The Next Multibagger Stock Could Come from this Sector

• India has always been a consumption economy due to the huge demographic dividend we have in terms of our population.
  
  Mc Donald's has only 500 stores in India, while Domino's Pizza has only 1,500 stores in India.
  
  The scope is huge. I say this for two reasons. First due to the under penetration, the scope of expansion is massive. Second, due to rise in India's income levels more people will eat out regularly. This will be the cause of a huge boom in QSR sales.

This is what we wrote recently in one of our editorials.

There was a time when quick service restaurants (QSRs) and food delivery companies were investors' favourite stocks.

Blockbuster IPOs by Zomato and Burger King India were proof of that. When both these companies came out with their initial public offers, the IPO market was red hot. Both IPOs received a strong response and a bumper listing.

Despite making losses in the last three years, and reserves on its balance sheet also negative, the IPO of Burger King was over-subscribed 157 times!

Investors were hooked on the idea that India is a young and emerging country. Assuming millions of Indians would consume increasing amounts of pizzas and burgers for decades, it only seems logical that the companies will do well over the long run.

Despite a bumper listing, share price of Zomato and Burger King India (now renamed as Restaurant Brands Asia) kept soaring higher. Those who did their research shared a sense of disbelief about the stock prices.

And rightly so. Things took an unexpected turn soon enough. In early 2022, QSR companies took a big hit to their share prices.

Both stocks came tumbling down rapidly. Zomato was severely affected while the fall in Burger King was in line with the broader market.

However, as things stand now, QSR and food delivery companies have seen a good recovery in share price as well as their financials.

In the most recent June 2022 quarter, almost every QSR company has posted good growth and also laid out plans to open up new stores.

We believe this sector could boom in the next 3 years.

Let's take a look at individual companies in this space and their recent performance.

# Restaurants Brands Asia (Burger King)

After touching a low of Rs 87 in May 2022, share price of Burger King currently trades at Rs 133. The company has seen a swift recovery in the past two months.

As the national master franchisee of the Burger King brand in India, the company has exclusive rights to develop, operate, and franchise Burger King branded restaurants.

Restaurant Brands' shares made their stock market debut on 14 December 2020 and were listed at a 92% premium whereas the stock closed 130% higher on its first day of trading.

The issue was the second most subscribed IPO of 2020 as it was subscribed 156 times.

In 2022, raw material costs increased as supply chains were affected, and the rupee depreciated to 80 against the dollar. This added to cost pressures for Restaurants Brands.

But as the stock market recovered, Restaurants Brands followed suit and rose from its lows.

What gave a boost to sentiment was the company's plan to expand its network by adding outlets in this financial year.

In financial year 2021-22, the company had 315 outlets (265 in 2021). This number is set to increase to 390 by end of financial year 2022-23 and further to 470 in the subsequent year, according to reports.

On the financial front, take a look at the table below to see how the company has fared on a yearly as well as quarterly basis.

Financial Snapshot

	Yearly			Quarterly
Rs m, standalone	Mar-20	Mar-21	Mar-22	Mar-22	Jun-21	Jun-22
Sales	8,412.4	4,944.5	9,437.1	3,997.90	2,976.12	4,892.22
Operating Profit	1,096.0	434.7	1,107.0	297.74	156.41	422.32
OPM (%)	13%	9%	12%	7%	5%	9%
Profit after tax	(765.7)	(1,739.1)	(929.5)	(815.4)	(647.5)	(508.9)
Total debt	1,985.2	0.0	0.0	-	-	-

Data Source: Ace Equity

To know more, check out Restaurant Brands' financial factsheet and its latest quarterly results.

# Devyani International

Devyani International was listed in August last year and its performance for the next 3 months was subdued.

The company had its fair share of hiccups as the global stock market selloff dampened sentiment. However, of late, shares of the company have seen an upward trend and rose to the highest share price since listing last week.

Devyani International is the largest Franchisee of Yum! Brands and operates the highest outlets of KFC, Pizza Hut, and Costa Coffee in India.

The company is the largest operator of QSR chains in India. In the June 2022 quarter, it achieved an important milestone of reaching 1,000 stores. 25 years to get to this important landmark!

It plans to double this store count in 4-5 years.

In June 2022 quarter, Devyani delivered strong numbers as strong store additions coupled with early signs of demand revival supported growth.

In June 2022, Devyani's revenue doubled to Rs 7.1 bn while EBITDA rose 167%.

