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Q2 saw muted sequential trends on a weak Q1 base, suggesting continued macro-weakness. BK India/WESTLIFE/KFC (SAPPHIRE) delivered 3.5%/1.0% /0% SSG, while others saw SSG declines. Even the Q3 outlook suggested only a normal seasonal pick-up sequentially vs. a pent-up expectation (World Cup/low-Q1 base). Focus across players is on driving SSG through transaction growth vs. increased bill values, which is a good strategy in a weak demand environment. Burger/Chicken players have launched limited-period value offers with products at Rs99-179. Despite weak trends, store additions picked up sequentially and companies have retained their annual targets, suggesting continued growth investments. Capex (as a % of sales) remained largely in line with historical trends in H1FY24 (refer Exhibit 7). Among QSR categories, Pizza/Burger categories saw sequential share gains at the cost of Chicken, likely due to the extended Shravan period in Q2, which should reverse in H2. Otherwise, the pizza category is witnessing intense competition and consumers are downtrading to other categories. RM pains (ex-wheat) are largely behind, with gross margin improving 20-100 bps across players. However, negative leverage and muted near-term outlook drove significant earnings cuts across companies. While our long-term view is constructive for QSRs, a prolonged slowdown and high valuation are driving our SELL rating on JUBI/DEVYANI. Our BUY rating stays for SAPPHIRE/WESTLIFE, led by better SSG, narrowing margin gap vs. peers, and attractive valuation (SAPPHIRE). BK India is currently not under active coverage.

QSR growth has moderated on weak macros; growth investments continue: Our analyses of listed QSRs suggest that: i) The overall listed space has seen 9%/11% growth in Q2/H1, indicating a moderating growth trend vs. FY20-23 CAGR of ~15%, amid inflation-led demand woes. ii) Among QSR categories, Pizza/Burger chains saw sequential share gains at the cost of Chicken, likely due to the extended Shravan period in Q2, which should reverse in H2. We believe headwinds persist for the pizza category due to intense competition and a shift to lower price points amid inflation. Chicken/Burger together contributed 55% revenue share in H1FY24 vs. 52% in H1FY23 and 45% preCovid (FY19). We remain confident about the Burger/Chicken category’s outperformance, led by lower price points, promotional value offers, and festive demand pickup.

BK India took a higher share of footfalls; KFC should benefit from the low base in Q3: Among listed burger QSR chains, BK India fared better with 3.5%/23% SSG/revenue growth in Q2 vs. 1%/7% growth of WESTLIFE, albeit WESTLIFE SSG’s performance was better than other QSR names. In our view, BK India’s performance has been propped by an attractive entry-level meal offering at Rs99 vs. Rs179 offering for WESTLIFE (Mc-Veggie /Mc Chicken – relatively premium). For KFC, SAPPHIRE/DEVYANI delivered 0%/-4% SSG in Q2, likely impacted by higher vegetarian consumption days, but performance was better than significant SSG declines in the pizza category. In our view, KFC should benefit more in Q3, from a low base sequentially

Focus remains on value launches to drive footfall growth: The intensity of value launches has definitely increased, as focus remains on improving accessibility for new consumers through entry-level launches (Rs99/179). In our view, McDonald’s/KFC/BK India are reaping more benefits vs. pizza players due to higher moderation in the RM bucket (lower dairy and higher palm oil exposure). H1 saw the launch of the Rs99/179 value meal offer by BK India/WESTLIFE, which helped them report healthy SSG. KFC launched the Snacker range (7 products @Rs99), helping it log flat SSG (vs. a decline for pizza players).

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