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February 2021 Sector Report

Retail f cus QSR: The Right Combo

Nihal Mahesh Jham Abneesh Roy Prateek Barsagade +91 22 6623 3352 +91 22 6620 3141 +91 22 4063 5407 Nihal.Jham@edelweissfin.com Abneesh.Roy@edelweissfin.com Prateek.Barsagade@edelweissfin.com

Edelweiss Securities Limited Retail

Contents

Executive Summary ...... 2

Story in Charts ...... 8

Industry Outlook ...... 10

o Food service industry: Overview ...... 10

o Chain QSR market: Fastest-growing segment ...... 13

o Online food delivery spurt to continue ...... 22

o Covid-19: A blip, but an enabler as well ...... 25

o What’s the secret sauce to success? ...... 27

Outlook & valuations: Factoring opportunity and profitability ...... 29

Appendix: Global corporations - Business models ...... 31

Initiating Coverage: o Burger King India ...... 35

Company Update: o Jubilant Foodworks ...... 66

o Westlife Development ...... 79

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Executive Summary

“There is no sincerer love than the love of India’s appetite for QSRs seems insatiable even after more than two food.” -George Bernard Shaw decades of the segment’s presence in the country. A combination of favourable demographics (millennials), India-centric value priced offerings and the recent spurt in food delivery aggregators have led to the market clocking a 19% CAGR over FY15-20. We expect their dominance on the Indian palate to gain further flavour and estimate the QSR chain market to be the highest growing sub-segment--23% CAGR over FY20-25E-in the entire food service market as chains deepen penetration in tier II/ III cities. Covid has, in fact, become an enabler boosting preference for QSRs.

However, it’s not all a cake walk. Despite its popularity, success and return structures remain divergent. Most QSRs, except Dominos, are still tweaking their business models even as they keep expanding. In our view, key ingredients for success of QSRs are: a) A well-established brand. b) Menu adaptability–most important. c) Favourable store economics. d) Well-defined store location criteria. e) Regular adaptation to counter brand/menu fatigue. f) Established supply chain. Comparing major QSR companies, Jubilant Foodworks (JFL) ranks the highest on all these parameters despite lower store expansion potential.

JFL, thus, remains our top pick in the QSR space (BUY, TP: INR3,575) spearheaded by Dominos, given the potential for store count to jump ~40%, imparting four-five years of visibility. SSSG, despite a mature network, remains industry leading, further reflecting the brand’s popularity. Moreover, Domino’s delivery plus digital leadership bodes well in the post-covid era. Burger King India (BKI), the last major QSR entrant in India so far, has aggregated a compelling recipe for success--strong brand, a favourable master franchise agreement, reasonable store economics and a customer proposition focused on value and wide offerings. Store addition potential (~4x) is the key plus in its favour, but demanding current valuations compel us to initiate with ‘HOLD’ and TP of INR143. QSR chains: Robust growth; international brands gaining flavour The QSR sector in India gained mileage post the entry of Domino’s and McDonald’s in 1996. Even after more than two decades of presence and growth, India’s chain QSR sector has clocked 19% CAGR over FY15-20--one of the fastest-growing consumer discretionary categories, driven by: a) younger demographics; b) India- centric offerings and value pricing; c) online food ordering and food delivery; and d) strong marketing push. Global QSR chains have captured a much higher market share (Top-5 hold ~50%) due to: i) popularity and brand pull is already established and much higher; ii) their fast food cuisines have been perfected globally; and iii) expansion into tier II/III cities. Delivery/aggregators fuelling exponential growth While delivery operations had always been around, a quantum leap in Platform-to- Consumer segment/aggregators (100% CAGR over FY16-20) has helped expand the

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overall market exponentially. The segment currently accounts for 47% of the total delivery market (FY16: 6%). The industry is thriving due to development of the online ecosystem (mainly from Swiggy and Zomato), attractive promotions & discounts, a variety of new offerings and cash-back offers. Online aggregators also influence consumption behaviour and lead to significant increase in ordering over the long term. Moreover, aggregators have boosted sales of restaurants 30% on average, a significant driver considering the fixed cost nature of the business. Covid, while a blip, is a longer term enabler QSRs took a heavy knock from covid-19, especially the store/non-delivery focused players. Fortunately, these chains had the infrastructure and process for delivery services in place long before the spread of the pandemic, which enabled them to adapt swiftly to government regulations. Hence, while the entire food service market plunged 82% YoY in H1FY21, organised QSRs (Domino’s, Burger King, McDonald’s – West & South) contraction was restricted to 45% and by September recovery was already at 85%. More importantly, chain QSRs have been on target in meeting customers’ heightened requirements with regards to food quality, service standards, etc., and have successfully captured the opportunities thrown up by consumers’ cautious dining habits. Momentum to sustain; QSR’s to be fastest growing food segment India’s chain QSR sector has reached sizeable scale (FY20: INR188bn), but still forms mere 4% of the total food service market (FY20: INR4.3tn, global average 20%). In addition to existing enablers (demographics, value pricing, online ordering) increased penetration in tier II & III cities, facilitated by improved supply chains, innovation and customisation in operating models and store sizes, will also fuel growth. Over FY20-25, the QSR chain market is estimated to be the highest growing sub-segment--23% CAGR--of not just the chain market, but also the entire food service market. Despite opportunity and brand presence, return structures divergent Despite their global popularity, success and return structures of QSRs in India remain divergent. Domino’s is by far the most profitable and successful QSR in India driven by: a) high store throughput and margins riding its popularity and dominant market share; and b) limited store capex driven by its smaller store size as business is delivery driven. Burger QSRs have larger store sizes due to: a) more kitchen space requirement; and b) dine-in focus; this drives store capex higher and returns lower. In recent years, with most companies having established their presence, focus of mature QSRs is shifting from expansion to store economics and profitability. This has been the case especially with Westlife Development, which has initiated ROP2.0 in 2016 to improve store return ratios. Global QSRs (brand owners) though work on a different model of primarily franchising (See Appendix). What’s the secret sauce to success? In our view, key ingredients for the success of QSRs are: a) A well-established brand. b) Menu adaptability–most important. c) Favourable store economics. d) Well- defined store location criteria. e) Regular adaptation to counter brand/menu fatigue. f) Established supply chain. This has played out on the global front as well-- KFC in China, Dominos in Australia. Also, penetration of various QSRs remains focused on top-8 cities, signalling a long growth runway. Our preferred menu (picks) When we compare the three major QSR companies across these parameters (see Exhibit 2 below), we believe all have attractive product propositions and have been at the forefront of innovation and localization, which has helped them become

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respective category leaders (Domino’s 80% share of pizza market, McDonald’s 36% of burgers & sandwiches and Burger King 16%) with an established supply chain network. JFL’s dominance and reach is by far the highest, but that to an extent has also limited incremental growth opportunities for the company. On this parameter, BKI leads the pack given its late start and also wider geography area compared to Westlife Development (WDL). It’s in delivery where JFL has a strong presence, much better than peers. Also, the salience of pizza to delivery has been traditionally higher. Jubilant Foodworks (JFL) has been the bell weather of India’s QSR space and also its success potential. Potential to expand Domino’s store count by ~40%, despite the robust 16% store expansion CAGR over the past decade, imparts four-five years of store addition visibility. Moreover, even with a mature network (average: >7 years), SSSG remains industry leading, reflecting brand popularity. Its delivery plus digital leadership bode well in the post-covid era, burnishing prospects. Overall, we forecast a strong 11%/15% revenue/EBITDA CAGR over FY20-23. JFL remains our top pick in the QSR space and maintain ‘BUY’ with TP of INR3,575 (40x June 2022 EV/EBITDA). Recent additions– Ekdum! and Hong’s Kitchen–will take three-four years to make any significant revenue contribution, but provide option value. Though the last major QSR to enter India (2014), Burger King India (BKI) has aggregated a compelling recipe for success: strong brand, a favourable master franchise agreement and reasonable store economics. In addition, BKI’s customer proposition—focused on value and wide offerings—has lasting flavour, visible in its store productivity. The key aspect of BKI‘s story though is its highest store addition potential among QSRs—our analysis pegs it at ~1,100 by CY26. Overall, we expect BKI to meet its target of 700 stores by CY26, driving a 33% EBITDA CAGR (FY20–23E). Our relative multiple of 34x June 2022 EV/EBITDA (based on business profile comparison with QSR peers), however, implies limited upside. Initiate with ‘HOLD’. Westlife Development’s (WDL) relentless innovation drive and focus on value offerings have rendered it the leader in the burger QSR space (~36% market share). The company is now shifting focus to: a) further improvement in store profitability by cutting store opex/capex by ~20% via ROP 2.0 (benefits visible); and b) maximising potential of recent extensions like McCafe and McDelivery, which are further boosting SSSG (FY18-20: 12% versus FY15-17: 0%) and store profitability (improved store ROCE ~1.5x). Despite its leadership, store addition potential remains robust, which enhances growth visibility. The stock is trading at 23x FY23E EV/EBITDA, with pre covid one year average of 26x. ‘NOT RATED’. QSR valuation comparison

CAGR RoCE Target FY23 EV/EBITDA Mcap Sales: EBITDA: CMP TP Company Rating (INR % Upside 17- 17-20/20- Post INDAS Pre INDAS (INR) (INR) FY20/23E bn) 20/20-23 23 Jubilant Foodworks BUY 380 2,883 3,575 24 15/11 33/15 29/25 36 53 Burger King India HOLD 55 144 143 -1 54/18 NM/33 -1/5 25 39 Westlife Development* NR 71 455 NA NA 18/8 44/17 8/13 26 32 Source: Company, Edelweiss Research, Bloomberg

Note: FY17-20 EBITDA CAGR based on pre INDAS 116 adjustments; FY20-23 post INDAS 116 adjustments

For Westlife Development, Sales/EBITDA CAGR based on consensus numbers and multiples based on consensus TP

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Comparison across key parameters

JFL WDL BKI

Brand & Franchise Terms Brand Strength

Franchise contract flexibility

Royalty

Supply Chain set-up

Store Network & Profitability

Current scale

Expansion potential

Store Profitability

Menu Design

Core menu

Complimentary offering

Day parts

Delivery Adaptability

Delivery reach

Listing on aggregators

Own Delivery/Data

Overall

Source: Company, Edelweiss Research

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QSR comparison Jubilant Foodworks Westlife Development Burger King FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20 Financials (INR bn) Revenue 20.7 24.1 25.5 29.8 35.3 38.9 7.6 8.3 9.3 11.3 14.0 15.5 2.3 3.8 6.3 8.4 EBITDA 2.6 2.7 2.5 4.5 6.1 8.8 0.2 0.4 0.5 0.8 1.2 2.1 -0.4 -0.4 0.1 1.0 PAT 1.2 1.1 0.8 2.1 3.3 3.1 -0.3 0.0 -0.1 0.1 0.2 0.1 -0.6 -0.6 -0.2 -0.7 RoE (%) 20.0 14.5 9.2 21.8 27.7 24.5 -5.3 -2.4 -2.3 2.4 3.8 0.9 -15.5 -19.1 -5.8 -27.5 RoCE (%) 27.4 21.4 13.3 33.0 42.4 28.9 -2.9 -0.8 0.5 3.9 6.8 7.5 -16.7 -22.3 -8.4 -0.7

Key Metrics Store count (#) 876 1,026 1,117 1,134 1,227 1,335 209 236 258 277 296 319 88 129 187 260 Cities 196 235 264 266 273 282 26 30 34 37 41 42 NA NA NA 57 SSSG (%) 0.2 3.2 -2.5 14.1 16.8 11.5 -5.9 1.8 4.0 15.8 17.0 4.0 NA 12.2 29.2 -1.0

Common Size (%) Gross Margin 74.9 76.3 75.8 74.8 75.2 75.0 58.4 60.0 60.6 62.6 63.5 65.2 59.9 62.0 63.6 64.2

Employee 21.2 23.6 23.0 20.3 19.0 20.2 14.9 14.9 15.1 15.1 14.1 14.2 22.3 18.6 15.3 16.2 Rent 9.9 10.5 11.7 10.6 9.7 2.1 9.4 9.0 9.2 9.3 9.4 4.6 17.8 15.4 13.8 4.5 A&P 5.6 5.4 5.8 4.9 5.0 6.4 5.6 5.6 5.9 5.5 4.9 4.8 10.2 14.1 8.5 5.8 Royalty 3.3 3.3 3.4 3.4 3.5 3.5 3.5 3.5 3.9 4.2 4.6 4.6 3.0 3.2 3.7 4.1 Power & Fuel 6.0 5.8 5.7 5.4 4.8 4.4 11.0 10.1 9.1 8.3 7.4 7.4 9.2 8.6 7.5 8.4 Other Expenses 16.3 16.4 16.6 15.3 16.0 15.7 12.1 11.9 12.3 13.3 14.5 15.9 14.9 13.2 12.9 12.8 EBITDA Margin (%) 12.7 11.3 9.7 15.0 17.2 22.6 2.0 5.1 5.0 6.8 8.5 13.8 -17.6 -11.2 2.0 12.4

