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Dine-in revenue plays spoilsport

Lower footfalls drag dine in revenue

Westlife Foodworld (WLDL IN) reported Q3 sales of INR 6,003mn, down 2.4% QoQ/1.8% YoY, in-line with our estimates of INR 6,033mn. This was due to a decline of 9% YoY in SSSG. The on-premises business fell 5.1% YoY, while off-premise grew 3.1% YoY (on a high base). Delivery business contributed 42% to the overall revenue. The 9% YoY SSSG drop was led by a 6% YoY decline in SSSG due to external issues, with ~30% of stores in West and South India getting hit (saw a 10-50% dip in daily sales from mid-October).

Sharp decline in SSSG; inflationary pressures stable

Revenue growth was muted due to an SSSG dip of 9% in Q3, led by: 1) high base impact, 2) no positive impact from the Cricket World Cup (CWC), 3) high competitive intensity, 4) sentiment impact (boycott due to misinformation about stance on Israel-Gaza war) and 5) Chennai floods. Expect a relief from the flood situation and negative sentiment in the near term, which could offer some respite to SSSG, but competitive intensity has also spiked in the burger category due to companies such as Burger King/Good Flippin Burger/Burger Singh scaling up, which may continue to strain growth. Levers such as McCafé (90% of restaurants have McCafé) and Delivery segment (42% revenue contribution in Q3) have largely played out. Pressure continues to mount on growth for dine-in as footfalls did not revive significantly. But WLDL (burger category) may continue to perform better than the pizza category, as the latter could report much lower SSSG. Gross margin may improve due to inflationary pressures cooling off, but there may not be much improvement in EBITDA margin due to the introduction of value-based products with lower margin.

Valuations: Maintain Reduce; TP unchanged at INR 880

WLDL has added mere 23 stores in 9MFY24 compared with full-year guidance of 40-45 stores in FY24E, which could also be due to a muted demand environment. We have estimated an SSSG of (1%)/3%/4.5% in FY24E/25E/26E due to low demand and growth prospects. WLDL is trading at 36.2x/31.7x FY25E/26E EV/EBITDA (pre IndAS). The stock has corrected 11% in the past six months, factoring in muted performance. We believe there is little room for growth to rebound in the next two quarters and valuations are at a premium given muted growth prospects. We cut FY25E/26E revenue estimates 7.0%/8.6% factoring on lower SSSG and EBITDA estimates 8.6%/9.2% factoring in lower margins. We maintain Reduce based on 34x one-year forward EV/EBITDA (pre IndAS) and roll over to March 2025E TP of INR 880.

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