QSRs - Lackluster Performance To Continue: Motilal Oswal

Motilal Oswal Report

We interacted with various quick service restaurant companies recently and found that the growth metrics remained challenging, leading to a weak operating print. These headwinds affected FY24 performance and similar pressures have been observed in H1 FY25. Factors such as competition among brands, higher store unit expansion during the last two-three years (much faster than the consuming class growth), and growing local players (led by aggregators) have adversely affected unit economics for most players.

In response, companies have implemented diverse strategies, focusing on product innovation, emphasising value-for-money offerings to attract new customers, and enhancing consumer offers (free delivery, etc.) to increase eat-out frequencies. Despite these initiatives, the average daily sales did not improve (down 15- 20% from FY23 for most brands).

While the delivery channel remained healthy, dine-in continued to face significant pressures.

We remain cautious on QSR recovery in the near term. Unlike other discretionary categories, we do not anticipate significant benefits from the festive period for QSR.

While the ADS/same-store sales growth bases have been favorable, we do not expect much underlying improvement in H2 FY25. Restaurant operating margins were under pressure, and we expect this to continue in the near term too.

Jubilant FoodWorks appears to be outlier among QSR companies in the near term (driven by delivery moat), but its valuations are rich. Though dine-in companies are struggling, their operating growth metrics are likely to improve significantly once recovery begins. We reiterate Buy on Devyani, Sapphire, and Restaurant Brands Asia while Neutral on Jubilant FoodWorks and Westlife Foodworld.

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