Depreciation 4.7 5.2 5.9 5.2 4.3 8.9 6.6 6.9 6.8 5.9 5.7 8.9 9.0 8.1 6.2 13.8 Interest 0.0 0.0 0.0 0.0 0.0 4.2 1.3 1.8 1.7 1.3 1.3 5.2 0.0 0.1 0.0 7.8 PBT 8.3 6.6 3.8 10.5 14.0 10.1 -3.8 -2.4 -1.3 1.1 2.5 0.5 -24.8 -16.6 -2.5 -9.1

PAT 5.9 4.4 3.0 6.9 9.3 7.9 -3.8 0.3 -1.3 1.1 1.5 0.3 -24.8 -16.6 -2.5 -8.7

Store Metrics (INR mn/Store) Revenue 25.9 25.3 23.8 26.5 29.9 30.3 38.9 37.5 37.7 42.4 48.9 50.3 33.6 34.8 40.0 37.6 Gross Margin 19.4 19.3 18.0 19.8 22.5 22.8 48.4 22.5 22.9 26.5 31.1 32.8 20.1 21.6 25.5 24.1

Employee Cost 5.5 6.0 5.5 5.4 5.7 6.1 5.8 5.6 5.7 6.4 6.9 7.1 7.5 6.5 6.1 6.1 Rent 2.6 2.7 2.8 2.8 2.9 0.6 3.6 3.4 3.5 3.9 4.6 2.3 6.0 5.4 5.5 1.7 A&P 1.5 1.4 1.4 1.3 1.5 2.0 2.2 2.1 2.2 2.4 2.4 2.4 3.4 4.9 3.4 2.2 Royalty 0.8 0.8 0.8 0.9 1.1 1.1 1.4 1.3 1.5 1.8 2.2 2.3 1.0 1.1 1.5 1.5 Power & Fuel 1.5 1.5 1.4 1.4 1.4 1.3 4.3 3.8 3.4 3.5 3.6 3.7 3.1 3.0 3.0 3.1 Other expenses 4.2 4.2 3.9 4.0 4.8 4.8 4.7 4.5 4.6 5.6 7.1 8.0 5.0 4.6 5.1 4.8 EBITDA 3.3 2.9 2.3 4.0 5.1 6.8 0.8 1.9 1.9 2.9 4.2 7.0 -5.9 -3.9 0.8 4.7

Depreciation 1.2 1.3 1.4 1.4 1.3 2.7 2.6 2.6 2.6 2.5 2.8 4.5 3.0 2.8 2.5 5.2 PAT 1.5 1.1 0.7 1.8 2.8 2.4 -1.5 0.1 -0.5 0.5 0.7 0.2 -8.3 -5.8 -1.0 -3.3 Source: Company, Edelweiss Research

Note: Financials for FY20 are post INDAS 116 adjustment

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Global QSR valuation comparison

FY20-23E FY20-23E FY20 P/E (x) EV/EBITDA (x) M Cap Sales EBITDA EBITDA RoCE- Company Name Country Brand/Franchise (USD bn) CAGR (%) CAGR (%) margin (%) FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY22 (%) Global QSR Brand owners McDonald's Corp USA McDonalds 155 5 NA NA 27 30 24 22 NA 17 17 16 20 Starbucks Corp USA Starbucks 116 9 14 20 51 54 32 27 27 25 21 18 35 Yum! Brands Inc USA KFC, Pizza Hut, Taco Bell 31 6 5 36 25 28 25 23 20 21 19 17 NM Restaurant Brands InternationalCanada Inc Burger King, Tim Hortons, Popeyes 28 3 12 33 17 17 14 13 22 20 17 16 10 Darden Restaurants Inc USA Olive Garden, LongHorn 16 6 20 11 NM 45 20 16 24 24 16 14 NA Domino's Pizza Inc USA Dominos 15 8 8 20 34 29 28 25 25 23 21 20 84 Jollibee Foods Corp Philippines Jolibee 4 NA NA 9 NM (26) 39 NA 16 52 14 NA 3 Papa John's International Inc USA Papa Johns 3 6 NA 7 NM 59 44 39 34 25 21 NA NA Average 6 12 20 31 30 28 24 24 26 18 17 30 Median 6 12 20 27 30 27 23 24 23 18 17 20

Global QSR Franchise Yum China Holdings Inc China KFC, Pizza Hut 24 9 4 19 41 38 29 25 13 17 13 12 20 Domino's Pizza Enterprises LtdNZ, Australia Dominos 6 12 16 18 60 48 42 36 30 25 22 19 13 Domino's Pizza Group PLC UK, Ireland Dominos 2 10 17 19 NM NM NM NM 21 17 16 13 20 AmRest Holdings SE CEE KFC, Pizza Hut, Burger King 2 3 7 17 87 (13) 64 23 9 14 8 7 3 Arcos Dorados Holdings Inc LATAM McDonalds 1.0 (0) (7) 13 28 (6) 22 12 7 24 11 9 4 Collins Foods Ltd Australia, Europe KFC and Taco Bell 0.9 8 2 17 35 23 20 17 10 11 10 9 7 BK Brasil Operacao e AssessoriaBrazil a Restaurantes BurgerSA King, Popeye's 0.5 12 34 9 (64) (11) 132 37 13 29 7 6 NA Average 7 10 16 31 13 51 25 15 19 12 11 11 Median 9 7 17 38 9 35 24 13 17 11 9 10

India QSR Franchise Jubilant Foodworks Ltd India Dominos, Dunkin Donuts 5 10 16 22 124 141 68 55 40 44 30 26 25 Westlife Development Ltd India McDonald's 1.0 8 17 14 NM NM NM 70 37 141 29 23 7 Burger King India India Burger King 0.7 22 32 12 NM NM NM NM 58 NM 35 25 1 Average 13 21 16 124 141 68 62 45 93 32 25 11 Median 10 17 14 124 141 68 62 40 93 30 25 7 Source: Company, Bloomberg, Edelweiss Research

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STORY IN CHARTS

Growth robust even after more than two decades Growth also driven by delivery, mainly P2C segment 400 12.5

320 10.0

240 7.5 (INRbn) 160 bn) (USD 5.0

80 2.5

0 0.0 FY15 FY16 FY17 FY18 FY19 FY20 2016 2020 Restaurant to Consumer Platform to Consumer Chain Standalone

QSR market – Dominated by international brands Except Domino’s, other players still to expand reach Outlet count (%) 300

Domino's, 19 240

180

Subway, 8 (#) 120 Others, 56 McDonalds, 7 60 KFC, 6 Burger 0 King, 4 Domino's McDonald's KFC Burger King

Food service market to contract in FY21 due to covid Chain QSRs expected to clock faster recovery

1500 H1FY21 FY21E 0 1200 -20 900

-40

(INRbn) 600 (%)

300 -60

0 -80

Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY20 -100 Pre Covid Post Covid Industry JFL WDL BKI

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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Growth momentum of chain QSR’s to sustain Fastest growing sub-segment of the entire market

900 25

720 20

540 15 (%)

(INRbn) 360 10

5 180

FDR

QSR CDR

FY15 FY16 FY17 FY18 FY19 FY20 FY25E Café

PBCL

FD/IC

Food

Chain Service Chain Standalone CAGR: 15-20 CAGR: 20-25 Market

Source: Company, Edelweiss Research Source: Company, Edelweiss Research Store ROCE – Return structures divergent Sector SSSG has gone through various phases

-Benefit of GST 45.0 40.0 -Consumption slowdown introduction -Impact of -Company specific initiatives 36.0 28.0 demonetization

27.0

16.0 (%)

18.0 (%) 4.0 9.0 -8.0 0.0

-20.0

KFC King

Burger FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Subway Pizza Hut Pizza Domino’s JFL WDL Yum BKI McDonald’s Source: Company, Edelweiss Research Source: Company, Edelweiss Research Return ratios have been on an uptrend recently Online ordering also driving better store economics

75.0

59.0 Post-Online

43.0 (%) 27.0

11.0 Pre-Online

-5.0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 0 50 100 150 JFL WDL Dine in Phone based Take away Online ordering

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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Industry Outlook

Food service industry: Overview India’s food services market has gained momentum in the past decade due to changing consumption patterns--increase in tendency to eat out, which had not traditionally been a feature of Indian lifestyle. This has ensured consistent growth for the country’s food services market, which has evolved considerably since the 1980s, when the number of organised brands was negligible and the market was widely dominated by unorganised players. A noticeable shift began in 1996 with the opening up of restaurants such as McDonald’s and Domino’s Pizza, followed by Subway, KFC, Burger King, Haldiram’s, Moti Mahal and Taco Bell, among others. India’s food services market is classified into organised and unorganised segments based on three key characteristics--accounting transparency, organised operations with quality control & sourcing norms and outlet penetration. The organised market is further divided into chain restaurants, standalone restaurants and restaurants in hotels. Chains are further divided into six sub-segments based on average price charged per person, service quality & speed and product offering: 1) fine dining (FDR); 2) casual dining (CDR); 3) pub, bar, club & lounge (PBCL); 4) quick service restaurants (QSR); 5) cafes; and 6) frozen desserts (FD/IC). Indian Food Services Market (INR bn)

Food Service Market (4,236)

Restaurant Chain Market Size Standalone (licensed) Market Size Unorganized in hotels (398) (1,203) (2,519) (116)

Café QSR IC/FD CDR FDR PBCL Café QSR IC/FD CDR FDR PBCL (25) (188) (21) (134) (6) (24) (96) (348) (43) (911) (27) (176)

Source: Technopak, Edelweiss Research

Food services market size The food services market in India has posted consistent growth since FY15 and was estimated at INR4,236bn in FY20 as per Technopak. It is projected to clock 9% CAGR over the next five years to INR6,505bn by FY25. In FY20, the biggest segment of the food services market was the unorganised market (59% of food service market).

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Indian Food Services market size CAGR CAGR (INR bn) FY15 FY16 FY17 FY18 FY19 FY20 FY25E (FY15-20) (FY20-25) Unorganised market 1,950 2,076 2,225 2,381 2,535 2,519 3,075 5 4 Organised standalone 660 722 820 935 1,096 1,203 2,309 13 14 Chain market 175 204 236 285 350 397 966 18 20 Restaurant in Hotel 80 88 95 105 115 116 156 8 6 Total 2,865 3,090 3,376 3,706 4,096 4,236 6,505 8 9 Source: Technopak, Edelweiss Research

Organised food services market: Overview

The organised food services market in India (chain and standalone outlets, excluding restaurants in hotels) was estimated at INR1,600bn in FY20 as per Technopak and is projected to clock CAGR of 15.4% to INR3,275bn by FY25; its share in the total market is estimated to jump from 38% in FY20 to 50% by FY25. The organized food service market (INR1,600bn) is further divided into standalone restaurants (INR1,202bn) and Chain restaurants (INR398bn). Organized food service market CAGR CAGR (INR bn) FY15 FY16 FY17 FY18 FY19 FY20 FY25E (FY15-20) (FY20-25) QSR 159 184 210 253 307 348 825 17 19 CDR 456 502 586 683 813 911 1,909 15 16 Café 67 72 77 83 93 96 136 7 7 FD/IC 26 29 31 35 40 43 73 11 11 PBCL 104 116 127 140 166 176 296 11 11 FDR 23 23 25 26 27 27 35 3 5 Total (INR bn) 835 926 1,056 1,220 1,446 1,600 3,275 14 15 Source: Technopak, Edelweiss Research

Chain market: Began in 1990s; well entrenched now

The chain market in India has evolved and changed significantly over the past three decades. The transition phase can be divided into three stages (refer exhibit below). Evolution of chain market in India

Source: Technopak, Edelweiss Research

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Evolution of chain market in India

Phase I (1991-2001) Phase II (2001-2010) Phase III (2010 onwards) Penetration in newer segments (Travel, Education, High focus on Metro & Mini Metros Thin Penetration in Tier I & II Cities Medical) and increased penetration in Tier I & II cities Ownership/ Franchise Model & Continuation with franchisee model & Emphasis on contracts more centred around

Management contracts JV’s revenue sharing Funded by personal capital & Partnerships/ JVs with related business Expansions under brands & emergence of new conventional means interest, Initiation of PE funding brands/concept. PE driving expansion New Opportunity areas with Focus on Customer acquisition, sustainable Customer engagement, format diversification & CRM, Expansion & extended capacity revenue growth Product enhancement building Source: Technopak, Edelweiss Research

The chain market in India was estimated at INR398bn in FY20 and is projected to post CAGR of 19% to INR965bn by FY25 (Technopak estimate). Growth will be driven by rising presence of international brands, strengthening of back-end infrastructure, acceptance of new cuisines, changing lifestyles & aspirations and the emergence of entrepreneurial ventures in these segments. The chain market is currently dominated by the QSR sub-segment, followed by CDR and café. Chain market size and growth CAGR CAGR (INR bn) FY15 FY16 FY17 FY18 FY19 FY20 FY25E (FY15-20) (FY20-25) QSR 78 91 105 130 162 188 524 19 23 CDR 56 67 81 98 118 134 302 19 18 Café 17 18 19 21 24 25 37 8 8 FD/IC 10 12 13 15 19 21 43 16 15 PBCL 9 11 12 15 21 24 53 22 17 FDR 5 5 6 6 6 6 6 3 3 Total 175 204 236 285 350 398 965 18 19 Source: Company, Edelweiss Research

During FY20, the split of expenditure by sub-segment on eating out was 38% in QSR, 31% in CDR and 14% in café. Easy access, competitive pricing, availability of combos and meal packages drive preference for QSRs among the younger population and professionals working in the office environment.

