PL Stock Report: Westlife Foodworld (WESTLIFE IN) - Company Update – Near term demand pressures, LT story intact - Downgrade to 'HOLD'

Westlife Foodworld (WESTLIFE IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd

Rating: HOLD | CMP: Rs958 | TP: Rs958

Company Update – Near term demand pressures, LT story intact

We cut FY24/25 EPS by 8.4/7.4% respectively although we remain positive on long-term growth story given brand moat and huge scope to increase penetration. WFL has bucked the trend of demand slowdown from the past few quarters, however there has been some softening in demand off late as consumers cut back on spending amidst higher food inflation. WFL is on a path of sustained growth with 1) success of Mcsaver value meal 2) sustained traction in chicken business in south and 3) ability to provide all day menu across breakfast, snack and meals. WFL is looking at makeover of McCafe with more food options and accelerated innovations in its core segments of Burgers, Chicken and coffee in 2H24 which is expected to provide sustained traction in festival season. We estimate Sales/EPS CAGR of 18.2%/30.6% over FY23-26. We assign DCF based target price of Rs958 (Rs932 earlier) with Hold rating (Accumulate earlier) with positive bias in LT.

♦ Demand under stress: Demand has come under stress in Q2 due to inflationary pressure with QoQ dip in consumer frequency of eating out which is likely to impact SSG. However, decline in inflation and new launches are expected to revive demand and improve sales during festive season in Q3.

♦ Increasing competitiveness from unorganized sector: Westlife is observing increase in competition from unorganized sector first time post covid. With inflation remaining at elevated levels consumers seem to be downtrading and moving towards lower valued meals offered by unorganized sector.

♦ RM prices remain under control: RM prices have been largely stable. WFL has not taken any price hikes as of now, although any unprecedented increase in inflation may lead to hikes to offset RM pressure.

♦ Value meal continues to gain traction: Rs179 value meals continues to bring in incremental footfalls led by increase in order frequency for the same. However, WFL does not have any plans to dilute pricing in value meals.

♦ Chicken continue to see healthy demand: Chicken continue to see robust demand in Q2, there is likely to be some new additions in the chicken menu led by innovations in fried chicken category, Westlife is committed to grab any new opportunity for market expansion in chicken category with shortlisting micro clusters for chicken market.

♦ McCafe to get new look, Q3 to see new addition in burger/chicken: McCafe is exploring a new look, new price points and menu innovations to compete with other standalone café chains. WFL is also looking at increased menu innovations in burger and chicken category in coming quarters.

♦ FY24 to incur capex of ~Rs2-2.5bn: FY24 is likely to incur capex of ~Rs2000mn-Rs2500mn with addition of 40-45 new stores. We expect 8-10 stores addition in 2Q24 and double digit addition in 3Q and 4Q as well.

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