Despite weak near-term consumer sentiment, the management remains confident of achieving 7-9% SSSG (same-store sales growth) for FY20 due to— Western fast food continuing to grow at robust 14-15% in value terms, while Indian fast food and particularly hawkers being hit the most by slowdown.
Management of westlife highlighted that it targets to add 25-30 stores annually (no change in plans amidst slowdown) with focus on expanding in existing core cities. Apart from store expansion, reimaging stores via EOTF (Experience of The Future) remains a core focal point—currently only 45 stores have EOTF and company is aggressively ramping up roll out of EOTF to other stores (targeting 100% conversion to EOTF by FY23).
Near-term demand trends: Despite weak near-term consumer sentiment, the management remains confident of achieving 7-9% SSSG (same-store sales growth) for FY20 due to— Western fast food continuing to grow at robust 14-15% in value terms (including store expansion-led growth), while Indian fast food and particularly hawkers being hit the most by slowdown. Growth in near term has been more footfalls-led (especially for Westlife), average ticket size has been largely flat y-o-y and near-term growth has been partially aided by successful launch of value platform in April 2019.
Strong focus on RoCE improvement: Under Vision 2022, focus is on taking the cash on cash returns (Restaurant Operating Margin/ Capital Employed) to 25% (currently at +20% now—West is higher); company plans to achieve this through—tight control on keeping cost of development under control (through initiatives like ROP 2.0), sustained expansion in Southern markets (cash on cash returns) and higher returns on incremental capital deployed in new stores through initiatives like EOTF, McCafe and McDelivery.
Confident of achieving Vision 2022 targets: Management indicated that over the longer term, it remains confident of achieving its Vision 2022 targets of Rs 60-65 mn avg unit value (AUV), 400+ stores and 13-15% margin (near term to focus on Rupee Margin than percentage margin) band led by various initiatives like—Menu innovation, brand extensions (McCafe and McDelivery yielding healthy results), scaling of Value platform (recently launched in April 2019), EOTF (reimaging stores and to bring the entire network under EOTF by FY23; currently only 45 stores under EOTF) and New product category launch (likely in April 2020) and Loyalty programmes to be some of the key future growth drivers.
Key risks: Availability of quality real estate at competitive prices, consistent cost inflation (especially in utilities and manpower through rise in minimum wages) and volatile demand volatility are among the key challenges that the management has indicated. We maintain a BUY rating with a target price of Rs 316.