Format wise average monthly spend per household

Avg monthly spend per household (INR) Format FY16 FY20 CAGR FY16-20 (%) Quick Service Restaurants 1,573 1,779 4.2 Casual Dine Restaurants 1,276 1,452 4.4 Café 638 656 0.9 Frozen Dessert/ Ice Cream 383 375 -0.7 PBCL 340 375 3.3 Fine Dining Restaurants 43 47 3.3 Total 4,252 4,683 3.3 Source: Technopak, Edelweiss Research

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Chain QSR market: Fastest-growing segment The organised QSR sub-segment in India was estimated at INR348bn in FY20 and is projected by Technopak to clock 19% CAGR to INR825bn by FY25. Growth will be driven by the chain QSR market, which accounted for ~54% of the total QSR sub- segment in FY20 and is pegged at ~64% of the total QSR sub-segment by FY25. Historical growth of chain QSR has primarily been driven by international brands such as Domino’s Pizza, McDonald’s, Burger King, KFC and Subway, which cumulatively accounted for ~52% (as of FY20) of the chain QSR market in India. QSR market growth

900

720

540

(INR bn) 360

180

0 FY15 FY16 FY17 FY18 FY19 FY20 FY25E Chain Standalone

Source: Technopak, Edelweiss Research

In order to remain competitive in an expanding market, achieve scale and increase consumer acceptance, most QSR companies are adjusting their offerings (including flavours, pricing and services) to meet demands of the India market.

The chain QSR segment has clocked 19% CAGR over FY15-20--second highest sub- segment after PBCL, driven by:

1) Younger demographics: There is a rising trend in urban cities in India, across all economic classes, to eat out without the need of a special occasion, but rather as part of a shopping experience or leisure outing. This trend is particularly strong with population in the millennial age group of 15-34 (~447mn, 34% of population), which during FY20 ate out approximately twice per month and ordered-in approximately once per month. India has the highest number of millennials in the world and this population is expected to grow at a faster rate than other groups, which is likely to spur eating out behaviour among Indian consumers.

Consumer eating out frequency and spends Eating out - Ordering in - Average spend per outing Average spend per order Age group Frequency/month Frequency/month (INR) (INR) 15-24 yrs 2.3 0.9 230 124 25-34 yrs 1.9 0.7 225 118 > 35 yrs 1.5 0.3 303 107 Source: Technopak, Edelweiss Research

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2) India-centric offerings and value pricing: Extremely cost conscious Indian customers have found appeal in combos and value meals of QSR chains. In addition, initiatives such as opening of vegetarian restaurants in certain parts of the country, creation of non-beef & non-pork-based menus, separation of vegetarian and non-vegetarian cooking areas, introduction of local flavours and setting of India-centric pricing with affordable entry-level products on the menu have helped drive acceptance and demand.

Value offerings from various QSR brands

Source: Edelweiss Research

3) Online food ordering and food delivery: The platform to consumer/aggregators segment has clocked 100% CAGR between FY16 and FY20. The industry has received support from development in the online ecosystem, attractive promotions & discounts, a variety of new offerings and cash-back offers. Broader tailwinds such as rising disposable incomes, higher DINKS (Double- Income-No-Kids) families, falling data costs and increased smartphone penetration have also played an important role in this industry’s growth.

Delivery growth driven by Platform to Consumer segment

20.0

16.0 Delvery market estimate 12.0 increased by 10% post Covid

(USD bn) (USD 8.0

4.0

0.0 2016 2020 2025 2025 PostCovid PreCovid Restaurant to Consumer Platform to Consumer

Source: Technopak, Edelweiss Research “In any other culture, it may not have created as much noise.” Ajay Kaul, 4) Strong marketing push: On average, companies in the food services market former CEO of Jubilant Foodworks on the invest 3-5% of their annual budgets on marketing. Especially at the start of the 30 minute delivery campaign decade certain campaigns like Dominos’30 minute delivery guarantee and McDonald’s value offerings resonated with the population.

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Ad spends by major QSR’s

Brands FY17 FY18 FY19 FY20 Domino's 5.5 4.7 4.7 6.4 Westlife (McDonald's) 5.9 5.5 5.4 5.1 Burger King 10.3 14.3 8.5 5.8 Source: Company, Edelweiss Research

Note: Ad spends as a % of revenues

Overall, the strong growth in QSRs is expected to sustain driven by sustenance of these factors. In addition, deeper penetration in tier II & III cities, facilitated by improved supply chains, innovation and customisation in operating models and store sizes, will also aid further growth. Over FY20-25, the QSR chain market is expected to be the highest growing sub-segment of not just the chain market, but also the entire food service market.

Chain QSR's - fastest growing sub segment

15 (%)

0 QSR CDR Café FD/IC PBCL FDR Chain Food Market Service CAGR: 15-20 CAGR: 20-25

Source: Technopak, Edelweiss Research

Key formats in chain QSR India’s chain QSR sub-segment is dominated by burgers and sandwiches, with market share of 31% in FY20, followed by pizza, with a market share of 26% and chicken, with a market share of 15%. Majority of the companies within these formats are international brands. Balance 25% is split between small national and regional companies offering Indian ethnic cuisine, Chinese cuisine and other types of cuisine.

Key categories in Indian QSR market

(INR bn) FY15 FY20 CAGR (%) Burgers & Sandwiches 24 58 19 Pizza* 27 50 13 Chicken 16 28 12 Indian Ethnic 4 28 48 Others 7 24 28 Source: Technopak, Edelweiss Research

Note: *Does not include companies operating in CDR and other segments

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Segment dominated by international chains driven by robust store expansions The organised chain market counts more than 100 brands with over 7,000 outlets (3,000-3,500 in FY16) spread across various cities in India. International companies have been able to scale their operations across the country given their strong supply chains, established standard operating procedures, global best practices, product innovation and reaping benefit of Indian consumers’ increased eating out tendency. International companies have experimented with multiple formats and cuisine offerings and have successfully introduced products that cater to the palate of Indian consumers (e.g., wraps by Domino’s Pizza; Big Boss and Masala Whopper by Burger King; KFC Rice Bowl) enabling them to increase presence across various high footfall destinations and to capture increased consumer traffic through different formats.

Major QSR chains in India Mega Mini Tier II & metros metros Tier I others Brands Year of Entry Origin Core Offering Outlet (%) (%) (%) (%) Domino’s 1996 USA Pizza 1354 25 32 20 23 Subway 2001 USA Sandwich 541 37 43 12 8 McDonald’s 1996 USA Burger 481 36 35 17 12 KFC 2004 USA Chicken 454 19 37 21 23 Wow! Momo 2008 India Momos/Chinese 317 29 59 6 6 Burger King 2015 USA Burger 261 41 26 11 23 Jumbo King 2001 India Vada Pav 131 83 11 6 0 La Pino’z 2011 India Pizza 134 27 21 33 19 Haldiram 1937 India Indian Snacks 80 79 9 7 5 Bikanervala 1950 India Indian Snacks 82 61 9 14 16 Smokin Joe’s 1993 India Pizza 50 58 20 4 18 Taco Bell 2010 USA Mexican inspired foods 57 32 54 12 2 Street food by Punjab Grill* 2008 India Indian Snacks 41 47 34 12 7 Source: Company, Technopak, Edelweiss Research

Note: For Street Food by Punjab Grill year of entry refers to year in which company was formed

Global QSR chains have posted higher growth due to: a) Popularity and brand pull of global QSRs is already established and much higher. b) Fast food cuisines served by them have been perfected globally. Large international QSR chains have successfully expanded into tier II and III cities as well, although there is a high concentration (~50%) in mega and mini metros.

Indian QSRs, which have tried competing in these popular categories, have seen limited scale up, a trend apparent globally as well. However, niche or local offerings which don’t have any major global competition have seen brands scale-up. In India too, new chains like Jumbo King and Wow! Momo have picked up pace recently.

Domino’s Pizza has captured the largest market share (19% in FY20) of the chain QSR sub-segment by number of outlets due to aggressive marketing, attractive value proposition and a strong home delivery network. It is followed by Subway (8%), McDonald’s (7%), KFC (6%) and Burger King (4%)--a relatively new entrant that has increased its count in the shortest span of time compared to other international QSR companies and has become a prominent player in the QSR sub-segment.

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QSR market – market share by outlet QSR market – market share by revenue

Outlet count (%) Revenue (%) Domino's, Domino's, 21 19

Subway, 8 Others, 48 Subway, 6

Others, 56 McDonalds, McDonalds, 7 11 KFC, 6 Burger KFC, 10 Burger King, 4 King, 5

Source: Technopak, Edelweiss Research Source: Technopak, Edelweiss Research

SSSG has been volatile over past decade

The sector’s SSSG has gone through various phases. At the start of the decade, many of the QSRs were still expanding presence and adding new stores, which helped them clock strong SSSG. Unfortunately, SSSG in FY16 and FY17 was impacted due to policy reforms (mainly demonetisation) and a consumption slowdown across discretionary categories. However, implementation of GST along with company specific initiatives (WDL’s push for McCafe) and an improvement in consumption, spurred SSSG of all players in FY18 and FY19.

SSSG trends over the past decade

40.0 -Consumption slowdown -Benefit of GST -Impact of demonetization introduction -Company specific 28.0 initiatives

16.0 (%) 4.0

-8.0

-20.0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 JFL WDL Yum BKI

Source: Company, Edelweiss Research

* For Yum indicates system sales growth during calendar year.

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Robust store expansion pace (though moderating) driving revenue growth

Companies in the food services market operate in varied locations, including malls, high streets, office complexes, highways, hospitals, airports, etc. Malls and high streets have traditionally been the preferred locations for the food services market. All major QSRs have seen a sharp growth in the first half of the decade as reach was improving and companies were expanding city base as well. Post 2015, overall growth has slowed due to increased penetration and also prudence in expansion to focus on store profitability and moderate closures. After 2015, Burger King, which launched in that year itself, has been the fastest growing QSR.

Store expansion trajectory of key QSR brands CAGR CAGR Market Entry (FY) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Q2FY21 FY10- FY15- 20 (%) 20 (%) Domino's 1996 307 378 465 576 726 876 1,026 1,127 1,134 1,227 1,335 1,354 16 9 Subway 2001 175 248 330 414 476 476 568 613 638 NA 671 541 14 7 McDonalds* 1996 NA 250 282 316 369 369 393 424 447 464 489 481 8 6 KFC# 2004 75 151 221 299 328 352 310 310 342 380 443 454 19 5 Burger King 2015 - - - - - 12 49 88 129 187 260 261 NM 85 Source: Company, Edelweiss Research, *Indicates consolidated outlet count of both McDonald’s operators in India,

#KFC re-entered in India in the year 2004

McDonald’s is the category leader in burger & sandwiches with close to 36% market share and revenue for its West & South operations–WDL has posted 15% CAGR over FY15-20 driven by a pick up in SSSG post FY17. The category has outpaced growth of market leader due to entry of new players such as Burger King, Wat-a-burger, a. In the pizza category in the chain QSR segment, growth has been driven by Domino’s with a market share of ~80%. Domino’s has outpaced category growth by filling in the void created by exit of other pizza brands such as Papa John’s. Revenue trajectory of key QSR brands CAGR CAGR (INR bn) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY10- FY15- 20 (%) 20 (%) Domino's 4.2 6.8 10.2 14.2 17.3 20.9 24.4 25.6 30.4 36.1 38.8 25 13 Westlife Development 2.8 3.8 5.4 6.8 7.4 7.6 8.3 9.3 11.3 14.0 15.4 19 15 Burger King NA NA NA NA NA NA 1.4 2.3 3.8 6.2 8.4 NA 57 Source: Company, Edelweiss Research

Supply chain: In place for incumbents; most still prefer cluster based approach

The situation today in India is much better than in the early 1990s when the initial set of QSRs came in and had to set up their own distribution from scratch. In fact, availability of key ingredients was also an issue initially.

Majority of the QSRs in India follow the cluster-based approach and restrict openings to a limited number of cities. Distribution costs in the business remain high and opening a sizeable number of stores in vicinity helps reduce the overall distribution cost and aids profitability of stores. Most players outsource their entire supply chain, but still keep a regular check/control over it.

Dominos follows a hub-and-spoke distribution network wherein its commissaries are the hubs and the retail outlets are the spokes. The raw material is replenished in the outlets from the hubs every four days or when it gets over, whichever is earlier.

