@ Market Cap Rs. 5200 Cr
QSR is more of a macro story in India’s ecosystem due to young population, large population, increasing per capita, changing eating habits, changing family structure etc; which are the drivers for penetration. I am liking Restaurant Brands Asia to play this theme.
Over the last 2-3 quarters, even while all domestic QSR brands have shown de-growth at the unit level, RBA has shown improvement in kpi such as SSSG.
It seems business is at a good pivot point after 10 years of domestic operations, having built 455 restaurants over this short period. The McDonald’s franchise Westlife entered the market in 1996, almost 14 years before RBA, and has 397 restaurants in West and South India.
Improving traffic through a value strategy… the value strategy has resulted in lower AOV (Average order value) but has resulted into increased SSSG (Same store sales growth) and ADS (Average daily sales).
While simultaneously increasing their gross margins… achieving through supply chain efficiency. Gross margin reached 67.7% in Q4FY24 from 66.4% the previous year, with guidance to reach 69% by FY 27. Westlife has gross margins of 70%.
EBITDA level profitability was achieved in India, but geo-politics delayed profitability in Indonesia. Achieving a restaurant and company EBITDA of 9.7% and 4.3% resp in FY24. While, Westlife does 22-23% and 16-17% resp.
Operating leverage plays out in such businesses… as marketing costs although remain stable at 5%, other fixed costs get distributed over a much larger base with scale.
Continued expansion through FY27 to meet 700 store target… to reach this, 80-85 stores per year will be opened for the next 3 years, a 16% CAGR through store addition. If SSSG recovers, top-line growth of 20-25% is achievable.
Debt… mainly for the Indonesian business, the India business has been grown by raising capital through equity. The outstanding borrowings in the books of PT Sari Burger Indonesia as of March 31, 2023 is Rs 165 cr.
Equity dilution… is present
Negative cash conversion cycle… has led to a 10x growth in cash from operating activity from March 21 to March 24, benefiting growth through internal accruals. The company also showed positive FCF in the current year (both at consolidated and standalone basis).
Indonesia business.. has been the reason why the business has been given lower multiples. The company has guided that no new capital allocation will be done in the business in FY25. This should help weather the current slowdown in the country while improving unit economics, thus reducing drag at the consolidated level.
Closest competitor, Westlife… has shown operating leverage play out in the last 5 years, along with FCF generation while focusing on growth. The return matrix has also significantly improved. When compared to Westlife, while RBA was much behind in the business lifecycle, the improvement in returns appears sharper.
Beyond FY27… When store addition slows down, it could be fair to say that the company can achieve unit growth and profitability at least in line with Westlife, i.e., ADS of Rs. 155,640 (currently at Rs. 117,000) and Restaurant operating margins and Company operating margin of 22-24% and 15-17% respectively (currently at 19% and 14%).
Valuation… RBA earnings growth will have a balance mix of store growth and margin expansion. And due foreseeable longevity of the business, it should get a high valuation multiple over long term in line with other QSR businesses.
Available at P/S of 3x, while Jubilant, even after the de-rating trades at 5.8x, and Westlife is given a 5.5x multiple.
As the business cannot be evaluated on earnings I am taking CFO as a comparison matrix. The OCF generation of RBA and Westlife have been similar in FY24; thus the P/OCF of RBA and Westlife are coming to 16x and 38x resp. Even if West life deserve a higher multiple due to stronger brand recognition of Mc Donald’s there could be some scope for re-rating for RBA if it continues on this growth trajectory.
Branded business… have proven to be high ROE and ROCE businesses over the long term; like FMCG, branded pharma, branded hospitals, Titan, Trent, etc. by taking market share from local players. These businesses have longer gestation but lead to a deep brand moat, resulting in higher returns and FCF generation.
Jubilant Foodworks was the first entrant within the Indian QSR segment (1995) and we have seen that play out.
Based on the above theory and the improving financials, I believe that the business is becoming a good candidate for stock re-rating and earnings led growth, if the slowdown in QSR segment eases out…
Built a tracking position. Stock might give enough accumulation time as the sector is currently facing headwinds
July ’24 bought @ avg price of Rs. 118, totalling to 1 % of portfolio
Analysing market opportunity of the sector based on the AMBIT report - 26th July 24
Consumption stories in India are knitted around penetration, and the report had some important data points on that. They also provide a framework on which QSRs are evaluated.
