Quick service restaurants in India to see flattish Q2 on distressed economy
Quick-service restaurants in India will see a flattish revenue growth and a sharp decline in profits in the coming quarter of the financial year, said HDFC Securities, echoing the commentary coming from the industry in recent weeks.
Among the players, Westlife Foodworld is seen as doing comparatively better, while Jubilant Foodworks, which operates India’s largest pizza chain Dominos, is likely to fare the worst, the broker said.
HDFC Securities said Westlife Foodworld is the only restaurant chain that has showcased at least average performance in the second quarter of the financial year, with a sequential improvement of 3.2% on the top line and 2.2% on the operating profit level, said the broker.
Jubilant, on the other hand, is seen as reporting a sharp 10% fall in its operating profit compared to the year-ago period, while sales are seen up 3.8% on the year.
Devyani International Ltd and Sapphire Foods, meanwhile, are expected to report performances that are between these two extremes.
On a year-on-year basis, both of them will see 14-15% growth in sales and flattish operating revenue, HDFC Sec said. Compared to the first quarter, however, Sapphire Foods — which operates fast food chains like Taco Bell, KFC, and Pizza Hut— will see a sharp fall of 12% in its operating profit.
Among the factors supporting a sequential improvement in profitability is relatively steady raw material prices during the second quarter compared to the first quarter.
“However, with weak same store sales growth, we expect pressure on return on margin and EBITDA margin to sustain,” the broker said.
The deterioration in the growth of the QSR industry is due to a sustained demand deceleration over the past few quarters. Inflation, particularly in the prices of dairy items such as cheese, has caused consumers to stay away from food items like Pizza and look for more affordable options posing a challenge for the QSR industry.
Outlook
In the coming quarters, the broker expects better revenue growth from restaurants supplying burgers and fried chicken. “Demand recovery in Q3FY24 will be a key monitorable, with the festive season and the World Cup benefits around the corner. On a relative basis, we expect better revenue metrics for McDonald’s and KFC and weaker revenue metrics for Domino’s and Pizza Hut,” HDFC Sec said.
But for the sector as a whole, the poor performance is expected to continue or even worsen in the coming months.
The broker also noted that the fast food industry in India is likely to cut down on the number of new store openings, even though they will remain committed to their long-term target of rapid store expansion.
HDFC Securities said it remains optimistic about the long-term potential of the sector, but it also sees some turbulence in the short term.
“We believe that the QSR industry has multi-year growth potential, given India’s rising consumer base, eating-out frequency, quicker delivery and value-for-money proposition. However, given high inflation impacting consumer wallets, we do not expect growth recovery anytime soon.”, it said.