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Supply chain comparison City Key Logistics Own Company Key vendors cou Comments partner warehouses nt Jubilant Unlike peers, owns NA NA Yes 282 Foodworks commissaries Hyfun Foods, Mrs. Bectors, OSI Vista, PepsiCo, Schreiber, Veeba Burger King Coldex No 57 Completely outsourced and Venky’s Westlife Amrit Foods, Cremica Industries, Dynamix, Trikaya Agriculture, RK Foodland No 42 Completely outsourced Development Vista Source: Company, Edelweiss Research

Multiple operating models; Brand partnerships and royalty have been stable The food services/QSR market in India has evolved from home grown, standalone, family-run business ventures to international partnerships with multipolar and integrated business models. Key operating models in food service/QSR’s

Format Involvement of brand owner (BO) Key costs – BO Revenue - BO Example Master Franchise (MF) International brand helps the franchisee Pre-operative expenses Royalty Domino’s Pizza set up the business by sharing its such as supplier technical knowhow and lending the development, franchisee brand name training, location assessment and consulting expenses Company owned and franchise Similar to MF. In addition, brand Pre-operative expenses Store revenues Pizza Hut and establishes its own representative office and costs to set-up + Royalty Jumbo King in the country. The representative office office and stores has a team that is in close relationship with the franchisee and is responsible for creating and maintaining the brand image. Joint venture The brand enters into a joint venture All costs related to store Store revenues Starbucks, agreement with a local entity. Local + Royalty Burger King and partner has a deep understanding of the TGI Friday’s consumer behaviour in the country and provides real estate to the international brand, as well as setting up the supply chain. 100% company owned set up their business with their own All costs related to store Store revenues Café Coffee Day, investment Barbeque Nation Source: Company, Edelweiss Research

Given that these brands are franchised, the franchise owners in India pay royalty between 4% and 7%, depending on the brand, agreement, lease income, etc.

In India, global QSRs have traditionally preferred to set up base via a local partner. Other than Subway, every other major QSR has chosen a domestic company to partner with. Except for the McDonald’s issue with its North & East franchise, existing partnerships forged at the beginning of their entry in to the country have continued. Also, royalty rate charged by these companies is in sync with the global average.

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Partners of global QSR’s in India

Brand Global Company India Company Agreement Royalty Master Domino’s Domino’s Pizza, Inc. Jubilant Foodworks 3-4% Franchisee North & East: M Agrawal Group, Master McDonald’s McDonald’s Corporation 4-5% South & West: Westlife Development Franchisee -Devyani International Multiple KFC Yum Brands Inc. 7-8% -Sapphire Foods Franchisee Subway Subway Group Multiple franchisee partners Micro Franchisee 7-8% Burger Restaurant Brand International Burger King India Ltd. JV 4-5% King -Devyani International Multiple Pizza Hut Yum Brands Inc. 7-8% -Sapphire Foods Franchisee North & East: Stellar Concepts Chilli’s Brinker International Regional Franchisee 5-6% South & West: TexMex Cuisine India Source: Technopak, Edelweiss Research

Return structures across QSRs remain divergent Key QSR brands comparison The Great McDonalds Burger Metrics Domino's KFC Subway Pizza Hut Chilli's BBQ Nation Kebab (Westlife) King Factory Format QSR QSR QSR QSR QSR CDR CDR CDR FDR Master Master Multiple Micro Master Multiple Regional Own + Own + Business model franchisee franchisee franchisee franchisee Franchise franchisee franchisee franchisee franchisee Outlet count 1354 311 454 541 261 432 21 147 23 APC (INR) 200-225 225-250 200-225 175-200 200-225 400-450 600-700 775-800 1,250-1,500 Average ticket value (INR) 500-550 550-600 500-550 250-300 500-550 1,450-1,550 2,750-3,000 3,500-3,750 6,000-6,500 COGS (%) 22-23 34-36 34-36 32-34 35-36 25-26 29-30 34-35 31-32 Gross margin (%) 77-78 64-66 64-66 66-68 64-65 74-75 70-71 65-66 68-69 Ad spends (%) 4-5 5-6 6-7 4-5 ~5 4-5 3-4 NA 5-6 Royalty 3-4 4-5 7-8 7-8 4-5 7-8 5-6 NA 6-7 Store EBITDA 21-23 13-15 14-16 20-22 12-14 17-19 20-21 20-21 16-18 Capex for Initial build and opening 15-20mn 35-40mn 30-35mn 4-5mn 20-25mn 20-25mn 30-35mn 25-30mn 40-50mn Average store size (in sq ft) 1400-1600 2600-3200 2500-3000 750-1000 1300-1400 2600-3200 3700-4300 4800-5400 4500-5000 ADS ('000)* 75-80 120-130 120-130 30-35 110-120 70-80 140-150 150-160 190-210 Source: Technopak, Edelweiss Research; *Pre-covid estimates

Despite their global popularity, success and return structure of QSRs in India remains divergent. Domino’s is by far the most profitable and successful QSR in India driven by: a) high store throughput and margins led by its popularity and dominant market share in the pizza QSR space (~80%); and b) limited store capex driven by its smaller store size and delivery-driven business.

Burger QSRs have larger store sizes due to: a) more kitchen space requirement; and b) dine-in focus. As a result, while store capex is high, returns are low. It’s for this very reason that Subway can operate with much smaller stores due to limited kitchen space as well as seating requirement. Thus, despite lower Average Daily Sales (ADS), it makes one of the highest store ROCEs in the QSR segment.

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Comparison of key metrics Burger BBQ Domino’s McDonald’s KFC Subway Pizza Hut Chilli’s GKF King Nation Average sales/Day (INR) 77,500 1,25,000 1,25,000 32,500 1,15,000 75,000 1,45,000 1,55,000 2,00,000 Annual Sales Per Store (INR mn) 28 45 45 12 41 27 52 56 72

Gross Margin (%) 77.0 65.0 65.0 67.0 65.0 75.0 70.0 65.0 69.0 Gross Margin (INR mn/Store) 21 29 29 8 27 20 37 36 50

Store EBITDA Margin (%) 22.0 14.0 15.0 21.0 13.0 18.0 20.0 20.0 17.0 EBITDA (INR mn/Store) 6 6 7 2 5 5 10 11 12

Capex (INR mn/store) 20 40 35 5 25 25 35 30 50

EBIT (INR mn/Store) 5 4 4 2 4 3 8 9 9

Store Level RoCE (%) 24.0 9.1 12.6 42.5 14.9 12.8 23.2 30.5 17.8 Source: Technopak, Edelweiss Research

In recent years, with most companies having established their presence, focus of mature QSRs is shifting from expansion to store economics and profitability. This has specifically been seen in the case of WDL, which has initiated ROP2.0 in 2016 to improve store return ratios.

ROCE of the two major players (JFL and WDL) has improved primarily due to uptick in SSSG, which has spurred margin improvement also.

Return ratios have seen an uptrend recently

75.0

59.0

43.0 (%) 27.0

11.0

-5.0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

JFL WDL

Source: Company, Edelweiss Research

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Online food delivery spurt to continue The Restaurant-to-Consumer (R2C) delivery segment includes the delivery of meals directly by restaurants. The order can be placed via platforms or directly through a restaurant website or app. The Platform-to-Consumer (P2C) delivery segment focuses on online delivery services that provide customers with meals from partner restaurants that do not necessarily have to offer food delivery themselves. In this case, the platforms (e.g., Zomato, Swiggy, etc.) handle the delivery process.

Business models for online delivery in India

Source: Statistia, Technopak, Bloomberg

Delivery market overview

20.0

16.0 Delvery market estimate 12.0 increased by 10% post Covid

(USD bn) (USD 8.0

4.0

0.0 2016 2020 2025 2025 PostCovid PreCovid Restaurant to Consumer Platform to Consumer

Source: Technopak, Edelweiss Research

As per Technopak, the overall delivery market in India is expected to post a 12% CAGR to reach USD18.1bn by FY25 from USD10.2bn in FY20, up from USD4.7bn in FY16, a CAGR of 21%.

Aggregators/P2C delivery segment driving incremental growth

The P2C/online food delivery market is currently one of the hottest spaces in India. While the segment started off in early 2010, over the past few years FoodTech aggregators like Swiggy, Zomato and others have raised billions of dollars in funding and ploughed them back into creating a large market for FoodTech consumption. This has been created majorly via: a) Investing in marketing campaigns and offers to build pipelines to consumer’s minds and wallets. b) Investing in marketing

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campaigns and specific programmes to build pipelines to restaurants. c) Investing in the delivery infrastructure.

Aggregator's city presence has seen a huge surge

600

480

360 (#) 240

120

0 Swiggy Zomato FY18 FY20

Source: Company, Edelweiss Research

The segment has posted the strongest growth in both the delivery business models- -100% CAGR between FY16 and FY20. The industry has been aided by development of the online ecosystem, attractive promotions & discounts, a variety of new offerings and cash-back offers. Broader tailwinds such as rising disposable incomes, higher DINKS families, falling data costs and increased smartphone penetration have also played an important role in this industry’s surge.

Despite the spurt, India’s food delivery market remains nascent compared to peers.

Food delivery market global comparison

USA UK Brazil India Population (mn) 329 68 211 1,366 Average Order Value (USD) 33 35 10 4 Off-premise eating (%) 49 33 18 20 Online % of food service spend 8 9 2 3 Source: Prosus, Edelweiss Research

Note: Eat Out / Off Premise % is defined as % of foodservice spend that is eaten off premise (e.g. Takeaway + Home Delivery + Drive Through)

Overall, as per Technopak, the P2C market is expected to clock CAGR of 15% to USD9.7bn over FY20-25. Prior to covid-19, growth of the P2C delivery segment was estimated at 13%, but has now increased to 15% primarily due to consumers' preference for food delivery over dine-in during the pandemic. This will take the P2C segment at 54% of the overall delivery market by FY25 compared to mere 6% in FY16.

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Key driver of restaurant economics; QSRs jumping on bandwagon

Online partnerships have been a boon for restaurants as they have helped increase overall top line by ~30% via a larger consumer base. With improved kitchen utilisation, online partnerships have also enabled restaurants to improve their bottom lines, especially considering majority of the costs are fixed (only 25% of restaurant costs are food related, i.e., variable).

~75% of costs of a restaurant are non-food/fixed Online ordering drives a sharp improvement

EBIT Margin, 5 D&A, 5 Food, 25 Post-Online

Other costs, 20

Pre-Online

Marketing, 5 Labour, 25 0 50 100 150 Rent, 15 Dine in Phone based Take away Online ordering

Source: Prosus, Edelweiss Research Source: Redseer Consulting, Edelweiss Research

FoodTech delivery players have been able to provide value to partner restaurants. Even after factoring in platform commissions (~20%), the incremental business drives higher profitability for the restaurant. Currently, almost 28% of the overall business of partner restaurants comes from FoodTech players. Going forward, we expect contribution to increase further, thus increasing their dependency on FoodTech players.

Online aggregators also influence consumption behaviour and lead to significant increase in ordering.

Evolution of a customer using food apps

6-8 times per week 3-4 times per week 3-4 times Habituated per week 1-2 times Exploring Power per week users Deal foodie Alternate hunters users -New or occasional -Discount driven -Variety seekers, -Mature food-tech users -Mostly single and wanting to try users -Usually married students different cuisine -Young and working and settled -High AOV professionals

Source: Redseer Consulting, Edelweiss Research

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While separate disclosures are not available, considering majority of the food delivery market is concentrated in the top 7-8 cities, chain QSRs are estimated to derive significant portion of revenue from these aggregators. There has been sharpened focus across the board on increasing delivery salience to further drive delivery.

WDL’s focus on delivery to drive store revenues All major QSR’s focus on driving delivery

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

While food aggregators have helped drive higher business, two aspects need monitoring for better use of this channel. These are

a) Excessive discounting: With a mature market in terms of business models, user acceptance and brand familiarity, leading online food aggregators (Zomato and Swiggy) are competing to capture the pole position in the market. Both the companies are fighting fiercely for market share through promos, discounts and gaining loyalty via subscription plans. However, discounts offered by these platforms are pressurising overall profitability of QSR companies. Also, it can dilute the brand of the QSR’s as seen with Dominos during FY15-17.

b) Commission structure: Ideally the take rate/commission of platforms is ~20%. Factoring this too, the incremental business generated by platforms adds to the profitability of restaurants. However, given that these platforms are still to turn profitable, any plans to increase commissions could impact business economics for restaurants. Covid-19: A blip, but an enabler as well Due to covid-19, consumers have become more cognizant of hygiene and safety issues and chain QSRs or CDRs have positioned themselves to meet all the heightened requirements related to food quality, service standards, processes and delivery capabilities to capture the opportunities that arise due to consumers’ more cautious dining habits, particularly in the post-covid-19 world. While some consumers are expected to go back to the unorganised sector, there will be others who will permanently shift to the organised sector. This void created thus can be easily addressed by chain QSRs and CDRs.