Total Addressable Market – TAM.. gives an outlook for scalability potential of these brands.. based on size of Indian food market, the consuming population and number of towns they can expand to
- The size of Food service market in India was Rs. 4.25 lakh Cr as of FY20; comprised of Restaurant in hotels, Standalone organised, unorganised and chains. Of which QSR segment is just 4.4% and 60% is still un-organised ie Rs. 2.52 lakh Cr.
- According to world data lab, India’s consuming population (person spending more than USD 11/day) is 0.35 bn, against world consuming population of 4 bn ie 8.6% of global. Hence, compare that to number of stores present in India for these QSR brands against their total global store count.. Domino’s – 9.4%, KFC – 2.5%, Pizza Hut – 4.5%, Mc Donald’s – 1.4%, Burger King – 2.3%. Where Domino’s is the only brand which has a higher share than global average, while all other’s may atleast have potential to double their reach.
- There are roughly 550 towns in India with population greater than 0.1 mn. Currently, 90% of India’s chain market (ie QSR, Cafe, Ice Creams, casual dining, fine dining and PBCL – Pub, bar, cafe lounge) are in top 8 cities.
Share of top 8 cities have been decreasing over time for QSRs, still Domino’s is the only brand having presence in 413 towns. Between FY19-24, 60% of additions by the brand were in non-metro cities. Though the productivity/ revenue per store is lower, on a ROCE basis these stores are still significantly profitable and ROCE accretive given the lower cost base. Analysis showed that, compared to 80% ROCE for mature stores in metro cities, Tier III and beyond still make 65%+ ROCE.
For perspective, KFC and Pizza Hut are present in 240 – 250 Cities, Subway is in close to 150 cities, while Burger King’s presence is limited to 120 cities. Thus, all of them have scope to double their geographical presence.
This is because the high operating leverage in the business. A phase of high SSSG growth leads to significant improvement in margins and most importantly ROCE. The relation is visible globally too.
For perspective, Sapphire mature KFC stores can clock a ROCE > 40% for 2500 – 3000 sq ft stores and > 60% for 1500 – 2000 sq ft stores. Pizza as a category has a higher store RoCE profile (referred in Domino’s example above) driven by higher delivery share and smaller store sizes.
SSSG is driven by brand strength, addition of optionalities like cafe. Rates McDonald’s as the highest in this attribute given 1) brand strength 2) track record of SSSG 3) footfall/ADS addition via McCafe
Valuation.. Indian QSR sector compares to other discretionary names like Trent, Titan, Relax and Avenue Super-marts.
Due to – Opportunity size, Longevity of growth , ROCE
While I had previously used P/CFO as the matrix to compare, they have used EV/EBITDA in the report.
Devyani Jubilant and Westlife currently trade at 33x-35x EV/EBITDA while, Sapphire and RBA are trading at 20x.
This is still much lower than the multiples given to brands in Grocery (DMArt or Spencer), Jewellery (Titan or Kalya), Innerwear (Page or Lux), Apparel Retail (Trent or Shoppers Stop), Branded Apparel (Vedant fashion, GoFAshion, Arvind Fashion), Footwear (Relax, Metro, Bata, Campus) or even Luggage (VIP or Safari).
Conservatively, for a stock return expectation of 20% compounded over 20 years. The company’s EBITDA should grow at 16% CAGR over that time frame, while settling for a long term EV/EBITDA of just 15x..
For the near term we can keep our return expectation of 45% if the company is able to give a 30% CAGR in EBITDA over next 3 years, and gets a re-rating of 30x (in-line with Westlife or slightly lower). This EBITDA growth is possible as all consensus estimates point at RBA to have EBITDA returns upwards of 35% CAGR between FY24 to FY27.
Positives for RBA, which brings in both growth and re-rating possibilities.
- In an under penetrated space
- Under valued to it’s peers
- With a growth potential upwards of high teens, where operating leverage is waiting to play out
- Presence in consumption space which enjoy a higher terminal value
Keeping in mind that the business will show lumpiness, as consumption at times would grow slower than supply; due to changing demographics and eating habits of our country, the longevity of business would remain it’s strength.
This stock seems to fit in my criteria for a consumer stock having ability to give compounded return over a long period of time.