Fast Food Stocks: Does Growth Justify Sky High Valuations?

The last 2 years were dull when it came to festive vibes due to Covid. But this year is going to be like the good old days.

Diwali will have a lot of pent-up demand which will boost sales and profits of many consumer firms.

I read an article that said that the festive season makes up more than 35% of annual sales and profits of many consumer companies. After all, Indians are big fans of McDonalds and Domino's Pizza.

So if so many people love these QSR i.e. quick service restaurants, is it a good strategy to buy the stocks of these companies?

Common sense would say yes.

However, it's important to look at the fundamentals and valuations of these companies.

The problem with these mega brands like McDonalds, Dominos, Pizza Hut, and KFC is that their PE ratio have always been high. It's important to figure out if these high valuations are justified considering the growth prospects.

This is a sector I've always liked but never got a chance to recommend as I could never agree with the valuations.

So let me directly jump to the stocks...

It's important to understand which QSR stocks can do well and why. And if yes, then are they worth buying at these valuations?

I analysed three stocks which represent the QSR space to understand where they stand on a valuation perspective. They are, Jubilant Foods (Domino's Pizza), Restaurant Brands Asia (Burger King), and West Life Development (McDonalds).

Let's look at them one at a time...

Restaurant Brands Asia (Burger King)

There is no point looking at loss making companies. Even if these companies are expected to make profits at a point in time in the future, it's difficult to predict when it will turnaround.

The master franchisee of Burger King in India, Restaurants Brand Asia, is still making losses. So investing in Burger King stock is out of question, though you may want to try its whoppers collection of burgers.

West Life Development (McDonalds)

Now as much as I am a fan of eating burgers from McDonalds, when I look at the numbers, the stock never gives me confidence.

While I agree, the brand is extremely strong but the stock at every level always looks overpriced.

Let me tell you why...

To start with, West Life Development which runs the Mc Donald's franchisee in West and South India is on an aggressive store expansion mode.

The management has set an ambitious target of adding 35-40 stores in FY23 and thereafter 200 restaurants in the next 3-4 years.

On a conservative basis, this adds up to 50-60 stores per year. In the past the company has been adding 25-30 stores per year.

McDonalds on an Aggressive Expansion Spree

Let's talk broadly on numbers.

West life development ended FY22 with sales of Rs 15.7 bn with roughly 326 stores. That means every store did sales of Rs 48 m on average. Now as per the management, it's expected to go on an aggressive expansion mode.

McDonalds Revenue Per Store

So, by the end of FY24, even if we assume 411 stores and take the revenue/store at Rs 58 m, a 20% rise from FY22, we get total sales of Rs 23.8 bn.

On this Rs 23.8 bn if you take EBITDA margin of 15%, which in my view is the best case, the operating profit comes to 3.6 bn.

FY24 EPS for McDonalds

So, with a price of around Rs 730 per share, the FY24, PE ratio on the EPS of 7.7 comes to roughly 95.

I'm taking the best possible scenarios and still the PE ratio comes to 95 times, two years forward.

Also, the return on equity works out to only 12-13%. The reason being the company will have to incur capex leading to low returns.

Jubilant Foods

Lastly, for Jubilant Foods, the story is the same with regards to valuations. However the operating metrics and efficiency and performance ratios are way better.

This is the only company which has high valuations but shows strong revenue and profitability growth along with ROCE and ROE of 20-25% on a consistent basis.

The point I'm trying to make is that though Jubilant Foods is expensive, superior operating efficiency along with strong growth makes it a stock to watch out for on corrections.

In terms of valuations, even Jubilant Foods trades at a forward 2-year P/E ratio of 60 times. However the company has enjoyed an average 10-year ROE and ROCE of 24% and 25% respectively. Also, it has maintained its 5 year operating margins at 21% despite challenges.

This shows us how resilient the business model is.

But as much as I would love to have a burger or a pizza, the valuations seem excessive as of now.

So, that was my take on the QSR space, They are among the best brands in India but the stocks are very expensive.

What do you think dear reader? Will you buy or avoid these stocks? Share your thoughts here.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure

Aditya Vora (Research Analyst) Hidden Treasure has 7 years of experience in the markets as an equity research analyst. He is a Chartered Accountant by qualification and worked with some of the big names on Dalal Street like Motilal Oswal, CRISIL, and IDFC securities. He follows a rigorous process of financially screening stocks. At the same time, Aditya believes an investor's edge lies in capturing qualitative factors. His forte is bottom up stock picking. However, he is also a firm believer in the importance of market cycles. Especially identifying emerging themes at an early stage.