Westlife: Retain ‘buy’ with a revised target of Rs 370

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Published: July 30, 2019 2:00:22 AM

The management remains confident of delivering 7-9% SSSG and modest margin expansion in FY20 and is on track to deliver on Vision 2022.

The SSSG growth was driven by various demand-stimulating initiatives planned by the company such as launch of the McDonald’s app in Q4FY19, McSaver offer, free delivery during IPL and World Cup and the launch of McCafe rewards programme.

Westlife Development’s Q1 print was a mixed bag — while the SSSG (same store sales growth) at 6.7% [quarter-on-quarter] uptick (a positive surprise) was ahead of our estimate of 5%, operationally the quarter was weak (both absolute/vs estimates) due to higher-than-expected staff costs and other expenses (led by front loading of A&P spends).

The management remains confident of delivering 7-9% SSSG and modest margin expansion in FY20 and is on track to deliver on Vision 2022. Sustained scale-up in brand extensions/ EOTF footprint and focus on VFM offerings/menu innovation remain core growth drivers. We have cut our Ebitda estimates by 7-8% as we moderate our SSSG and margin estimates and EPS (earnings per share) estimates by 25-30% to bake in higher tax guidance. We bake in 15% sales (8.5% SSSG/50 store additions) and 28% Ebitda CAGR (210 basis points OPM expansion) over FY19-21. Retain ‘buy’ with revised DCF-based target price (TP) of Rs 370 (Rs 420 earlier).

Revenue grew 12% year-on-year to Rs 380 crore (1% above our estimate) led by 6.7% SSSG — commendable given a high base of 24% and tepid consumer sentiments. We note SSSG accelerated q-o-q despite deterioration in demand environment/pressure on industry-wide dining sales. The SSSG growth was driven by various demand-stimulating initiatives planned by the company such as launch of the McDonald’s app in Q4FY19, McSaver offer, free delivery during IPL and World Cup and the launch of McCafe rewards programme.

The company opened four new restaurants in Q1FY20, taking the total store count to 300 across 41 cities; added seven McCafe (taking the total count to 197). Annualised average revenue per store continues to show improvement (at Rs 49.2 million, 23-quarter high; up 10.5% y-o-y and 1% q-o-q). Ebitda declined 8% y-o-y to Rs 32.7 crore due to 180 bps y-o-y decline in Ebitda margins to 8.6%, primarily on account of 180 bps higher other expenses (higher upfront advertising expenses) and 30 bps higher employee cost even as GM expanded 30 bps y-o-y to 64.3%. Adj. PAT fell to Rs 5.8 crore (below estimate) on account of tax payout of Rs 2.3 crore.

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