Fast Food Restaurants Hope For Gradual Demand Recovery After Soft Demand

The quick-service-restaurant sector has observed large underperformance in the last financial year. After a robust run over in fiscal 2022 and the first half of fiscal 2023, revenue growth of the QSR brands moderated from the second half of 2022–23 due to subdued demand as well as competition from food aggregators. The third-quarter results of the last fiscal across the sector saw continued weakness in topline and bottom-line growth, accompanied by weak market sentiment.

Weaker demand on the back of elevated inflation has been one of the main reasons cited by companies. According to the third-quarter results posted by companies, the industry-wide demand trend remained challenging despite moderation in inflation. The dine-in footfall remained lower and management commentary said that demand dipped further after Deepavali.

Despite a weaker base and an additional day due to the leap year, the same-store sales growth is also expected to remain muted in the fourth quarter of fiscal 2024. The slowdown in the QSR industry has turned out to be more prolonged than previously anticipated, according to Kotak Securities.

Zomato Ltd. and Swiggy have rapidly expanded their presence in India, reaching even small restaurants.

Zomato's monthly active restaurant partners surged from 61,000 in fiscal 2019 to 2.54 lakh in the December quarter of fiscal 2024, while Swiggy boasted 2.72 lakh active restaurants by fiscal 2023. The growth has broadened their customer base, particularly benefiting smaller eateries.

However, BNP Paribas Exane Research suggests that this expansion is dampening QSR sales as increased options from food delivery platforms lead to sales fragmentation. This is likely playing a part in the weakness in the average daily sales of the QSR industry, besides the general weakness in demand, it said.

Major QSR companies have also seen a shift in market share. Jubilant FoodWorks Ltd. has been under the most pressure, with its share contracting 200 basis points from 35.1% in the first quarter of fiscal 2023 to 33.1% in the third quarter of fiscal 2024. Westlife Foodworld Ltd. and Barbeque Nation Hospitality Ltd. were also the companies that lost market share over the same period.

Devyani International Ltd., Sapphire Foods India Ltd. and Restaurant Brands Asia Ltd.'s Burger King division saw an expansion in market share.

Kotak observed that while predicting the exact timing of recovery is challenging, it anticipates the downturn to conclude soon. The brokerage expects recovery to start from the second half of fiscal 2025.

Kotak highlighted that the sequential improvement in the same-store sales trends of Domino's, operated by Jubilant in India, in the fourth quarter is encouraging and gives hope for a bottoming out and gradual demand recovery in the current fiscal.

Among the QSR companies, Sapphire Foods is Kotak's top pick due to lower earnings risk and reasonable valuations, followed by Devyani International.

Companies have not reduced their store-opening guidance and remain hopeful for a gradual recovery as well, despite the soft demand scenario and underperformance.

"Current slowdown appears cyclical, mirroring the impact of inflation on mass discretionary consumption and doesn't change our outlook of (the) food service industry," Jubilant FoodWorks said in its Q3 earnings call.

Devyani International also said that weak consumer sentiment and depressed consumer spending would be short lived as it expects recovery over the next few quarters.

Nuvama does not think that the reason for the structural slowdown in the industry is on the back of higher penetration and competition owing to food delivery apps. The brokerage said that if demand at the lower end normalises, the QSR companies would benefit.

Nuvama said the excessive amount of store additions over the last two years weighed on industry margins, but the brokerage now sees signs of moderation, which would benefit QSR margin.

Nuvama said the share prices of the QSR companies have almost halved since their peak in 2021 and, hence, offer an attractive entry point.

For example, the share prices of Barbeque Nation and Restaurant Brands now trade 73% and 52% lower from their all-time highs respectively.

Valuations of the profit-making QSR companies also stand lower from their peak.

Jubilant FoodWorks' price to earnings ratio currently stands at 89.15, compared to its peak of 165.87 in fiscal 2021. The current P/E for Sapphire Foods stands at 38.52 compared to 190.5 in fiscal 2021, according to Bloomberg.

Devyani International, Sapphire Foods and Westlife Foodworld have the highest number of 'buy' calls, with 85% of analysts tracking Sapphire Foods being bullish on the counter.

Analysts are equally bearish and bullish on Jubilant FoodWorks with 17 buy' and 'sell' calls each. The average of 12-month analyst price targets stands highest for Restaurant Brands and lowest for Westlife Foodworld.