Research Report On Burger Chains Stocks, Burger King & Westlife Development, By Prabhudas Lilladher

Sector Report

A play on Brand pull and Technology

We are initiating coverage on Burger Chains (WDL and Burger King) with a positive view. We believe organized Burger chains will benefit from accelerated shift towards organized food service players post Pandemic given low penetration, focus on hygiene and fast catch up by convenience channel. We expect burger chains to benefit from covid 19 led restructuring by closure of unviable stores, rental negotiation, supply chain improvements which have lowered overheads by 20-30%. Burger Chains have also broad based their offering with Wraps, Rice Bowls, Puffs, Breakfast items and SIS café as a part of their menu options. We believe worst is over and expect WDL to add 25/30 stores every year while BK will add 200 stores in next 3 years. We estimate WDL to report sharp turnaround with an increase in EPS from Rs4.9 in FY22 to Rs10.2 in FY24. BK is expected to turn profitable from FY23 with an estimated EPS of Rs1.7 by FY24. We value both the stocks on DCF and initiate coverage with a Buy rating and March22’ target price of Rs 618 for WDL and Rs 221 for Burger King. We initiate on
Burger Chains with Buy rating.

Burger Chains offer huge scope of growth and scalability; We believe Burger chains offer huge scope of growth in India given that global leader McDonalds has ~480 stores while No2 chain Burger king has 270 stores. Stores number in USA and China stands at 13846/3386 for McDonalds and 7346/1025 for Burger King. Burger chains grew at a CAGR of 19.4% between FY14-20 and are expected to sustain momentum in the coming years led by improved affordability, rising consumer aspiration and favorable demographics.

Burger Chains will emerge stronger post pandemic: Burger Chains led by McDonalds have undertaken massive business restructuring and cost cutting by closure of non- viable stores, rental negotiation, supply chain rationalization, buying and usage of perishables and flexi hours for manpower with more focus on variable pay. Industry has seen 20-30% reduction in fixed costs with achievement of 100bps lower margins at 25% lower sales in case of WDL.

Burger chains have broad based Menu options: Burger chains have moved beyond burgers to include products like wraps, desserts, rice bowl, and breakfast menu options. Burger chains have included products to suit taste, palate and sensibilities of Indian consumers with fully vegetarian Burgers, Non Beef and Pork products in non Veg, separate kitchens for veg and non veg. This has broad based the consumer appeal and transitioned them as family restaurants.

SIS café’s offer huge scalability: Burger chains led by McDonalds(McCafe) have started SIS Café’s while Burger King will likely launch BK Café over time. SIS café has just 20% of capex of a normal café with 500-700 bps higher gross margin than their food business. SIS Cafés are positioned as casual meeting places and attract younger crowd which improves brand salience. McCafe has presence in 223 (227 as on 9MFY21) stores as on FY20, achieving sales of Rs14mn/store and contributing Rs3.2bn to overall sales which is expected to increase to Rs18mn/café with sales of Rs6.4bn by FY24.