Westlife Development Ltd - Research Report
Private Client Research
Rating
Buy
Sector
Finance - Others
Company
Finance - Others
February 01, 2020
Sensex: 39735.53
CNX Nifty: 11661.85
NSE: WESTLIFE
BSE: 505533
Reco Price
Rs. 438.00
Price Target (1 Year)
Rs. 616.00
Upside
40.63%
Date
February 01, 2020
Sensex
39735.53
CNX Nifty
11661.85
Exchange
Code
NSE
WESTLIFE
BSE
505533
Stock Data
CMP (Rs)
438.95
Face value (Rs)
2
52 Week Range (Rs)
457.55 - 261.45
Market cap (Rs Crores)
6837.42
Price To Book Value (x)
11.69
P/E Ratio (x)
280.82
EV/EBIDTA (x)
32.85
One Year indexed Stock Performance
Westlife Development Ltd
Sensex
Return (%)
1m
3m
12m
36m
Absolute
27.73
26.09
15.62
95.31
Sensex
-3.80
-1.07
8.96
41.20
Shareholders
(in %)
31-Dec
Promoter
62.14
Public
37.86
Others
0.00
Total
100
+91 22 6639 3000
research@stockaxis.com
Profile
Westlife Development Limited (WDL) focuses on establishing and operating McDonald’s restaurants across West and South India, through its wholly owned subsidiary Hardcastle Restaurants Pvt. Ltd. (HRPL). Hardcastle Restaurants was established as a joint venture between Westlife Development and the McDonald's Corporation in 1995. Hardcastle Restaurants opened its first McDonald's restaurant in 1996. The joint venture was converted into a master franchisee in 2010. HRPL operates more than 315 McDonald’s restaurants (as of September 2019) across 42 cities in the states of Maharashtra, Karnataka, Telangana, Gujarat, Tamil Nadu, Kerala, Chhattisgarh, Andhra Pradesh, Goa and parts of Madhya Pradesh, and provides direct employment close to 10,000 employees. HRPL constantly focuses on customers by managing operations at the local level, including marketing campaigns and special offers, menu management and limited time offers and monitoring customer satisfaction. HRPL generates revenues primarily from sales by company-operated restaurants. McDonald’s operates through various formats including standalone restaurants, drive-thru, mall food courts, and dessert kiosks. It also has three thriving brand extensions – McDelivery, McCafe and McBreakfast.
Source: Company, Stockaxis Research
Brand extensions will lead to improve profitability
Innovative menu to lead growth:
Indian consumer’s taste has evolved over the years after tried various cuisines.
Indians have tended to change restaurants on basis of taste, and Indian taste in
foods has widely appreciated. WDL has also kept consumers preference in mind and
have extended their menu which is Glocal menu, i.e. Global + local. Glocal menu
is fusion of local and global taste. In their Glocal menu they have launched many
items in past such as, Mexican aloo wrap, Dosa masala brioche, Spicy Rice bowl and
Chicken kebab burger etc. Such varied menu will help to lead growth and add new
customers and also allows existing customers to shift according to their preference.
Exhibit 1: Innovative menu
Source: Company, Stockaxis Research
Selective store selection and addition to boost revenues:
WDL has a medium term plan, “Vision 2022” in which WDL wants to double
its stores in range of 400-500 in 2022. WDL has started acceleration in terms of
store additions since FY20. Usually WDL had added around 15-16 stores in a year,
but in FY20 they started acceleration in store additions and have added 19 stores
in nine months which takes total count of stores to 315 stores in operation as on
31st December 2019. We believe that WDL’s “Vision 2022”
is on track and the momentum of store additions will continue in Future. Apart from
just adding stores, WDL is also keen in selecting proper location for the store.
As on date 93% of its stores are located in Maharashtra, Karnataka, Gujarat, Tamil
Nadu and Telangana. Top seven cities account for 76% of total stores and 60% of
its addition of stores would be in these top seven cities. This is a cluster approach
where company tries to gain market leader status region wise than just widening
its reach. We believe this approach will help WDL to drive sales, SSG and will help
to achieve their topline target of Rs.20-25 bn.
Exhibit no 2: Vision 2022
Source: Company, Stockaxis Research
Brand extensions:
WDL management’s vision of 1+1+1=5 is really playing out very well for WDL,
consistent focus on building and expanding its brands such as; McDelivery, McCafe
and McBreakfast along with menu innovation and new design of store is been backbone
of growth of WDL. WDL has evolved these brands and have expanding its footprint
very well. These formats have been accepted very well by customers and it is turning
in favor of WDL. Each brand is performing very well in its segment; McDelivery is
now available to 258 stores as on 31st December 2019. McDelivery constitutes
18% of total sales as on FY19 which was 10% in FY16.Technology is a key driver for
increasing delivery orders; as the user friendly app helps consumers to order with
ease, Data analytics and Digital marketing has helped for targeting consumers very
well. We believe McDelivery is a competitive edge over other chains as Burger king
and KFC are largely dependent on other Food aggregator’s i.e. Swiggy and Zomato.