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Covid impact summary

Segment Impact QSRs, particularly the chain QSRs, were the first to demonstrate recovery from the impacts of COVID-19. Chain QSRs generally had the infrastructure and process for delivery services in place long before the COVID-19 crisis and were able to adapt to the government restrictions swiftly. Therefore, while dine-in services had been affected the chain QSR QSRs were able to maintain growth and revenues through enhancing their delivery services. Consumers are also more inclined to order from reputable international QSR chains given they generally maintain high hygiene and safety standards. Café and CDR were typically known for their dine-in experience and generally did not offer delivery or takeaway Café and CDR services, so they were not as adaptive to the safety measures and social distancing imposed by the government and the new ways of serving customers in response to COVID-19. PBCL and fine dining restaurants were significantly impacted by COVID-19 as most of them stayed closed till the end PBCL and Fine Dining of July 2020 and in some parts of the country till Oct 2020. Moreover, even after they have re-opened, customers have been hesitant to visit given ongoing concerns. Cloud Kitchens and food delivery platforms, such as Zomato and Swiggy, played an important role during the Cloud Kitchens/Food Delivery lockdown to serving consumer needs. As of October 2020, Zomato and Swiggy have both recovered to nearly 100% Platforms of their pre-COVID-19 levels of sales. The unorganized segment was the segment within the food services market that was most significantly impacted by COVID-19. It is estimated that this segment will be the last to demonstrate recovery in sales primarily due to Unorganized Segment consumers' concerns over hygiene and food safety, and small business owners are less likely to have sufficient working capital to sustain them through the business downturn. Source: Company, Edelweiss Research

FS market expected to contract 53% in FY21 Chain QSR’s expected clock faster recovery

1500 H1FY21 FY21E 0 1200 -20 900 -40

(INRbn) 600 (%) -60 300

0 -80

-100

Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Industry JFL WDL BKI Pre Covid Post Covid

Source: Company, Edelweiss Research Source: Company, Edelweiss Research Recovery trajectory Westlife Development Jubilant Foodworks Dine- Sales Delivery Sales Delivery Dine- Operational Total Operational in+Others Operational Total Operational Recovery Recovery Recovery Recovery In+Takeaway Stores Stores (%) Recovery Stores Stores (%) (%) (%) (%) (%) (%) (%) Apr-20 119 319 37 15-20 NA NA 673 1,330 51 24 47 NA May-20 197 319 62 15-20 NA NA 890 1,330 67 40 70 NA Jun-20 261 319 82 40-45 NA NA 1,050 1,354 78 56 80 NA Jul-20 270 319 85 40-45 NA NA 1,057 1,356 78 70 95 42 Aug-20 278 319 87 65-70 NA NA 1,125 1,360 83 85 111 55 Sep-20 287 319 90 65-70 90 ~50 1,354 1,312 103 92 112 68 Oct-20 302 319 95 NA NA NA 1,264 1,264 100 96 116 72 Source: Company, Edelweiss Research

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What’s the secret sauce to success? As per us, key ingredients, for the success of QSRs are: a) A well-established brand. b) Menu adaptability–most important. c) Favourable store economics. d) Well- defined store location criteria. e) Regular adaptation to counter brand/menu fatigue. f) Established supply chain. We see this with global examples too (KFC in China, Dominos in Australia). Also, penetration of various QSRs remains focused in top-8 cities, signalling a long growth runway. When we compare the 3 major QSR companies across these parameters (see table below), we believe all have attractive product propositions and have been at the forefront of innovation and localization, which has helped these players to become respective category leaders (Dominos ~80% share of Pizza market, McDonald’s 36% of Burgers & Sandwiches and Burger King: 16%) with an established supply chain network. JFL’s dominance and reach is by far the highest but that to an extent has also limited incremental growth opportunities for the company. On this parameter, BKI leads the pack given its late start and also wider geography area compared to WDL. It’s on delivery where JFL has a very strong presence, much better than peers. Also, the salience of Pizza to delivery has been traditionally higher. Comparison of key metrics

JFL WDL BKI

Brand & Franchise Terms Brand Strength

Franchise contract flexibility

Royalty

Supply Chain set-up

Store Network & Profitability

Current scale

Expansion potential

Store Profitability

Menu Design Core menu

Complimentary offering

Day parts

Delivery Adaptability Delivery reach

Listing on aggregators

Own Delivery/Data

Overall

Source: Company, Edelweiss Research

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Retail

Common Size (%) Gross Margin 74.9 76.3 75.8 74.8 75.2 75.0 58.4 60.0 60.6 62.6 63.5 65.2 59.9 62.0 63.6 64.2

PAT 5.9 4.4 3.0 6.9 9.3 7.9 -3.8 0.3 -1.3 1.1 1.5 0.3 -24.8 -16.6 -2.5 -8.7

Depreciation 1.2 1.3 1.4 1.4 1.3 2.7 2.6 2.6 2.6 2.5 2.8 4.5 3.0 2.8 2.5 5.2 PAT 1.5 1.1 0.7 1.8 2.8 2.4 -1.5 0.1 -0.5 0.5 0.7 0.2 -8.3 -5.8 -1.0 -3.3 Source: Company, Edelweiss Research

Note: Financials for FY20 are post INDAS 116 adjustment

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Retail

Outlook & valuations: Factoring opportunity and profitability

QSR valuation comparison

Note: FY17-20 EBITDA CAGR based on pre INDAS 116 adjustments; FY20-23 post INDAS 116 adjustments

For Westlife Development, Sales/EBITDA CAGR based on consensus numbers and multiples based on consensus TP

Jubilant Foodworks (JFL) has been the bell weather of India’s QSR space and also its success potential. Potential to expand Domino’s store count by ~40%, despite the robust 16% store expansion CAGR over the past decade, imparts four-five years of store addition visibility. Moreover, even with a mature network (average: >7 years), SSSG remains industry leading, reflecting brand popularity. Its delivery plus digital leadership bode well in the post-covid era, burnishing prospects. Overall, we forecast a strong 11%/15% revenue/EBITDA CAGR over FY20-23. JFL remains our top pick in the QSR space and maintain ‘BUY’ with TP of INR3,575 (40x June 2022 EV/EBITDA). Recent additions– Ekdum! and Hong’s Kitchen–will take three-four years to make any significant revenue contribution, but provide option value. Though the last major QSR to enter India (2014), Burger King India (BKI) has aggregated a compelling recipe for success: strong brand, a favourable master franchise agreement and reasonable store economics. In addition, BKI’s customer proposition—focused on value and wide offerings—has lasting flavour, visible in its store productivity. The key aspect of BKI‘s story though is its highest store addition potential among QSRs—our analysis pegs it at ~1,100 by CY26. Overall, we expect BKI to meet its target of 700 stores by CY26, driving a 33% EBITDA CAGR (FY20–23E). Our relative multiple of 34x June 2022 EV/EBITDA (based on business profile comparison with QSR peers), however, implies limited upside. Initiate with ‘HOLD’. Westlife Development’s (WDL) relentless innovation drive and focus on value offerings have rendered it the leader in the burger QSR space (~36% market share). The company is now shifting focus to: a) further improvement in store profitability by cutting store opex/capex by ~20% via ROP 2.0 (benefits visible); and b) maximising potential of recent extensions like McCafe and McDelivery, which are further boosting SSSG (FY18-20: 12% versus FY15-17: 0%) and store profitability (improved store ROCE ~1.5x). Despite its leadership, store addition potential remains robust, which enhances growth visibility. The stock is trading at 23x FY23E EV/EBITDA, with pre covid one year average of 26x. ‘NOT RATED’.

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Retail

Global QSR valuation comparison

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Retail

Appendix Appendix 1: Global corporations business model focused towards franchises

Globally, majority of the renowned QSR brands originate in the US. Unlike their franchisees spread across countries, these companies have reached a certain level of maturity and now a days derive majority of their revenues from franchising rather than core store operations.

Summary of global QSR brands Year of Revenues EBITDA Company Brands Outlets Countries Margin (%) launch (USD bn) (USD bn) Starbucks Corp. Starbucks 1971 31,256 81 26.5 5.5 20.9 McDonald's Corp. McDonald's 1955 38,695 119 21.1 9.1 43.0 Burger King 1954 Restaurant Brands International Tim Hortons 1964 27,086 >100 5.6 2.2 39.1 Popeyes 1972 KFC 1952 Yum! Brands, Inc. Pizza Hut 1958 50,170 152 5.6 2.1 37.3 Taco Bell 1962 Domino's Pizza, Inc. Dominos 1960 17,020 90 3.2 0.6 19.5 Baskin Robbins 1945 Dunkin' Brands, Inc. 21,297 60 1.4 0.4 32.7 Dunkin Donuts 1950 Papa John's International, Inc. Papa John's 1984 5,395 49 1.6 0.1 6.4 Source: Company, Edelweiss Research, Note: Considered major public traded companies

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Retail

McDonald’s Corporation McDonald’s owns and franchises restaurants globally. ~93% of its restaurants are franchised and the company derives majority of its profitability from its franchising operations (~80% of total EBITDA). It has recently launched a Velocity Growth plan. The plan is designed to drive sustainable comparable sales and guest count growth.

It continues to scale and optimise the plan through the following growth accelerators: a) Experience of future stores (launched in India also). McDonald’s is building upon its investments in Experience of the Future (EOTF) stores, focusing on restaurant modernisation in order to transform the restaurant service experience and enhance the brand in the eyes of its customers. b) Digital: Improving its existing service model with customers through technology. c) Delivery: McDonald’s continues to build momentum with its delivery platform as a way of expanding the convenience for its customers.

Over the long term, McDonald’s is targeting system-wide sales growth of 3-5% and operating margin around mid-40%.

McDonalds Corp business summary CY17 CY18 CY19

Key Financials Company-operated restaurants 12.7 10.0 9.4 Franchised restaurants 10.1 11.0 11.7 Total Revenues (USD bn) 22.8 21.0 21.1

Company-operated 2.3 1.7 1.7 Franchised 8.3 9.0 9.5 Total Store EBITDA (USD bn) 10.6 10.8 11.1

SG&A and others 1.1 2.0 2.0 Reported EBITDA (USD bn) 9.6 8.8 9.1

Key Metrics Revenue share - Company operated (%) 55.7 47.5 44.7 Revenue share - Franchise (%) 44.3 52.2 55.3

Revenue share - USA (%) 35.1 36.5 37.2 Revenue share - International (%) 64.9 63.5 62.8

Company operated margin (%) 18.2 17.4 17.6 Franchise margins (%) 82.3 82.1 81.1 Total Margins (%) 46.5 51.3 52.7

SSSG (%) 5.3 4.5 5.9 Source: Company, Edelweiss Research

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Retail

Domino’s Pizza, Inc. Founded in 1960, Domino's is the largest pizza restaurant chain in the world based “Our business model is straightforward: we on global retail sales, with more than 17,200 stores in over 90 markets. The handcraft and serve quality food at a company’s roots are in convenient pizza delivery, with a significant proportion of competitive price, with easy ordering access and efficient service which are aided by our sales from carryout customers. technology innovations” Domino's Domino's generates revenues and earnings primarily by charging royalties to its franchisees, with 98% of its stores franchised. All its owned stores are located in the US, with all international stores franchised. India is the company’s largest international market, followed by UK and Mexico.

It also has a supply chain division which supplies food, equipment and supplies from its supply chain centers to all of its US franchised stores and certain international franchised stores as well.

Dominos Pizza business summary CY17 CY18 CY19 Key Financials Company-owned stores - USA 491 515 454 Supply Chain 1,739 1,943 2,105 Franchised restaurants 558 616 670 Total Revenues (USD mn) 2,788 3,074 3,228

Company-operated margins - USA 113 117 107 Supply Chain 195 211 235 Franchised margins 558 616 670 Total Store EBITDA (USD mn) 866 944 1,012

SG&A and others 345 373 382 Reported EBITDA (USD mn) 521 572 629

Key Metrics Revenue share - Company operated (%) 17.6 16.7 14.1 Revenue share - Supply Chain (%) 62.4 63.2 65.2 Revenue share - Franchise (%) 20.0 20.0 20.7

Company operated margin (%) 23.1 22.6 23.7 Supply Chain margin (%) 11.2 10.9 11.2 Franchise margins (%) 100.0 100.0 100.0 Total Margins (%) 31.1 30.7 31.3

SSSG (%) - US Stores 7.7 6.6 3.2 SSSG (%) - International Stores 3.4 3.5 1.9

Total Stores 14,856 15,914 17,020 Source: Company, Edelweiss Research

Note: Revenues for CY18, CY19 are excluding U.S. franchise advertising

Franchise margins have been derived, not reported separately by company

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Retail

Restaurant Brand International (Owner of Burger King) Restaurant Brand International (RBI) is a Canadian corporation formed in 2014 to serve as the indirect holding company for Tim Hortons (founded in 1964), Burger King (1954) and Popeyes (1972). Tim Hortons, Burger King and Popeyes brands have similar franchise business models. The three brands are managed independently while benefiting from global scale and sharing of best practices. Approximately 100% of total restaurants of each of its brands was franchised.

RBI generates revenue from the following sources: (i) franchise; (ii) from properties it leases or sublease to franchisees; and (iii) sales at restaurants owned by RBI. In addition, Tim Hortons business generates revenue from sales to franchisees related to supply chain operations. Burger King and Popeyes earn nearly all revenues from franchise and property revenues.

