Your taste buds are tantalising the business appetite for these stocks

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The hotels & restaurants are amongst the worst hit sectors due to Covid-induced localized lockdowns. Despite the lockdowns, Indians are not shying away from settling their taste buds. A while ago we witnessed people taking the dalgona coffee challenge and posting their creations over social media. Many of our social media feeds were filled with images of exotic culinary prepared by our friends at their homes. Similarly, food delivery volumes also picked across the country as more and more Indians have switched to ordering in to satisfy their palates.

The restaurant industry which is facing burnt of lockdown has a very bright future, as India’s spend on food consumption is 1/4th of India’s GDP. Of this only 10% is on food services (delivery and dine-out) vs. 54% for the U.S. and 58% for China. With much busier lifestyles, higher disposable incomes and quirky food choices this gap is going to narrow from here.

Growth appetite

According to a report released by Kotak Institutional Equities India’s organized food services market is expected to grow at about 10.5% CAGR to US$37 bn (Rs2.8 lakh crore) over FY2020-25E, capturing a 46% market share, up from 40% at present. Within the organized segment, chains can potentially grow at 13% CAGR to US$9.5 bn (Rs716 bn), capturing 12% share in the overall food services market and a 26% share in the organized food services market, up from 9% and 23%, respectively.

“Bottom-up analysis of the market opportunity for western QSRs (Quick Service Restaurants) across 541 districts in India indicates potential for over 50% store growth by FY2025E,” stated the report.

Improving store economics

The pandemic has compelled QSRs to aggressively review cost structures and variable costs (including employee costs) to the extent possible and even renegotiate rentals. Many chains have shut down underperforming stores. To improve the revenue models restaurants have introduced delivery fees and/or enhance the price gap between in-store menu and online menu (higher product price + packaging charges for delivery orders to partly cover delivery costs or commission paid to aggregators). Some QSRs have even switched to Delco stores (delivery + carry-out formats) and smaller store formats to optimize capex and rentals.

Menu for your portfolio

With the industry undergoing these structural shifts brokerages are is bullish on the following stocks.

Burger King India | Target price: 221 | Upside: 57%

According to Prabhudas Prabhudas Lilladher, Burger King India has a huge competitive advantage to capitalize on emerging growth opportunities given the exclusive pan India master franchise of Burger King, second-largest Burger brand globally. It enjoys the flexibility in tailoring menu, promotions and pricing offer and has fixed royalty at 5%. The company has adopted a cluster-based approach with faster scalability and operating leverage. Higher sales/sq ft and sales/capex (Rs31,093, 1.87x) than peers and the option of launching BK Café augurs well for the stock.

Westlife Development | Target price: Rs 535 | Upside: 15%

Edelweiss believes Westlife Development’s focus on brand extensions, cost management initiatives and diversification into newer segments would help it achieve sustainable high-single-digit SSSG (same-store sales growth) once market condition normalises. Further, gross margin improvement along with strong optimisation of fixed costs should lead to steady improvement in operating margin. We expect the company to resume its store expansion plans from Q2FY22E with emphasis on the high-margin low-cost McCafes and McDelivery hubs.

Jubilant Foodworks | Target price: Rs 3,200 | Upside: 7%

Kotak Institutional equities is of the opinion that Jubilant Foodworks outlook is brightened by several factors in the current environment 10-15% reduction in restaurant supply, lower discounting by aggregators, increase in digital adoption and ordering-in behaviour. The company is well placed to accelerate Domino’s store expansion powered by favourable externalities and improved economics. Investments in new brands (Popeyes, HK and Ekdum!), DP Eurasia and BBQ offer optionality. It has the potential to transition into a multi-brand QSR with unparalleled network benefits. The extent of its success hinges on its ability to enhance organizational capabilities.

In the kitchen

To capitalize on the future opportunities and serve their customers better more and more restaurant chains are heading towards Dalal Street to raise capital and strengthen the balance sheet. Devyani International, the largest franchisee of Pizza Hut, KFC and Costa Coffee, has filed a draft red herring prospectus (DRHP) with market regulator SEBI to launch a Rs 1,400-crore IPO.

Another company that has filled DRHP with SEBI and could be one of the IPOs to watch out for in 2021 is Zomato. The home delivery platform plan to raise ₹7,500 crore.

So while you order your favourite dishes keep the mollahs ready to invest in these stocks.