Westlife Development - Store expansion likely to return starting FY22 - ICICI Securities

2Q performance again demonstrated Westlife's strong execution capabilities. It managed to reduce average monthly fixed cost by ~30% (renegotiating rents, reimagining supply chain, variable staff costs, etc.), thereby limiting cash losses - Rs270mn loss in 2Q. Although the commentary on recovery in convenience formats (delivery, drive-through, takeaway and on-the-go - together contribute >50% of revenues) sounds promising, we expect pressure from weakness in core dine-in business and high operating leverage structure. Long-term benefits from expansion of food service market remain intact, but medium-term weakness limits ability for store expansion (likely to start at regular pace from Jun-21 onwards only) which is integral to current fair value. HOLD.

- Performance improved sequentially: In 2QFY21, revenue declined 47% while EBITDA declined 93%, recurring PAT (loss) was Rs271mn. Westlife reported 41% same store sales decline, driven by extended lockdowns and lower consumer confidence (65% of cases were in South and West India), washout of dine-in sales in Maharashtra (50% of stores are in Maharashtra) and restrictive operations in rest of the locations. However, there was sequential growth in sales with recovery rates improving to 65-70% in Aug and Sep from 40-45% in July. Recovery rates of stores where dine-in has opened recently is almost double of the stores which have been operational for over 12 weeks - improving consumer confidence. Convenience platform sales have also recovered well - McDelivery (~90% of pre-Covid in Sept'20), Drive Thru (~75-80% of pre-Covid for Sept'20), On the Go (grew by ~4x from July'20 to Sept'20).

- Store expansion likely to return from FY22: Westlife closed 9 McDonald's stores in Q2, total store count to 311 (43 cities). It plans to launch 3 new McDonald's stores in H2FY21. Management stated that the store size will be similar to stores previously opened (for now) as they expect dine-in to return back.

- Structural cost savings could accelerate margin expansion once sales recover: Gross margin declined 180bps YoY to 63.5% due to lower volumes (including beverages). However gross margins of 65.5% in Sept'20 are flattish YoY. Comparable EBITDA margin declined 1300bps YoY to 2% due to negative operating leverage. However, fixed costs were reduced by ~30% during the quarter. Management expects to achieve pre-Covid level margins with ~90% of sales driven by cost optimisation.

- Valuation and risks: We increase our FY22 earnings estimates by 7%; modelling revenue / EBITDA CAGR of 7 / 22 (%) over FY20-22E. Retain HOLD with DCF-based revised target price of Rs380 (Rs340 earlier). Key downside risk includes sustained weak consumer sentiment impacting restaurant throughput.

Shares of WESTLIFE DEVELOPMENT LTD. was last trading in BSE at Rs.373.2 as compared to the previous close of Rs. 369.3. The total number of shares traded during the day was 1890 in over 86 trades.

The stock hit an intraday high of Rs. 375 and intraday low of 371.2. The net turnover during the day was Rs. 705622.

Source : Equity Bulls

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