Restaurant Brand International key summary CY17 CY18 CY19 Key Financials Tim Hortons 3,155 3,292 3,344 Burger King 1,219 1,651 1,777 Popeyes 202 414 482 Total Revenues (USD mn) 4,576 5,357 5,603

Tim Hortons 1,227 1,441 1,431 Burger King 1,046 1,505 1,594 Popeyes 147 350 413 Total Store EBITDA (USD mn) 2,420 3,296 3,438

SG&A + Others expenses 503 1,199 1,246 Reported EBITDA (USD mn) 1,917 2,097 2,192

Key Metrics EBITDA Margin - Tim Hortons 38.9 43.8 42.8 EBITDA Margin - Burger King 85.8 91.2 89.7 EBITDA Margin - Popeyes 72.8 84.5 85.7 Total Store EBITDA Margin (%) 52.9 61.5 61.4

SSSG (%) - Tim Hortons -0.1 0.6 -1.5 SSSG (%) - Burger King 3.1 2.0 3.4 SSSG (%) - Popeyes -1.5 1.6 12.1

Total Stores - Tim Hortons 4,748 4,846 4,932 Total Stores - Burger King 16,767 17,796 18,838 Total Stores - Popeyes 2,892 3,102 3,316 Total Stores 24,407 25,744 27,086 Source: Company, Edelweiss Research

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India Equity Research Retail February 17, 2021

BURGER KING

INITIATING COVERAGE

KEY DATA Rating HOLD A whopper not on discount Sector relative Neutral Price (INR) 144 12 month price target (INR) 143 Though the last major QSR to enter India (2014), Burger King India Market cap (INR bn/USD bn) 55/0.8 (BKI) has aggregated a compelling recipe for success: strong brand, a Free float/Foreign ownership (%) 47.1/13.7 favourable master franchise agreement and reasonable store economics. In addition, BKI’s customer proposition—focused on value INVESTMENT METRICS 550 and wide offerings—has lasting flavour, visible in its store productivity. 425 The key aspect of BKI‘s story though is its highest store addition 300 175 potential among QSRs—our analysis pegs it at ~1,100 by CY26. 50 -75 Overall, we expect BKI to meet its target of 700 stores by CY26, driving Sales Growth EPS Growth RoE PE (%) (%) (%) (x) a 33% EBITDA CAGR (FY20–23E). Our relative multiple of 34x June 2022 Retail BURGERKI IN EQUITY EV/EBITDA (based on business profile comparison with QSR peers), however, implies limited upside. Initiate with ‘HOLD’. FINANCIALS (INR mn) Base in place: strong brand, MFA and reasonable store economics Year to March FY20A FY21E FY22E FY23E BKI has put the building blocks in place: i) a strong brand – second-biggest burger Revenue 8,412 5,027 10,222 13,777 brand globally; ii) a favourable master franchise agreement (MFA) – stable royalty EBITDA 1,040 122 1,549 2,444 Adjusted profit (722) (1,772) (437) 20 rate, pan-India franchise opportunity and flexibility in vendor selection, which has Diluted EPS (INR) (2.6) (4.6) (1.1) 0.1 driven margin improvement; and iii) stable store economics – stores break even in EPS growth (%) 80.0 78.6 (75.4) nm year one, with mature stores clocking an RoCE in excess of 20%. RoAE (%) (27.5) (36.5) (6.5) 0.3 P/E (x) nm nm nm 2,945.0 Customer proposition driven by value and wide offerings EV/EBITDA (x) 56.9 453.0 36.3 23.4 BKI’s customer proposition is a blend of value offerings, variety, strong vegetarian Dividend yield (%) 0 0 0 0 menu and flame grilling expertise. BKI has been able to carve a niche for its value- driven strategy; on individual SKUs, BKI has the cheapest offerings among major PRICE PERFORMANCE burger QSRs. All this reflects in BKI’s store productivity too, comparable to WDL, despite its ‘late’ entry. Overall BKI’s established product innovation process, focus on value offerings, and younger store profile should drive strong SSSG. Big room for store addition; likely to be fastest-growing QSR chain Our store expansion analysis puts the opportunity size at ~570 stores in FY20, rising to ~1,100 by 2026 (BKI targets 700). Even after touching this target, BKI’s market

share in the chain QSR segment is expected to be about 4% in FY25E (4% in FY20).

Outlook and valuation: Pricing the growth; initiate with ‘HOLD’ Explore: In light of strong revenue growth track record (FY17–20: 54% CAGR), we estimate revenue would expand at an 18% CAGR over FY20–23 (FY21–23E: 66%) driven by a 15% store CAGR and SSSG coming back on track. Besides, higher gross margins and increasing store maturity would drive up EBITDA margin to 18% in FY23 (FY20: 12%, EBITDA CAGR: 33%). BKI would be self-sufficient to fund its expansion from FY26. Financial model Podcast Comparing BKI with JFL and WDL shows BKI lags on: i) profitability and cash flows; and ii) market share and presence. However, BKI scores high on: i) growth potential; ii) margin stability; and iii) store economics. Thus, we assign BKI a target multiple of 34x June 2022 EV/EBITDA (25x FY23E), similar to the consensus multiple range for Video Corporate access WDL, and at a 15% discount to JFL. This yields a TP of INR143, implying limited upside potential. Initiate with ‘HOLD/SN’.

Nihal Mahesh Jham Abneesh Roy Prateek Barsagade +91 (22) 6623 3352 +91 (22) 6620 3141 +91 (22) 4063 5407 [email protected] [email protected] [email protected]

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BURGER KING

The Story in Charts

MFA flexibility aided margin improvement Stable store economics, mature store RoCE 20%+ 65.0 28.0

63.0 21.0

14.0

61.0 (%)

(%) 7.0 59.0

0.0 57.0 -7.0 55.0 Y1 Y2 Y3 Y4 Y5 FY17 FY18 FY19 FY20 Store RoCE (%) Store EBITDA Margin (%)

Focus on value pricing Store expansion remains robust 250 1250

200 1000

150

750 (INR)

100 (#) 500 50 250 0 Entry level Veg Entry level Entry level meal Burger Chicken Burger price 0 Current Current CY26 CY26 BKI McD Wendy's KFC BKI Potential Target Potential

Robust revenue growth trajectory… …along with margin expansion

15,000 2,500 20.0

12,000 1,900 15.0

1,300 10.0

9,000 (%)

(INRmn) 700 5.0

(INRmn) 6,000

100 0.0 3,000 -500 -5.0 0 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY17 FY18 FY19 FY20 FY21E FY22E FY23E EBITDA EBITDA Margin (%) - RHS

Source: Company, Edelweiss Research

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BURGER KING

Financial Statements

Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 8,412 5,027 10,222 13,777 Share capital 2,777 3,817 3,817 3,817 Gross profit 5,397 3,147 6,676 9,035 Reserves (23) 3,140 2,704 2,723 Employee costs 1,365 1,085 1,565 1,991 Shareholders funds 2,754 6,957 6,520 6,540 Other expenses 2,992 1,940 3,561 4,600 Minority interest 0 0 0 0 EBITDA 1,040 122 1,549 2,444 Borrowings 1,985 0 0 0 Depreciation 1,164 1,351 1,479 1,797 Trade payables 816 658 958 1,280 Less: Interest expense 655 784 642 720 Other liabs & prov 6,411 6,378 7,239 8,726 Add: Other income 56 241 134 93 Total liabilities 11,967 13,992 14,716 16,546 Profit before tax (722) (1,772) (437) 20 Net block 4,742 5,130 6,190 7,900 Prov for tax 0 0 0 0 Intangible assets 5,625 5,328 5,904 7,083 Less: Other adj 0 0 0 0 Capital WIP 476 476 476 476 Reported profit (766) (1,797) (437) 20 Total fixed assets 10,842 10,933 12,570 15,459 Less: Excp.item (net) 0 0 0 0 Non current inv 34 20 20 20 Adjusted profit (722) (1,772) (437) 20 Cash/cash equivalent 466 2,442 1,457 347 Diluted shares o/s 278 382 382 382 Sundry debtors 32 19 39 53 Adjusted diluted EPS (2.6) (4.6) (1.1) 0.1 Loans & advances 303 290 290 290 DPS (INR) 0 0 0 0 Other assets 289 288 340 377 Tax rate (%) 0 0 0 0 Total assets 11,967 13,992 14,716 16,546

Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E SSSG (% YoY) (0.3) (43.0) 75.0 11.5 Reported profit (766) (1,797) (437) 20 Net store addition (#) 71.0 14.0 49.0 75.0 Add: Depreciation 1,164 1,351 1,479 1,797 Gross Margin (%) 64.0 62.5 65.2 65.5 Interest (net of tax) 655 784 642 720 EBITDA margin (%) 12.4 2.4 15.2 17.7 Others (31) (241) (134) (93) Net profit margin (%) (8.6) (35.3) (4.3) 0.1 Less: Changes in WC 108 (171) 228 272 Revenue growth (% YoY) 33.0 (40.2) 103.4 34.8 Operating cash flow 1,127 (75) 1,778 2,716 EBITDA growth (% YoY) 31.7 (88.3) 1,172.0 57.7 Less: Capex (2,275) (1,120) (1,955) (2,856) Adj. profit growth (%) 88.7 145.4 (75.4) nm Free cash flow (1,148) (1,195) (177) (140)

Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (6.0) 7.0 6.0 RoE (%) (27.5) (36.5) (6.5) 0.3 Repo rate (%) 4.4 3.5 3.5 4.0 RoCE (%) (0.7) (8.2) 1.5 5.2 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days 10 15 9 10 Royalty (%) 4.1 4.4 4.5 4.6 Receivable days 2 2 1 1 Capex (INR mn/Store) 26.0 26.8 27.6 28.4 Payable days 86 143 83 86 Employee per store (#) 24.4 20.0 23.0 23.0 Working cap (% sales) (78.6) (128.1) (73.6) (67.4) Inventory (% of RM) 3.1 3.1 3.1 3.1 Gross debt/equity (x) 0.7 0 0 0 Net debt/equity (x) 0.6 (0.4) (0.2) (0.1) Interest coverage (x) (0.2) (1.6) 0.1 0.9

Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) nm nm nm 2,945.0 EPS growth (%) 80.0 78.6 (75.4) nm Price/BV (x) 15.2 8.3 8.8 8.8 RoE (%) (27.5) (36.5) (6.5) 0.3 EV/EBITDA (x) 56.9 453.0 36.3 23.4 EBITDA growth (%) 31.7 (88.3) 1,172.0 57.7 Dividend yield (%) 0 0 0 0 Payout ratio (%) nm nm nm 0

Source: Company and Edelweiss estimates

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BURGER KING

Investment Rationale

Base in place: strong brand, MFA and reasonable store economics

 BKI has put the building blocks in place: i) a strong brand – second-biggest burger brand globally; ii) a favourable master franchise agreement (MFA) – stable royalty rate, pan-India franchise opportunity and flexibility in vendor selection, which has driven margin improvement; and iii) stable store economics—stores break even in year 1, with mature stores clocking RoCE in excess of 20%.

Strong brand; second-biggest burger chain globally

Burger King is one of the most renowned QSR brands globally, and the second- biggest pure-play burger chain after McDonald’s, with more than 18,000 outlets.

Outlets globally 45,000

36,000

27,000 (#) 18,000

9,000

KFC

Popeyes

Wendy's

Pizza Hut Pizza

Domino's Burger KingBurger McDonald's Source: Company, Edelweiss Research

Among top restaurant brands globally Brand Rank Brand value (USD bn) McDonald’s 10 46 Starbucks 37 18 KFC 96 8 Burger King 97 8 Source: Forbes, Edelweiss Research

A favourable MFA provides flexibility to drive margins

BKI was one of the last major global QSRs to enter the country. It has used the learnings from other QSRs, and in exchange for its commitment to open 700 stores by CY26, secured an MFA that gives it the opportunity to grow the brand along with good profitability. Key highlights:

1. Royalty rate is among the lowest in the segment; it is capped at 5% till 2039.

2. Burger King has given BKI pan-India rights to develop the chain. Lot of other brands have multiple master franchises.

3. Absolutely flexibility on designing its menu and pricing.

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BURGER KING

4. Flexibility to choose its vendor base and independently negotiate with them. For instance, beverage partner for Burger King globally is Coco-Cola, whereas BKI chose Pepsi.

A comparative snapshot of franchise agreements in India Brand Global Company India Company Agreement Royalty Master Domino’s Domino’s Pizza, Inc. Jubilant Foodworks 3–4% Franchisee North & East: MM McDonald’s Agrawal Group, Master McDonald’s 4–5% Corporation South & West: Westlife Franchisee Development -Devyani International Multiple KFC Yum Brands Inc. 7–8% -Sapphire Foods Franchisee Multiple franchisee Micro Subway Subway Group 7–8% partners Franchisee Burger Restaurant Brand Burger King India Ltd. JV 4–5% King International -Devyani International Multiple Pizza Hut Yum Brands Inc. 7–8% -Sapphire Foods Franchisee North & East: Stellar Concepts Regional Chilli’s Brinker International 5–6% South & West: TexMex Franchisee Cuisine India Source: Company, Edelweiss Research

A key differentiator for BKI vis-à-vis other franchise agreements in the country is the flexibility to choose its vendor base and independently negotiate with them. This flexibility has seen the company drive a significant improvement in gross margins over the last four years. In fact, despite its smaller operations than Westlife Development, BKI’s gross margins are similar.

Gross margins have seen an improvement 65.0

63.0

61.0 (%) 59.0

57.0

55.0 FY17 FY18 FY19 FY20

Source: Company, Edelweiss Research

Store economics remain decent; scope for improvement as brand matures

Unlike peers, BKI was conservative in terms of the store size it chose initially to expand its footprint. While its revenue productivity is similar to peers, the company’s smaller store size and consequent investments have resulted in reasonable store economics.

