE expects better traction in H2 with further strengthening of its value platform. 2) Focus remained on menu refresh, with launch of entry-level McChicken Fiesta burger and value combos at Rs69. Seasonal launches like mango-flavored desserts were also seen in Q1. The pilot launch of cookies/brownies on the McCafé platform has now rolled out to all outlets, and the company expects McCafé to contribute 17-18% to Store AOV by 2027. 3) To offset the impact from the negative brand sentiment due to news-flow around the quality of cheese, WESTLIFE has collaborated with Chef Sanjeev Kapoor to advertise usage of real cheese and regain consumer trust. 4) The impact of global actions of McDonald’s franchisees around the Israel-Palestine war, which started in Q3FY24, has been prolonged (vs. initial expectations). 5) Marketing spend for Q1 was higher by 100bps, but full-year spend is expected to be stable at ~5% of sales. 6) The MyMcDonald’s Rewards program gained good traction and the management expects it to boost consumer-ordering frequency. 7) WESTLIFE maintained its ‘Vision 2027’ guidance for store expansion (45-50 annual additions) and EBITDA-margin expansion to 18-20%. 8) Margin is expected to continue tracking an improving trajectory, with pickup in SSG and given cost controls. 9) To offset the cost inflation, WESTLIFE plans to take a 3-4% price hike every year

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