PL Stock Report: Westlife Foodworld (WESTLIFE IN) - Q2FY24 Result Update – Poor sentiment hits demand, LT drivers intact - HOLD

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

Rating: HOLD | CMP: Rs883 | TP: Rs844

Q2FY24 Result Update – Poor sentiment hits demand, LT drivers intact

Quick Pointers:

♦ SSG growth slows amidst poor sentiment and high base, 3Q outlook better, however significant uptick to take time

♦ WFL to add 40-42 stores in FY24 with target of total 580-630 stores by CY27.

We cut FY24/25 EPS estimates by 20.8/23.3% following disappointing SSG of 1% and 7.1% decline in PAT in 1H24. While a bit of slackness can be attributed to high base but the impact of poor consumer sentiment and high inflation has resulted in a shift of consumer preference to other eating out options, which has impacted WFL. While WFL does not any inflationary pressures, reversal in demand trends will take some time.

Long term growth drivers remain intact with focus on 1) Burger, chicken and Coffee combos and Mcsaver meals 2) guidance of 580-630 stores by CY27 (40/45 in FY24) 2) menu innovations and limited edition launches from time to time 3) increased traction on fried chicken and 4) flexibility of format with relevance across Metros, Tier 1, Mid-tier towns and Highways. We estimate Sales/EPS CAGR of 16.1%/20.4% over FY23-26E., we expect back ended returns linked to improved consumer sentiment and demand recovery. Maintain ‘Hold’ with DCF based TP of Rs844 (Rs958 earlier).

Revenue grew by 7.4% and SSSG at 1%: Revenues grew by 7.4% YoY to Rs6.1bn (PLe: Rs6.4bn) SSSG at 1% V/S 7% in 1Q Gross margins expanded by 464bps YoY to 70.1% (Ple: 70.5%) EBITDA grew by 2.4% YoY to Rs982mn (PLe: Rs1092mn); Margins contracted by 78bps YoY to 16% (PLe:17.0%) Adjusted PAT declined by 29.1% YoY to Rs224mn (PLe: Rs325mn). Added 9 stores in Q2 taking total store count to 370.

Concall Takeaways: 1) Demand remains tepid as eat out category/consumer spending remains under pressure, though Q3 outlook looks better given festive season 2) Market share improved across geographies 3) Rising RM price to have minimal effect on gross margin with right cost optimization techniques & price hikes (taken in earlier quarters). 4) 2Q24 saw 1% SSG growth led by weak consumer sentiments & high base of Q2FY23 5) Menu innovation as per occasion and geography to further fuel the growth 6) Shravan special menu saw good amount of traction and brought incremental footfalls to 7) Fried chicken is doing exceptionally well in south region with high customer recall. 8) Beverages and desserts are gaining traction led by menu innovation such as Oreo softies 9) All stores to be in EOTF format by 2027 except drive-through. 10) Westlife to add 40-45 stores in FY24, with no major closure & 580-630 store by 2027.11) Better mix & cost optimization techniques led to higher GM in Q2, similar trend is expected to continue in 2H 12) Digital sales are 67% of the total led by strong kiosk sales 12) WFL is looking at adding 40-50 stores under EOTF in FY24, however drive- thru and food court based stores will not have EOTF. 14) Store expansion to majorly come from south region followed by western markets 15) FY24 capex expected to be of Rs2bn-Rs2.5bn.

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