The strong performance was also aided by its top brands contributing the maximum. KFC posted the highest average daily sales per store (ADS), surpassing pre-pandemic levels. While Pizza Hut also posted a 30% same-store sales growth (SSSG) with a sequential improvement in ADS.

Financial Snapshot

	Yearly			Quarterly
Rs m, consolidated	Mar-20	Mar-21	Mar-22	Mar-22	Jun-21	Jun-22
Sales	15,163.9	11,348.4	20,840.1	5,907.5	3,527.5	7,047.2
Operating Profit	2,301.1	2,524.5	4,903.1	1,420.6	615.2	1,736.8
OPM (%)	15%	22%	24%	24%	17%	25%
Profit after tax	(1,216.7)	(552.1)	1,563.4	763.9	(288.8)	738.5
Total debt	5,440.9	4,633.3	1,324.8	-	-	-

Data Source: Ace Equity

Going forward, the company will continue to develop its store footprint and invest in technology to enhance digital competence, its FY22 annual report read.

# Sapphire Foods

Sapphire Foods was listed in November last year. The company's shares currently trade near the same level as listing price.

The company is one of the largest franchisees of Yum! Brands Inc. in the subcontinent, and operates more than 400 KFC, Pizza Hut, and Taco Bell restaurants across India, Sri Lanka, and the Maldives.

As of March 2022, the company has 576 outlets (437 in 2021). This outlet count is set to increase to 723 stores by end of this year according to the company's management.

In financial year 2021-22, the company saw a sharp rebound in sales with monthly run rate of sales surpassing pre-covid levels. Subsequently, margins also improved compared to pre-covid levels.

Financial Snapshot

	Yearly			Quarterly
Rs m, consolidated	Mar-20	Mar-21	Mar-22	Mar-22	Jun-21	Jun-22
Sales	13,404.1	10,196.2	17,215.7	4,968.3	3,030.5	5,462.7
Operating Profit	1,969.1	1,860.2	3,430.0	1,095.6	449.6	1,162.9
OPM (%)	15%	18%	20%	22%	15%	21%
Profit after tax	(1,592.5)	(984.6)	464.6	265.1	(260.9)	382.7
Total debt	712.0	756.6	612.2	-	-	-

Data Source: Ace Equity

Though analysts remain cautious as the company faces intense competition from unorganised as well as organised QSR players like Dominos, McDonald's, and Burger King.

In the most recent quarter, mutual funds added exposure to the stock and took their holding to 4.12% from 3.16% in March 2022.

To know more, check out Sapphire Foods financial factsheet.

# Jubilant Foodworks

So far in 2022, the share price of Jubilant Foodworks is down by 21.7%.

Jubilant FoodWorks is a part of the Jubilant Bhartia Group. It has two strong international brands in its portfolio Domino's Pizza and Dunkin' Donuts.

The Indian food service company has the exclusive rights to develop and operate Domino's Pizza brand in India, Sri Lanka, Bangladesh, and Nepal.

Jubilant Foodworks share price is falling and the reasons are not hard to guess. Constant FII selling, inflationary concerns, and most important of all, steep valuations, have taken a toll on the stock.

The company's crazy valuation has been the one thing that worries analysts and investors. The company is trading at a PE (Price to Earning) multiple of 76.6 and a PB (Price to Book value) ratio of 19.1. This is higher than the industry PE multiple of 41.1.

This means you are paying more that Rs 76 for every Re 1 earned by the company to buy the stock.

As of March 2022, the company had 1,623 stores (1,396 in 2021). The outlet reach is set to increase to 1,898 stores by end of financial year 2022-23 and to 2,123 by 2024, according to reports.

While other QSRs have expanded their store reach, Jubilant has been at the forefront.

Take a look at the table below which shows the company's recent performance.

Financial Snapshot

	Yearly			Quarterly
Rs m, consolidated	Mar-20	Mar-21	Mar-22	Mar-22	Jun-21	Jun-22
Sales	39,272.7	33,118.7	43,961.2	11,759.8	8,931.9	12,551.0
Operating Profit	9,452.1	8,442.7	11,501.3	3,024.4	2,204.5	3,147.9
OPM (%)	24%	25%	26%	26%	25%	25%
Profit after tax	2,799.8	2,316.7	4,203.9	967.6	695.2	1,127.5
Total debt	0.0	0.0	1,198.3	-	-	-

Data Source: Ace Equity

In the June 2022 quarter, Jubilant Foodworks posted decent numbers but noted that inflation has impacted margins. The COGS (cost of goods sold) rose 44% YoY and was up 8% sequentially due to inflation.