EOTF Stores:
As McDonald’s is largely Dine-in model, in-store experience is very important
from the customer’s point of view. WDL has consistently understood consumer’s
wants, although food menu is important but convenience, ambience and store décor
is important too. Hence one year ago, WDL had started transforming some select store
into EOTF stores i.e. ‘Experience the future stores’. EOTF store is
completely different than normal store; it has a new design, new menu, self ordering
kiosk’s etc. At Global level McDonald’s wants to convert its 1/3rd
of the stores into EOTF. We believe in India EOTF stores are unique in nature and
will attract lot of new customers. The first kiosk was installed at the outlet in
CR2 Mall at Nariman Point, Mumbai in March 2017. As on FY19 total count of EOTF
is at 25 stores, WDL expects to increase it to 80-100 stores by FY2022.
Exhibit no 3: EOTF Store
Source: Company, Stockaxis Research
McCafe is another growth driver: WDL started its first McCafe in 2014, with a aim to tap coffee market in India. As the Café culture is growing rapidly and it is expected to grow by 20% CAGR in FY16-FY22 as per Crisil. Introduction of McCafe’s into existing stores is very cost effective for company. Company easily cross sells its McCafe’s products to each of the customer. Customers have accepted the products of McCafe very well, in last 5 years company has widened its reach to 218 McCafe as on 31st December 2019. McCafe has sold around 10 million cups of coffee in last 5 years. McCafe sales have increased 8x in last 4 years, Due to presence of McCafe total sales of the store has increased by 2x in last 4 years. WDL has leveraged McCafe’s brand very well and it has not restricted its entry just to Coffee, it has also started a wide range of products such as Smoothies and Ice tea, Ice splashed beverages and Shakes. For WDL, McCafe is a margin accretive business which has evolved very well and it is one of the preferred coffee destinations. Even the data suggests that McCafe has gained some market share as McCafe has grown in double digit and CCD is posting weak single digit SSSG. We expect strong growth would continue which will be led by, consumption trend, various marketing trend, leveraging customer base of McDonald’s and relatively value-for-money portfolio as compared to Starbucks and CCD.
Exhibit no 4: McCafe stores
Exhibit no 5: McCafe Product
Source: Company, Stockaxis Research
Industry
Indian Quick selling restaurant industry
The Indian Restaurants and Food Services Industry has continued to expand at a healthy
pace, aided by y-o-y growth in the incomes and largely unaffected by the prevalent
economic scenario that has slowed growth in sectors like manufacturing and infrastructure.
The market size of the Indian restaurants and food services industry stands at Rs
3.7 trillion as of 2018 registering a y-o-y growth of about 10% and a CAGR growth
of 8.4% between 2013 and 2018. The Indian restaurant and food service industry comprises
two distinct segments: organised and unorganised. The organised segment accounts
for about 30-35% of the industry, while the unorganized segment accounts for the
remaining 65-70%. The organised segment is characterised by an organised supply
chain with quality control and sourcing norms with multiple outlets having standardised
designs. The unorganised segment lacks technical standardisation and a structured
supply system or business practices. Quick services restaurants (QSRs) and casual
and fine dining restaurants account for about 75-80% of the organised segment, followed
by cafes & bakery and pubs, clubs, bars, and lounge (PBCL) accounting for about
8-10% and institutional catering and kiosks with 13-15% share in the organised market.
CARE Ratings expects the restaurant and food service industry to register a growth
of about 10.4% CAGR for the next 5 years between 2018 and 2022 to reach Rs 5.5 trillion
by 2022. The growth will be supported by long term healthy demand outlook backed
by higher disposable income, favorable demographics and rising aspirations of the
burgeoning middle class, increasing internet penetration, increasing number of women
joining the workforce, increasing focus on health and wellness, technological advancements
and growing urbanization.
Quick Service Restaurants are special kinds of restaurants and form an integral part of the Indian Food Service Industry. The quick service restaurants or the QSRs have both fast food cuisines and minimal table services to cater to the needs of various youngsters and working professionals. The differentiating factor of these restaurants is the quick deliveries of food items which are an essential component for the working population of a developing country like India. QSRs generally target people in the age bracket of 16-35 years, as this is the age bracket interested in tasting new cuisines and having fast foods every day.