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BURGER KING

Key QSR brands – A comparison The Great McDonalds Burger Metrics Domino's KFC Subway Pizza Hut Chilli's BBQ Nation Kebab (Westlife) King Factory Gross margin (%) 77-78 64-66 64-66 66-68 64-65 74-75 70-71 65-66 68-69 Ad spends (%) 4-5 5-6 6-7 4-5 ~5 4-5 3-4 NA 5-6 Royalty 3-4 4-5 7-8 7-8 4-5 7-8 5-6 NA 6-7 Store EBITDA 21-23 13-15 14-16 20-22 12-14 17-19 20-21 20-21 16-18 Capex for Initial build and opening 15-20mn 35-40mn 30-35mn 4-5mn 20-25mn 20-25mn 30-35mn 25-30mn 40-50mn Average store size (in sq ft) 1400-1600 2600-3200 2500-3000 750-1000 1300-1400 2600-3200 3700-4300 4800-5400 4500-5000 ADS ('000)* 75-80 120-130 120-130 30-35 110-120 70-80 140-150 150-160 190-210 Source: Company, Edelweiss Research; *Pre-covid estimates

Store RoCE comparison across peers 45.0

36.0

27.0 (%) 18.0

9.0

0.0 McDonald’s KFC Pizza Hut Burger Domino’s Subway King

Source: BKI DRHP, Edelweiss Research

Note: RoCE calculated as store EBIT/capex per store

According to our analysis, BKI’s stores break even in the first year itself while mature stores clock EBITDA margin in excess of 15% with store RoCE of ~20%.

BKI standard store revenue ramp-up Store profitability and RoCE ramp-up 60 28.0

48 21.0

36 14.0

24 (%)

7.0 (INR mn/annum) (INR 12 0.0 0 Y1 Y2 Y3 Y4 Y5 -7.0 Y1 Y2 Y3 Y4 Y5 Store revenue Store RoCE (%) Store EBITDA Margin (%)

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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BURGER KING

Strong customer proposition driven by value and wide offerings

 BKI’s customer proposition is geared towards value offerings, variety, strong vegetarian menu, taste advantage and flame grilling expertise.  BKI has been able to carve a niche for its value-driven strategy via ‘2-for’/’3-for’ promotions. Even on individual SKUs for entry-level burgers and meals, BKI’s offerings are the cheapest among major burger QSR brands in the country.  Besides, BKI’s menu remains one of the most extensive in the burger QSR space. All this reflects in store productivity, which is on core offerings (excluding cafe contribution) comparable to the leader despite its ‘late’ entry.  Overall, BKI’s established product innovations process along with its value offerings should help it drive strong SSSG post-covid-19 recovery. BKI’s younger store network is an additional lever that would drive its above-industry growth.

BKI has focused its customer proposition towards value offerings, variety, strong vegetarian menu, taste advantage and flame grilling expertise. Given that the Indian consumer is extremely value-conscious, BKI has tailored its offerings to meet the customer demand by selling its products at attractive price points.

‘2-for’/’3-for’ promotions, wherein customers are able to enjoy 2/3 products at a much discounted price—for example 2 Crispy Veg burgers for INR69 or 3 Crispy Chicken burgers for INR129—has been key in generating demand for BKI.

Even on individual SKUs for entry level veg/non-veg burgers and meals, BKI has created offerings that are the cheapest among major burger QSR brands in the country.

Pricing comparison across QSRs 250

200

150

(INR) 100

0 Entry level Veg Burger Entry level Chicken Entry level meal price Burger BKI McD Wendy's KFC

Source: Company, Edelweiss Research

Another aspect of BKI’s menu is its focus on the WHOPPER sub-brand. It is a signature brand associated with Burger King globally; BKI too has maximised its presence on its menu. BKI has three vegetarian Whopper offerings (Veg Lite, Crunchy and Veg LTO) and five offerings in non-vegetarian burgers (Chicken Lite, Spiced Chicken, Chicken LTO, Classic Mutton and Mutton LTO).

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BURGER KING

Extensive menu offerings McD BKI KFC Burger Y Y Y Wraps Y Y N Rice Y Y Y Chicken Y Y Y Sides Y Y Y Pizza Puffs Y N N Coffee Y Y N Coolers Y Y N Desserts Y Y N Breakfast Y N N Source: Company, Edelweiss Research

BKI has also created one of the most extensive menus in the industry across the price range, creating options for every potential customer. It has a limited breakfast offering (unlike McDonald’s), which the company plans to add to in the coming years.

Menu offerings – A wide spread 10

6 (#) 4

0 Veg Burgers Non Veg Burgers McD BKI

Source: Company, Edelweiss Research

Offerings across price points 300 240 180

(INR) 120 60

King Egg King

BK BK Veggie

Crispy Veg Crispy

ClassicVeg

WHOPPER

Chicken LTO Chicken

WHOPPER

Chicken

Fiery Chicken Fiery

Crispy Chicken Crispy

ClassicMutton

ClassicChicken

PaneerOverload

SpicedWHOPPER

CheeseMeltdown

Veg Lite WHOPPER Lite Veg

Veg LTO WHOPPER Veg

Crunchy WHOPPER Crunchy

Chicken Tandoor Chicken Grill Mutton LTO WHOPPER MuttonLTO Chicken Lite WHOPPER Lite Chicken Source: Company, Edelweiss Research

42 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

BURGER KING

All these factors have helped BKI improve its store productivity significantly, now very close to WDL’s store productivity—which includes a notable contribution from McCafe, a format not yet present in BKI’s stores. Hence, like-for-like BKI’s store productivity is comparable with WDL’s despite the former’s much later entry and a younger store profile.

BKI's store productivity has seen an improvement 60.0

48.0

36.0 (INRmn) 24.0

12.0

0.0 FY18 FY19 FY20 BKI WDL

Source: Company, Edelweiss Research Note: Store productivity for existing stores

Established product innovations process; premium burger range launched BKI has an established process to generate new menu ideas and also to convert them to launches. New menu ideas come via: i) emerging trends – market launches, store feedback; ii) Global innovations – there is a Burger King global directory; and iii) in- house chef team. BKI has ideation and discussion sessions every week, post which products are further evaluated. Once a set of products is developed, post-internal feedback, many are discarded. These products then go in for extensive testing before being formally launched.

As BKI has continued to expand its restaurant footprint across India, it has also launched specific regional product innovations, such as BK® Fried Chicken in the east and south regions of India, as well as in Punjab, in January 2020. BKI also recently renovated its menu and introduced a range of taste-based gourmet burgers and part of the King’s collection. These burgers include Cheese Meltdown, Paneer Overload and Fiery Chicken. It also introduced new and additional sauces to complement its menu offerings.

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 43

BURGER KING

BKI sample graphic menu

Source: Media, Edelweiss Research

Positioned for millennials – Easier to tap into online channel BKI attempts to target and connect with millennials, which loosely comprise college students, casual diners and DINK (Double Income No Kids) couples, through their competitive price points, value leadership and its wide ranging menu. It also associates via ads and marketing strategies with millennials, both on TV and social media, store ambience and food packaging. Additionally, we believe that targeting millennials is the right strategy for a fast- growing brand such as Burger King owing to the following reasons:  India has a large millennial population, which has grown from 418mn in FY11 to 447mn in FY20. This demographic is expected to grow as the working-age population increases, enabling brands such as Burger King to encash a much longer customer LTV.

 In FY20, ~60% of Indians eating out were millennials, which represent the age group from 15 to 34 years old – hence it is necessary to target the largest market.

 Millennials, on average, are more likely to eat out twice every month and have a higher ordering frequency than other demographics.

The covid-19 pandemic has given a thrust to online delivery and even traditional non delivery categories like burgers have seen a sharp spurt. Given that online channels are becoming increasingly popular, a millennial-focused approach is likely to hold BKI in good stead.

BKI is also betting aggressively on its recently launched app. While in terms of downloads it still lags other QSRs, BKI is trying to drive the same via exclusive offers.

44 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

BURGER KING

Snapshot of BKI's app

Source: Edelweiss Research

SSSG to be driven by innovation and value focus; store age profile additional lever We maintain that pricing is key in driving both online and offline traffic for any QSR brand, and consequently in driving its SSSG. With BKI’s core focus remaining on maintaining its value leadership in conjunction with providing a wide variety to both vegetarian and non-vegetarian customers, we expect its SSSG to recover gradually once dine-in revenues start gaining traction again. In addition, given BKI’s target customers are millennials, value products are likely to encourage higher sampling and then gradually get them to upgrade across price points.

While FY21/22 is likely to be an aberration owing to the covid-19 pandemic, translating to lower dine-in revenues/eating-out frequency by customers, we expect BKI’s SSSG to compound at 4% over FY20–23.

SSSG to recover by FY22E FY18 FY19 FY20 FY21E FY22E FY23E

Stores (#) 129 187 260 275 324 399 Store Addition (#) 38 58 71 14 49 75 Store Addition (%) 47 45 39 6 18 23

SSSG (%) 12 29 0 -43 75 12

Revenue Growth (%) 64 67 33 -40 103 35 Source: Company, Edelweiss Research

In addition, BKI has a relatively younger store network compared with peers, and the ramp-up of younger stores should further help in driving above-industry-average SSSG growth.

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 45

BURGER KING

Average store age profile of BKI stores 5.0

4.0

3.0

(Years) 2.0

1.0

0.0 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E

Average Store age

Source: Edelweiss Research

46 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

BURGER KING

Big room for store addition; fastest-growing large QSR chain

 BKI has an institutionalized multi-layer store approval and roll-out process. The CEO, Mr. Rajeev Varman, personally overlooks the approval of each location.  Our store expansion analysis puts the current opportunity size (as of FY20) at ~570 stores (BKI store count: 260) with ~430 stores in mega and mini metro cities, about 70 stores in tier-I cities and the remaining 75 stores in other cities. The opportunity size is expected to increase to ~1,100 stores by CY26 (BKI target 700).

 Even after touching 700 stores by CY26, BKI’s market share of the organized chain QSR segment is expected to be around 4% in FY25E (4% in FY20).  All in all, BKI has been the fastest growing QSR chain over the last five years. If it continues at the current pace and reaches its 700 target by CY26, it will be the fastest-growing large QSR chain going forward too.

Institutionalized store expansion process; seen minimal closures

BKI has the exclusive national master franchise rights to develop and operate restaurants under the Burger King brand. As per the agreement, BKI is obligated to open 700 Burger King stores by December 31, 2026, which implies high-pace network expansion over the coming years.

BKI targets to launch flagship stores in high-traffic and high-visibility locations in key metropolitan areas and cities across India and then develop new restaurants within that cluster.

Restaurant roll-out process is managed by experienced development teams, dedicated project teams and multiple empanelled contractors. There is a multi-layer approval process along with detailed trade area analysis before a store is approved. Each new restaurant location requires the approval of senior management and BK AsiaPac. The CEO, Mr. Rajeev Varman, personally oversees the approval of each location.

Store opening process

Source: Company, Edelweiss Research

Since opening its first restaurant in November 2014, BKI had seven permanent restaurant closures, which took place due to business viability and decreased footfalls, as well as the non-fulfilment of obligations by the landlord. Of those closures, five were directly related to the impact of covid-19 on business.

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BURGER KING

Potential to open ~570 stores in the country at present; ~1,100 by 2026

BKI has focused its expansion in the NCR, which remains its largest market (~50% of stores are located in north India).

BKI current store locations

Source: Company, Edelweiss Research

Hence, to map the store potential for BKI, we benchmark its penetration in the NCR, its biggest and most penetrated micro market, and apply it to other metros and mini metro cities. Our potential stores for NCR puts BKI’s implied market share in the region around 11% of the chain QSR market and ~36% of the Chain Burger & Sandwiches market. Using these criteria, we get the following potential store print for BKI.

Store potential in metro and mini-metro cities Chain Market Potential BKI Existing BKI Dominos KFC City McD outlets Size (INR bn) outlets outlets outlets outlets Delhi NCR 84 104 73 201 48 65 Mumbai 84 104 37 142 89 23 Pune 26 32 12 66 36 21 Ahmedabad 14 17 6 33 18 4 Bengaluru 52 64 26 153 54 54 Hyderabad 18 22 13 68 24 33 Chennai 40 49 6 66 21 30 Kolkata 28 35 5 63 4 29 Total 428 178 Source: Company, Edelweiss Research

Note: City wise store outlets are Edelweiss estimates

For FY20, BKI had a 5% market share of the chain QSR segment in India. With lower competition in T1/T2 cities , we assume BKI can easily achieve a 15% market share of the chain QSR market (~50% of the chain market) in these cities and taking the average store productivity of INR30mn/store, we arrive at the potential store opportunities at present.

