Analysts take a bite of premium QSR stocks amid price hikes

Segment on the verge of multi-year growth trajectory, they say

Dine-in and quick-service restaurant (QSR) owners are facing a double whammy of cost and regulatory pressures.

Prices of edible oil, milk, wheat, coffee, vegetables, tea, and sugar have surged about 60 per cent year-on-year (YOY) because of supply chain disruptions and the depreciation of the rupee. Besides, the government has suggested that restaurants inflate menu prices rather than levying service charges.

Despite this, analysts remain bullish on stocks of premium QSR players because they believe any price hike announced to offset the cost pressure may have relatively low adverse effects.

“Continued spiralling food inflation, price hikes taken in recent months, along with weak consumer sentiments in the overall consumer discretionary category will have some pressure on same store sales growth (SSSG). However, we believe QSR chains that [have a] dine-in focus and have low ticket pricing will play out better in this crisis as consumers are looking for more [outings] post opening up of the economy,” said Naveen Kulkarni, chief investment officer at Axis Securities.

Adding a note of caution, Ashish Kanodia, analyst – consumer discretionary, at Ambit Capital, said: “QSR players largely cater to consumers in the lower and middle-income strata, who will be impacted the most due to inflationary pressures. Hence, there is a risk of slowdown in new store opening, and decline in revenue per store given lower volume/footfalls.”

He said since the restaurant business has high fixed costs, lower volumes and footfall will drive negative operating leverage, and, hence, could result in flat or low margins in the near term.

On average, restaurants have hiked prices by 20-25 per cent over the past twothree months, and are considering another round of price increases.

Pricing edge

According to an analysis by ICICI Securities, Jubilant Foodworks-owned Domino’s is the market leader in the pizza segment, but caters to a price sensitive audience vis-à-vis Devyani Internationalowned KFC and Sapphire Foods-owned Pizza Hut. “The latter is premium in the range of 5-10 per cent, and continues to maintain its slightly premium positioning vs Domino’s. This premium is maintained despite Jubilant’s recent price hike of 5 per cent (after a 4-5 per cent hike in December),” the brokerage said in a report released on Monday.

As regards Restaurant Brands Asia (erstwhile Burger King India), and Westlife Development-controlled Mcdonald’s, the former is cheaper in the value segment by 8-10 per cent, while the latter is cheaper in the premium segment by 20 per cent.meanwhile, Devyani International-owned KFC and Jubilant Foodworks-controlled Popeye’s (India) are closely priced, with the latter cheaper by 2-3 per cent.

Investment strategy

Kanodia of Ambit Capital says investors should focus on affordable premium players as they tend to do relatively better than low-ticket or mass-market players during an inflationary period. He prefers Barbeque Nation given its higher spending per head (3-4 times of QSR).

Motilal Oswal Financial Services, too, has a ‘neutral’ rating on Barbeque Nation with a target price of ~1,060 as it believes the price hike, along with other cost saving efforts, will revive Barbeque Nation’s gross margin.

The brokerage also initiated coverage on Sapphire Foods recently, with a ‘buy’ rating and a target of ~1,420.

“With healthy SSSG and rapid store additions, we expect Sapphire Foods to deliver 29 per cent CAGR (compound annual growth rate) in sales growth over FY22-24. We also expect it to improve its net profit margin to 5.3 per cent in FY24 from 2.7 per cent in FY22,” it said.

Meanwhile, Geojit Financial Services has a ‘hold’ rating with a target price of ~590, and Axis Securities has a ‘buy’ on Westlife Development with a target price of ~625 apiece. “We recommend investors have a long-term approach rather than looking at the short-term vagaries of the sector, as the QSR segment is on the verge of a multi-year growth trajectory driven by younger demographics, the growing participation of women in the workforce, and aggressive expansion into smaller towns,” Kulkarni of Axis Securities said.