The quick-service restaurants (QSR) are in a sweet spot to tap the growth in the Indian foodservice industry, with Covid acting as a strong tailwind, say analysts. While they expect Jubilant Foodworks, the master franchisee for Domino's Pizza in India, to be the most profitable and efficient of the lot, its expensive valuations at 177x FY21 P/E is a key concern. They, however, find more comfort in Burger King India amid expectations of swift expansion in topline and margins.
Going one step ahead, analysts at Motilal Oswal Financial Services (MOFSL) expect Burger King India to rise as much as 117 per cent in the next three years. They have a target price of Rs 365 per share, assuming 25x multiple.
"Burger King will enjoy an attractive opportunity for both topline and margin expansion, led by a big shift in its business model through the introduction of 'barbell' product strategy and BK Café. In addition, aggressive store network expansion and capped royalty rate will also be key drivers of EPS growth," the brokerage said in its coverage initiation report. It assigned a BUY call on Burger King with a one-year target price of Rs 210.
Burger King has been posting losses for some time now due to its young store network and fast pace of expansion, but that did not deter investors from lapping shares with both hands at the time of its initial public offer (IPO) in December 2020. The IPO was subscribed 156 times and the stock had listed at a 92 premium.
In fiscal 2020-21 (FY21), the company reported a net loss of Rs 174 crore. Analysts at MOFSL, however, believe Burger King India could turn profitable by FY23E, with return ratios also expected to improve. "We expect Burger King to generate a strong OCF in the years ahead. It is likely to record negative free cash flow (FCF) due to high investments needed for store additions," the brokerage said.
Burger Kings's same-store sales growth (SSSG) have been volatile. SSSG was a strong 12 per cent in FY18 and 29 per cent in FY19 before being flat, down 0.3 per cent in FY20 mainly due to economic slowdown and Covid-led impact.
Analysts at ICICI Securities expect Burger King to show a strong growth in the medium-term and estimate 21 per cent revenue CAGR over FY20-FY24E, driven by accelerated store expansion and menu innovation. The brokerage has initiated coverage on the stock last week with a discounted cash flow (DCF)-based target price of Rs 200. "We believe the flexibility around three key business aspects (menu, pricing and supply chain) along-with QSR industry’s expected growth of 23 per cent CAGR over FY20-FY25P are key growth drivers," it said.
With its 'barbell' strategy, Burger King has positioned itself as value-focused but is also focusing on premium products. Its signature Whopper range is priced upwards of Rs140 which is much higher than the high volume entry-level product price of Rs 45. This offers potential for premiumization-led topline growth and margins as per analysts. Its gross margins at 65-66 per cent are already close to those of Westlife Developments (~66-67 per cent) despite the absence of a coffee offering.
While the management has guided for gross margins of 66 per cent and 68 per cent in FY22/FY24E, there exists the potential for an upside to the guidance as it does not account for the positive impact of BK Café, analysts at MOFSL noted. The gross margins expansion, coupled with capped royalty rates, and declining rentals and overheads, are expected to drive an expansion in the EBITDA margins as well, it added.
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