The QSR segment though is a very significant segment of the Indian Fast food services
but is comparatively nascent and has a lot of scope for growth in India. In India,
a large number of international QSRs have established their outlets with franchise
rights of various companies. Indian QSRs are also coming up and expanding but foreign
brands maintain their dominance. McDonalds was the first QSR in India followed by
various others like KFC and Dominos.
The market experiences various growth drivers and is therefore expected to rise
in the future as well. Increased urbanization, modernization and commercialization
do not leave time with the working professionals and hence they rely on fast food
for their meals. Moreover, the modern women of India are also busy working in various
industries which decreases the time they get for preparing home cooked food. This
makes the whole family depend even more on fast foods. The availability of cheap
labor makes India a favorable ground for the development of QSR Industry.
Source: CARE Ratings, Research and markets
Profit & Loss Statement:- (Consolidated)
(Rs Crores)
| DESCRIPTION | 17-Mar | 18-Mar | 19-Mar | Mar-20 E | Mar-21 E | Mar-22 E |
|---|---|---|---|---|---|---|
| Net Sales | 930.79 | 1134.87 | 1401.61 | 1641.50 | 1987.50 | 2349.00 |
| % Growth | 11.70% | 21.90% | 23.50% | 17.10% | 21.10% | 18.20% |
| Food & Paper Cost | 366.31 | 424.97 | 505.52 | 577.81 | 689.66 | 796.31 |
| Gross Profit | 564.48 | 709.90 | 896.09 | 1063.69 | 1297.84 | 1552.69 |
| Gross Profit Margin(%) | 60.60% | 62.60% | 63.90% | 64.80% | 65.30% | 66.10% |
| Employee Cost | 140.73 | 171.55 | 197.11 | 229.81 | 278.25 | 333.56 |
| Operating & Establishment Expenses | 176.84 | 207.75 | 245.10 | 262.64 | 318.00 | 378.19 |
| Advertisement & Sales Promotion | 54.66 | 62.97 | 75.39 | 88.64 | 109.31 | 131.54 |
| Other Expenses | 145.29 | 190.27 | 257.84 | 270.85 | 333.90 | 399.33 |
| Total Expenditure | 883.84 | 1057.52 | 1280.97 | 1429.75 | 1729.13 | 2038.93 |
| EBITDA | 46.95 | 77.36 | 120.64 | 211.75 | 258.38 | 310.07 |
| Growth(%) | 10.10% | 64.80% | 55.90% | 75.50% | 22.00% | 20.00% |
| EBITDA Margins(%) | 5.00% | 6.80% | 8.60% | 12.90% | 13.00% | 13.20% |
| Depreciation | 63.72 | 67.26 | 79.72 | 119.57 | 125.55 | 129.32 |
| EBIT | -16.77 | 10.10 | 40.93 | 92.18 | 132.82 | 180.75 |
| Other Income | 20.03 | 17.77 | 16.07 | 15.50 | 18.50 | 23.50 |
| Interest | 15.38 | 15.01 | 17.73 | 79.79 | 83.78 | 88.81 |
| Profit Before Taxation & Exceptional Items | -12.10 | 12.90 | 39.30 | 27.90 | 67.50 | 115.40 |
| Exceptional Income / Expenses | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Profit Before Tax | -12.00 | 13.00 | 39.00 | 28.00 | 68.00 | 115.00 |
| Provision for Tax | 0.00 | 0.00 | -1.00 | 7.00 | 17.00 | 29.00 |
| Profit After Tax | -12.12 | 12.86 | 40.30 | 20.92 | 50.66 | 86.58 |
| PATM (%) | -1.30% | 1.10% | 2.90% | 1.30% | 2.50% | 3.70% |
| Earnings Per Share | -0.80 | 0.80 | 2.60 | 1.30 | 3.30 | 5.60 |
| Adjusted EPS | -0.80 | 0.80 | 2.60 | 1.30 | 3.30 | 5.60 |
Source: Stockaxis Research, Company Data
Valuation
WDL is one of the players to benefit from growth of QSR Industry, and growth of QSR industry. QSR Industry is pegged to grow by 10% CAGR. We believe WDL’s growth momentum would continue to grow on the back of innovative menu, extended brands, new store designs etc. WDL can gain higher market share with the help of its competitive advantage in terms of delivery and better market penetration over other burger chains. We also expect that several steps implemented in union budget will lead to boost consumption and WDL would be one of the players to be benefited with the uptick in consumption. We initiate a Buy on Westlife Development limited and expect price appreciation of 40%.