Profit after tax was down 46% YoY as exceptional item of Rs 260 m on investments in the Sri Lankan subsidiary got factored in.

The company's management said that the first quarter since Covid-19 without store restrictions saw sequential improvement in footfalls, dine-in levels and delivery sales.

To know more, check out Jubilant Foodworks financial factsheet and its latest quarterly results.

# Westlife Development

Westlife Development focuses on establishing and operating McDonald's restaurants across West and South India, through its wholly owned subsidiary Hardcastle Restaurants.

In the past three months, Westlife Development share price has gained over 30%. Most of the gains have come after the company posted its Q1 results.

Westlife Development last month reported a consolidated net profit of Rs 235.8 m in the April-June quarter in 2022 as compared to a net loss of Rs 333.9 m last year.

Along with turning profitable, the company also posted its highest ever sales of Rs 5.4 bn. In financial year 2021-22, the company had 326 stores, which is set to go up to 366 stores by end 2022-23.

In an interview, the company's vice-chairman said they plan to open over 200 restaurants in the next three to five years.

Take a look at the table below which shows the company's financial performance.

Financial Snapshot

	Yearly			Quarterly
Rs m, consolidated	Mar-20	Mar-21	Mar-22	Mar-22	Jun-21	Jun-22
Sales	15,477.9	9,860.3	15,764.9	4,550.8	2,591.6	5,379.3
Operating Profit	2,270.4	912.5	2,169.6	760.4	89.2	890.7
OPM (%)	15%	9%	14%	17%	3%	17%
Profit after tax	(73.5)	(994.2)	(16.7)	153.2	-333.9	235.8
Total debt	1,837.2	2,151.8	2,010.0	-	-	-

Data Source: Ace Equity

To know more, check out Westlife Development financial factsheet.

# Specialty Restaurants

From the entire lot, Speciality Restaurants appears to be the dark horse. In the past one year, shares of the company have gained 184%.

Speciality Restaurants entered the restaurant business by setting up Only Fish in 1992, followed by Main Land China, in Mumbai in 1994. It is one of the largest fine-dining restaurant chains in India.

Its brands Mainland China, Riyasat, Barishh, Episode One, Oh! Calcutta, Sigree/Sigree Global Grill, Haka, Flame & Grill, Cafe Mezzuna, and Hoppipola offer a variety of cuisines and dining formats.

The company's performance in financial year 2021-22 was good as all parameters showed growth.

It reported net profit of Rs 81.5 m as compared to a net loss of Rs 293.4 m last year. This was aided by revenue which grew 68%.

Coming to its quarterly performance, it reported a profit of Rs 150.3 m against a loss of Rs 85.7 m in the year ago period.

The company's management attributed establishing kitchen within kitchen in existing restaurants as the key factor behind its recent growth.

Financial Snapshot

	Yearly			Quarterly
Rs m, consolidated	Mar-20	Mar-21	Mar-22	Mar-22	Jun-21	Jun-22
Sales	3,577.8	1,501.4	2,529.3	717.8	304.3	899.7
Operating Profit	672.4	153.4	560.2	158.7	20.4	263.9
OPM (%)	19%	10%	22%	22%	7%	29%
Profit after tax	(380.0)	(293.4)	81.6	29.2	-85.7	150.3
Total debt	-	-	-	-	-	-

Data Source: Ace Equity

In an interview, the company's MD said that Speciality Restaurants has started earning around 30% of its revenue from delivery business from cloud kitchens and kitchen in kitchen models.

The company does not have any immediate plans to expand outlets.

To know more, check out Speciality Chemicals 2021-22 annual report analysis.

In conclusion...

The post pandemic scenario has changed how these companies operate. Most QSRs had to adapt by adding the option of delivery.

Some of the QSR now have around 30-35% of revenues coming in from deliveries.

The recent growth has been a result of new restaurant additions as well as improvement in same store sales growth (SSSG).

It's evident that the QSR space is growing. But so is the competition. Food aggregators, cloud kitchens, and foreign brands are coming in.

From personal experience, I can say that we Indians do not think of spending when it comes to food. Despite rising food inflation, we have not lost our appetite for food.

With more Indians eating out and online deliveries also on the rise, the QSR industry can produce the next set of multibagger stocks.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...