Are QSR cos bracing for another quarter of disappointment?

Devyani International Ltd's KFC same-store sales fell 3.3% compared with the drop of 7.9% in the Pizza Hut portfolio in the half-year ended September. (Image: Pixabay)
Devyani International Ltd's KFC same-store sales fell 3.3% compared with the drop of 7.9% in the Pizza Hut portfolio in the half-year ended September. (Image: Pixabay)

Summary

  • Inflationary pressures cooling off could mean better gross margin for QSR cos than six months ago

For investors in shares of quick service restaurant (QSR) companies, the menu looks rather insipid. Subdued demand had marred performance in the half-year ended September, and the December quarter (Q3FY24) appears to be following suit.

Analysts said a meaningful pick-up has not occurred despite it typically being a strong quarter amid tailwinds in the form of festivals. The ICC Cricket World Cup was also expected to boost sales this time around. But these events did not play out as envisaged. The previous year's higher base also contributed to the underwhelming same-store sales growth projections for Q3.

 

As per Antique Stock Broking’s interaction with channel partners, there was an uptick in demand during the festival days and on days when key matches were held (India playing the ICC World Cup). Note, the India matches were mostly scheduled on the weekends, which anyway sees better demand.

“Post the festive season and the World Cup, the demand momentum failed to sustain and footfalls were impacted across QSR companies," said Antique’s analysts in a report on 1 January, adding “Even during December last week (the highest revenue-generating week) footfalls were subdued compared to last year."

In this context, the KFC portfolio is likely to perform relatively better than pizzas, akin to the previous quarters. For perspective, Devyani International Ltd's KFC same-store sales fell 3.3% compared with the drop of 7.9% in the Pizza Hut portfolio in the half-year ended September. Intense competition is a key factor contributing to the weakness in the pizza segment. A big respite is not in sight for the pizza portfolio, at least in the near-term.

To be sure, all is not lost for QSR companies. According to Karan Taurani, analyst at Elara Securities (India), inflationary pressures have cooled off, which means a better gross margin than six months ago. “But the gains would not flow to the Ebitda level given the investment by QSR companies into promotional offers to propel better growth," said Taurani. The operating margin is also expected to face headwinds from network expansion.

For now, investors in QSR stocks are treading cautiously. Shares of Devyani, Sapphire Foods India Ltd and Westlife Foodworld Ltd saw a modest increase of 7%, 6% and 3%, respectively in 2023. In comparison, the Nifty 50 index rose 20%. Would returns in QSR stocks be mouth-watering in 2024? Well, that completely hinges on the extent of a rebound in demand.

 

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