Emkay Global Financial Services Ltd has initiated coverage on Westlife and said the company has superior unit economics – about 30-40% higher revenue per store – relative to peers
Shares of Westlife Development Ltd are trading around ₹510 apiece, flirting with their annual highs. Westlife owns Hardcastle Restaurants Pvt. Ltd, the master franchisee of McDonald's restaurants in west and south India.
The company has seen a consistent recovery in revenues every quarter in the financial year 2021. “Revenues should recover to 100% in the March quarter," said an analyst requesting anonymity. In the December quarter, Westlife curtailed the drop in revenues to nearly 25% year-on-year. Recall that revenues had declined by 75% and 48% year-on-year, respectively, during the June and September quarter.
Amit Jatia, vice chairman, Westlife told analysts from Motilal Oswal Financial Services Ltd, “The company entered the covid-19 lockdown with a strong focus on costs – this means that it is likely to exit FY21 with no cash loss. Cost savings are expected to continue post-covid."
Note that in the December quarter, Westlife had clocked an earnings before interest, tax, depreciation and amortization (Ebitda) margin of 10% even as revenues declined.
As such, Emkay Global Financial Services Ltd has initiated coverage on Westlife and they remain gung-ho on the latter’s prospects. The brokerage said Westlife has superior unit economics – about 30-40% higher revenue per store – relative to peers. This is supported by value pricing and strategies aimed at increasing in-store visits and offering complementing menus.
“Recent initiatives on digital could provide a further fillip," added Emkay. Further, there appears to be scope for expansion in Westlife’s Ebitda margin. According to Emkay, “In the past five years, Westlife’s operating margins expanded 700 basis points to 9%, driven by product mix changes and cost efficiencies. Margins are still sub-optimal in spite of higher sales and gross profit per store versus peers." One basis point is one-hundredth of a percentage point. Emkay estimates Westlife to record sales/Ebitda growth of 10%/20% in FY20-24E, despite the Covid-19-induced disruption in FY21 (16% sales CAGR ex-Covid).
Having said all of this, it’s worth noting that covid-19 cases have been rising lately. Thus, a key risk remains how covid-19 unlocking pans out. This would determine how the recovery in sales shape up in the coming days.
Furthermore, the sharp appreciation in Westlife’s shares already may well limit meaningful upsides in the near-to-medium term. The Westlife stock has appreciated as much as 48% from 1 January 2020. Based on Bloomberg data, the shares trade at an EV/ Ebitda of 32 times based on financial year FY2022 numbers. To be sure, valuations are not particularly cheap.