Buy Burger King For Target Price Of Rs. 250 (65% Gain): PL

A Whopper in making; BUY

Quick Pointers:

 SSSG at -4.9%, Net 5 stores closed in 4Q. Likely to add 55 stores in FY22.
 BK cafe to be launched in 4Q22, 75 cafes by FY23
 Dine in sales at 57%, convenience platforms at 43% of total sales in 4Q

We are increasing our DCF based target price to Rs250 (Rs221 earlier) as we factor in 1) BK Café launch by Jan-22 (75 cafés by FY23) and 2) superior margin delivery and upgraded guidance 3) success of BK App (200% growth) and 4) sustained innovations with launch of stunner Menu at price point of Rs50 and Rs70. We believe that 1Q would be impacted as Burger king as 55% stores in malls and another 15% in transit locations (Metros, IT parks etc.), however situation is far better than 1Q20 given building traction with convenience channel.

Burger chains as a whole will emerge stronger from the Pandemic given 1) Closure of more than 25-30% eateries due to Pandemic 2) Increased consumer focus towards health and hygiene measures and 3) Low penetration. Burger king has huge competitive advantage to capitalize on emerging growth opportunities given 1) Target to open 320 stores by FY22 and 700 by CY26 (265 as on FY21), 2) Launch of Value proposition strategy, 3) fixed royalty at 5% 4) cluster based approach with faster scalability and operating leverage 5) Launch of BK café by end of FY22. We estimate CAGR of 34.5% in sales over FY21-23. We estimate PAT breakeven by FY23 and strong profit growth post FY24. We believe margin guidance can see upside if BK café is a success. Maintain Buy with DCF based target price of Rs250 (Rs221 earlier).

Net sales up 2.3%, SSSG at -4.9%: Net sales increased 2.6% to Rs 1.96bn. March exit dine in at 57% of revenues while delivery at 43%. Gross margins at 65.6% expanded 220bps YoY on account of revenue recovery and supply chain cost initiatives. EBIDTA increased 17.1% to Rs 245mn. Margins expanded 150bps YoY to 12.5%. Excluding Ind AS 116 impact Restaurant Operating Margin stood at 0.2% while Op EBITDA grew 85.6% YoY to Rs 4.6mn. Loss came at Rs 259mn vs Rs 374mn in Q4FY20.

Concall Takeaways:

1) 4Q21 revenue recovery at 103% and ADS recovery at 92%. Exit ADS recovery in Mar-21 at 111%.

2) Will launch BK by Jan-22, ramp up to 75 cafes by FY23.

3) Soft launched Value Proposition (Value 2.0) at accessible price points of Rs 50-70 across Burgers, Wraps, Rice, Volcano. National launch in 3Q22.

4) BK app is witnessing massive traction, delivery revenue growth of >200%.

5) 265 stores as on Mar-21 of which 55% are in malls, 35% in high street and 15% are drive thru and transit locations. Incrementally, only 10-15% stores will be in malls.

6) April month dine-in channel witnessed robust growth but again shut due to localized lockdowns.

7) Target to open 55 stores, flat SSSG over FY20 and GRMs of 66% in FY22.