Deteriorating metrics in H2FY23 for Indian Retail Sector: IIFL Securities

5 Jun 2023 , 11:03 AM

While FY23 was again a strong year for the QSRs with revenue growing in the range of 13-23% on 4yr Cagr basis (YoY growth was much higher). However, on deep-dive one realises that majority of this was driven by aggressive store additions; ADS growth across the industry was muted. Moreover, Q4FY23 ADS for the industry declined YoY (demand slowdown and competition). Similar story played out in margins where Q4FY23 margins declined YoY across players, but expanded for FY23. JUBI underperformed with contraction in both Q4FY23 and FY23 margins. Westlife bucked the trend with positive SSSG and margin expansion.

Store opening

• In FY23, listed QSR players added 1,239 stores. This was on the back of strong addition of 1,065 outlets in FY22. Store growth accelerated significantly across players, despite demand slowdown in 2HFY23.
• Devyani clocked the highest store growth of 34% YoY (25% in FY22), followed by 30%/22% for Sapphire/Burger King. Store 4yr Cagr forDevyani/Sapphire/BK stood at 20%/18%/22% in FY23.
• Store growth for Westlife jumped to 8% YoY from 1% in FY22; but has been the lowest in the industry. It added 31 stores on net basis in FY23 vs 76 Burger King (BK) additions.
• Devyani continues to open higher number of stores on cumulative basis than Jubilant; 66 vs 61 in Q4FY23 and 305 vs 249 in FY23.
• In KFC, store growth YoY was higher for Devyani in FY23 (36% vs 30% for Sapphire). However, in Pizza Hut (PH), store growth for Sapphire was higher (33% vs 29% for Devyani).
• Accordingly, the mix of PH in Devyani fell to 51% (from 53% in FY22) and increased to 46% for Sapphire (45% in FY22).

Revenue/ADS performance

• On 4yr Cagr basis, revenue in FY23 grew the highest for Devyani and Burger King at 23% each — followed by 17% for Sapphire.
• But this was driven largely by store addition, as ADS growth was muted at 3% for Devyani and flat for Sapphire/BK on 4yr Cagr. JUBIADS growth was also flat, while being 1% for Barbeque. Westlife posted the highest ADS growth of 8% on 4yr Cagr.
• Moreover, exit rate of ADS growth was negative across players for Q4FY23. JUBI and Barbeque posted ADS decrease of 7%/6% YoY.
• Similarly, Devyani and Sapphire ADS fell on YoY basis with core brands of KFC and Pizza Hut declining in similar range of 6-10% for both companies in Q4FY23.
• Westlife and BK India bucked the trend, posting positive ADS growth of 12% and 7% respectively in Q4FY23.
• In FY23, 3% SSSG of Dominos on 4yr Cagr was above the 0%/-1% for Pizza Hut Devyani/Sapphire.
• For Sapphire, KFC’s 7% SSSG on 4yr Cagr was above Devyani’s 4%.

Cost and margin performance

• Barring JUBI, all QSR companies posted YoY expansion in pre-IndAS margin in FY23 with Westlife seeing the maximum expansion of 515bps. Margins for JUBI contracted by 185bps YoY.
• However, exit rate pertaining to Q4FY23 margins was poor across players, contracting by 300-500bps YoY. But with Q4 margins expanding by 200bps YoY, Westlife bucked the trend.
• Similarly, Ebitda per store for FY23 improved YoY across players; but fell sharply in Q4FY23. For JUBI, Ebitda per store decreased by 14% YoY in FY23 and by 35% YoY in Q4FY23.
• For Westlife, there was a very sharp spike in employee costs per store of 38% YoY in Q4FY23. Similarly, Other expense per store grew by 7% YoY. Despite this, Ebitda per store grew by 37% YoY — largely due to increase in gross profit per store by 18%.

Capex per store/return performance

• Westlife capex (adj. for change in CWIP) divided by gross new stores came in at Rs71mn vs Rs36.1m in FY22; and was even higher than Barbeque’s Rs35.9mn.
• Sapphire’s capex per store of Rs22mn increased by 14% YoY and was 57% higher than Devyani’s (52% higher in FY22).
• At 35%, ROIC for JUBI fell sharply in FY23 from 53% in FY22. Westlife saw sharp improvement to 21% from 5%.