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Hunger games

Increased adoption: double-digit growth intact in India’s QSR space

India’s QSR chain market is set to post a market size CAGR of 32% during FY23-27, well ahead of its F&B industry growth rate of 19%, and ahead of global counterparts (Source: Technopak), led by 1) increased per capita income at a CAGR of 4% during FY15-22, 2) acceptance in the non-metro markets, 3) increased delivery revenue in post-COVID era, and 4) strong expansion by new & existing firms. Within organized QSR, KFC India posted 30% CAGR during FY19-23 vs peers across categories that have grown by a mere 17% during the same period.

No longer the boss: competition, fried chicken muscles in pizza share

The post COVID era has worked unfavorably for pizza on 1) new and existing companies expanding aggressively (increased competition) , 2) scale up in delivery offerings by aggregators, which have increased variety (pizza was the only category which has ~60% delivery revenue as on FY20); this, in turn, has led to the category losing market share by 500bp during FY17-22. Pan-India, penetration of pizza outlets is double than that of fried chicken; India has 3.9 pizza outlets per mn vs a mere 1.05 fried chicken outlets per mn, which shows penetration opportunity for fried chicken. In large metro cities, the penetration of Domino’s & Pizza Hut based on population is 4-6x that of KFC (Mumbai has 11.5 Domino’s & PH stores per mn vs KFC’s mere 1.8). Fried chicken would continue to outperform pizza on 1) new store expansion, and 2) adoption of non-vegetarian food (~70% of Indians are non-vegetarian), which would drive better same store sales growth (SSSG) than peers.

Key lever hits a plateau: delivery revenue at ~42% in the near term

Most non-pizza QSR chains had a delivery revenue share of 22-25% preCOVID, which has reached 35-38% in the post COVID era, led by 1) aggregators scaling up delivery offerings, 2) brands working on better packaging for delivery, and 3) more customers ordering products other than pizza. We believe expansion in delivery contribution is a key lever behind better SSSG for the non-pizza category; menu innovation and increased adoption of non-pizza food would be growth drivers; however, we do not expect fried chicken and burgers to expand more than 40%- 42% in delivery contribution in the near term, as consumers return to restaurants and most non pizza chains will continue to drive a bigger share of revenue (~55%-60%) from dine-in, due to their larger store size. Although we believe delivery contribution may not move way too much beyond 40% in the near term, there is still room for some expansion.

Our outlook: selective positive stane; top picks - DEVYANI & SAPPHIREc

We are selectively positive on India’s QSR sector and prefer Devyani International (DEVYANI IN) and Sapphire Foods (SAPPHIRE IN) due to their focus on KFC, which is heavily underpenetrated in India vs pizza franchises. We initiate on DEVYANI and SAPPHIRE with a Buy rating and a SOTP-based TP of INR 210 and INR 1,740. We initiate Restaurant Brands Asia (RBA IN) with an Accumulate rating with a SOTP-based TP of INR 130. We retain Reduce on Jubilant FoodWorks (JUBI IN) and Westlife Foodworld (WLDL IN) with an unchanged TP of INR 500 (on 31x FY26E pre-IndAS EV/EBITDA) and INR 880 (on 34x FY26E pre-IndAS EV/EBITDA) respectively.

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