48 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

BURGER KING

Tier I cities store potential BKI Store Chain Classi Potential Productivity City Market Size Store Potential fication Revenues (INR (INR bn) (INR bn) mn/Store) Jaipur Tier I 3.5 0.3 30.0 9 Lucknow Tier I 3.5 0.3 30.0 9 Surat Tier I 1.0 0.1 30.0 3 Nagpur Tier I 1.3 0.1 30.0 3 Kanpur Tier I 1.0 0.1 30.0 3 Indore Tier I 1.6 0.1 30.0 4 Patna Tier I 1.0 0.1 30.0 3 Chandigarh Tier I 5.1 0.4 30.0 13 Kochi Tier I 1.6 0.1 30.0 4 Coimbatore Tier I 1.2 0.1 30.0 3 Vadodara Tier I 1.6 0.1 30.0 4 Ludhiana Tier I 0.7 0.1 30.0 2 Madurai Tier I 0.2 0.0 30.0 1 Vishakhapatnam Tier I 0.7 0.1 30.0 2 Bhopal Tier I 1.3 0.1 30.0 3 Amritsar Tier I 0.7 0.1 30.0 2 Rajkot Tier I 0.5 0.0 30.0 1 Trivandrum Tier I 0.3 0.0 30.0 1 Total 67 Source: Company, Edelweiss Research

In addition to these cities, there are 225 more cities where Domino’s has already reached and the other burger QSRs hardly have any presence. For WDL and BKI (and other burger QSRs too) have given limited attention to cities beyond metros. This always remains an avenue for them to expand further too as they choose.

QSRs' city reach 300

240

180 (#) 120

0 Domino's McDonald's KFC Burger King

Source: BKI DRHP, Edelweiss Research

Assuming BKI can open one store in even one third of these locations, there is a potential to open 75 stores in these cities.

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BURGER KING

Factoring in all of these aspects, we come to a store count potential of 570 stores for BKI in FY20. With the market expected to clock a 20% revenue CAGR, assuming that 10% of this will be driven by incremental locations/new cities, by CY26 end there would be a potential to expand the presence to ~1,100 locations, whereas BKI’s target is 700.

Total store potential for BKI Segment Existing Potential McD Dominos KFC Approach Benchmarking BKI''s presence in Delhi NCR to other Mega & Mini Metros 178 428 342 772 254 cities Assumed 15% QSR chain market share in these Tier I Cities 29 67 82 271 95 cities Tier II & Other Cities 53 75 58 311 104 Based on Dominos reach beyond the above cities Total 260 570 481 1,354 454 Source: Company, Technopak, Edelweiss Research

Note: Store breakdown by city for McDonald’s, Domino’s and KFC from BKI DRHP

Store expansion to be strong, to be amongst fastest growing QSRs

The number of outlets by established international brands has grown at a rate of 1.1–1.5x from FY15–20. During the same period, Burger King, grew exponentially: 21.6 times. Compared with other international brands, Burger King has been one of the fastest growing international chains in the QSR sub-segment in India over the past five years and is the fastest Indian QSR player to reach 250 restaurants among international QSR brands in India (during the first five years of operation).

While management is likely to be cautious on store expansion in FY21/22 owing to the covid-19 pandemic, we expect full-fledged expansion to resume FY23 onwards. We anticipate the company to add 14 and 49 stores in FY21 and FY22, respectively, and thereafter maintain a pace of 75 stores every year till FY27 to reach the 700 store count.

Modest expansion in FY21/22, to gather steam post-FY23 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Company-owned 85 123 181 252 266 315 390 Sub-franchised 3 6 6 8 9 9 9 Total store count 88 129 187 260 275 324 399 Expansion Gross addition 37 38 58 74 23 51 77 Closed 0 0 0 3 9 2 2 Net Addition 37 38 58 71 14 49 75 Source: Company, Edelweiss Research

50 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

BURGER KING

BKI's market share of organised QSR chain 5.0

4.0

3.0 (%) 2.0

1.0

0.0 FY17 FY18 FY19 FY20 FY25E

Market share (%) - Organized Chain QSR

Source: Company, Edelweiss Research

Despite its sharp growth, BKI’s market share of the organized QSR chain segment is expected to be around 4% by FY25E.

While the stores earlier were built considering the pre-covid era dine-in and delivery traction, we would not rule out the company adopting a delivery-focus strategy (similar to Domino’s), wherein more focus could be on the delivery channel and has calibrated dining space for customers. We expect these stores to be smaller and hence have lower capex and rental costs, thereby implying faster scalability.

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 51

BURGER KING

Valuation

 BKI, the fastest growing QSR chain, is headed in the right direction with aggressive expansion plans, strong focus on product value and unwavering efforts to enhance customer experience.

 A comparison with JFL and WDL shows that BKI lags on: i) profitability and cash flows; and ii) market share and presence. However, BKI scores high on: i) higher growth potential (potential stores ~4x); and ii) royalty and, hence, margin stability. On store economics and ramp-up, BKI is comparable to WDL. Besides, in the long run, BKI is poised to generate higher margin and cash flow than WDL.

 Hence, we assign BKI a target 34x June 2022 EV/EBITDA (25x FY23E), similar to the consensus multiple range for WDL, and at a 15% discount to JFL. This yields a TP of INR143, implying limited upside potential. Initiate with ‘HOLD/SN’.

BKI, the fastest growing QSR chain, is headed in the right direction with aggressive expansion plans, strong focus on product-value equation and unwavering efforts to enhance customer experience. In light of the strong organic growth BKI has charted so far, we expect its revenue to expand at an 18% CAGR over FY20–23 (66% CAGR over FY21-23) guided by 15% store CAGR and SSSG coming back on track. Besides, driven by higher gross margins and increasing store maturity, we expect EBITDA margin to improve from 12.4% in FY20 to 17.7% in FY23, with EBITDA expansion at a 33% CAGR. The company will be self- sufficient to fund its expansion and will generate FCFF from FY26. Comparing BKI to JFL and WDL, shows BKI lags on: i) profitability and cash flows, wherein JFL is miles ahead and even WDL has done better; ii) market share and presence. However, BKI scores on: i) higher growth potential than JFL or WDL (potential stores ~4x); ii) royalty and, hence, margin stability compared with WDL; and iii) store economics and ramp-up comparable to WDL. Also, in the longer term BKI has higher margin and cash flow potential than WDL. Thus we assign BKI a target multiple of 34x June 2022 EV/EBITDA (25x FY23E), similar to the consensus multiple range of WDL and at a 15% discount to JFL. This yields a TP of INR143, implying limited upside potential at current levels. Initiate with ‘HOLD/SN’. QSR valuation comparison CAGR RoCE Target FY23 EV/EBITDA Mcap Sales: EBITDA: CMP TP Company Rating (INR % Upside 17- 17-20/20- Post INDAS Pre INDAS (INR) (INR) FY20/23E bn) 20/20-23 23 Jubilant Foodworks BUY 380 2,883 3,575 24 15/11 33/15 29/25 36 53 Burger King India HOLD 55 144 143 -1 54/18 NM/33 -1/5 25 39 Westlife Development* NR 71 455 NA NA 18/8 44/17 8/13 26 32 Source: Company, Edelweiss Research, Bloomberg

Note: FY17-20 EBITDA CAGR based on pre INDAS 116 adjustments; FY20-23 post INDAS 116 adjustments

For Westlife Development, Sales/EBITDA CAGR based on consensus numbers and multiples based on consensus TP

52 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

BURGER KING

Comparison across key parameters

JFL WDL BKI

Brand & Franchise Terms

Brand Strength

Franchise contract flexibility

Royalty

Supply Chain set-up

Store Network & Profitability

Current scale

Expansion potential

Store Profitability

Menu Design

Core menu

Complimentary offering

Day parts

Delivery Adaptability

Delivery reach

Listing on aggregators

Own Delivery/Data

Overall

Source: Company, Edelweiss Research

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 53

BURGER KING

BKI's cash flow projection 12,500 1,000

10,000 800

7,500 600 (#)

(INRmn) 5,000 400

2,500 200

0 0 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E FY31E FY32E FY33E FY34E FY35E FY36E OCF* Capex FCFF Stores (#) - RHS

Source: Company, Edelweiss Research

Note: OCF after adjusting for lease payments

54 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

BURGER KING

Financial Outlook

 While business in FY21 is likely to be subdued owing to the impact of covid-19 pandemic, we expect BKI’s revenue to expand at an 18% CAGR over FY20–23 (66% CAGR over FY21–23) guided by 15% store CAGR and same store sales coming back on track.  We anticipate BKI’s EBITDA margins to improve over FY20–23 (12.4% in FY20 to 17.7% in FY23) driven by improvement in: i) gross margin on higher scale and launch of premium products; ii) lower advertising costs; and iii) operating leverage driven by higher scale. This is expected to drive an EBITDA CAGR of 33%.

 PAT loss for BKI widened in FY20 to INR766mn from INR383mn owing to the covid-19 pandemic. Given robust sales and EBITDA growth anticipated over the next few years, we expect BKI to PAT breakeven by FY23.

 BKI’s FCF has been negative owing to continuous capex on account of store expansion and low OCF given its relatively new operations. Going ahead, we expect capex to continue, but at a lower rate in FY21/22, but OCF to increase as stores mature and scale of operations grows. In all, this should lead to free cash generation FY26 onwards.

Robust revenue trajectory to come back from FY22E BKI turned in a strong revenue CAGR of 54% over FY17–20, driven by both rapid store expansion and increasing SSSG. Owing to the increasing preference and adoption for western fast food by Indian consumers and tailwind from online ordering convenience, we don’t foresee demand challenges for QSRs in general, and BKI in particular—owing to its strong brand-pull, attractive value proposition and customers’ preference for ordering from organised food retailers rather than unorganised. While the business in FY21 is likely to be subdued owing to the covid-19 pandemic, we expect revenue to expand at an 18% CAGR over FY20–23 (66% CAGR over FY21– 23) guided by 15% store CAGR and same store sales coming back on track. Robust revenue growth in sight 15,000

12,000

9,000

(INR (INR mn) 6,000

3,000

0 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Edelweiss Research, Company

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 55

BURGER KING

Combination of store expansion and SSSG pick-up to drive growth FY18 FY19 FY20 FY21E FY22E FY23E

Stores (#) 129 187 260 275 324 399 Store Addition (#) 38 58 71 14 49 75 Store Addition (%) 47 45 39 6 18 23

SSSG (%) 12 29 0 -43 75 12

Revenue Growth (%) 64 67 33 -40 103 35 Source: Company, Edelweiss Research

Maturing stores, operating leverage to drive margin expansion

We anticipate BKI’s EBITDA margins would improve in over the next few years, growing from 12.4% in FY20 to 17.7% in FY23, along with an EBITDA CAGR of 33%. We expect the following factors to be key towards driving EBITDA expansion:

 Improvement in gross margin owing to flexibility in vendor selection contracts, launch of premium menu, addition of margin-accretive segments to the menu, and price hike of ~3% taken every year. We believe the above factors, cumulatively, are likely to drive gross margin expansion over coming years.

 Given that ad spends have reached the necessary threshold in absolute terms along with the expectation of softer media rates in imminent years, we expect ad spends to moderate as a % sales.

 Store cost rationalisation was the key theme for most QSR players during the covid-19 pandemic, leading to control over discretionary expenses and optimisation of manpower costs. On the similar lines, we expect BKI also to truncate its redundant store-level expenses, leading to better profitability in the long run.

Margin improvement FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Raw Material Cost 40.1 38.0 36.4 35.8 37.4 34.7 34.4 Employee Cost 22.3 18.6 15.3 16.2 21.6 15.3 14.5 Sales & Marketing 10.2 14.1 8.5 5.8 5.0 5.0 5.0 Royalty 3.0 3.2 3.7 4.1 4.4 4.5 4.6 Rent 3.4 3.3 4.3 4.5 3.2 4.0 3.8 Power and Fuel 9.2 8.6 7.5 8.4 9.8 8.5 7.9 Other Expenses 13.4 11.9 11.9 12.8 16.3 12.8 12.1 EBITDA margin (%) -1.7 2.1 12.5 12.4 2.4 15.2 17.7 Source: Company, Edelweiss Research

Note: All financials, including FY17-19, are post IND AS 116 adjustments

56 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

BURGER KING

EBITDA to see a rebound post FY21E 2,500 20.0

1,900 15.0

1,300 10.0 (%)

(INRmn) 700 5.0

100 0.0

-500 -5.0 FY17 FY18 FY19 FY20 FY21E FY22E FY23E EBITDA EBITDA Margin (%) - RHS

Source: Company, Edelweiss Research

Note: All financials, including FY17-19, are post IND AS 116 adjustments

PAT loss for BKI widened to INR766mn in FY20 from INR383mn owing to the covid- 19 pandemic in FY21. Given the robust sales and EBITDA growth that we anticipate BKI to clock over the next few years, we expect it to PAT breakeven by FY23.

PAT break even likely by FY23E 250

-150

-550

(INRmn) -950

-1,350

-1,750 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Source: Company, Edelweiss Research

Note: All financials, including FY17-19, are post IND AS 116 adjustments

Negative working capital to aid returns BKI’s cash conversion cycle has been constantly improving in recent years, from negative 56 days in FY18 to negative 74 days in FY20. This was driven by the increase in payable days from 70 to 86 in FY20 and a marginal improvement in inventory days from 12 days in FY18 to 10 days in FY20. We expect working capital cycle to remain benign over the years owing to negligible receivables days and a quick inventory cycle.

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BURGER KING

Working capital to stabilize at normal levels post-FY21 FY18 FY19 FY20 FY21E FY22E FY23E Inventory Days 12 10 10 15 8 10 Debtors Days 2 2 2 2 1 1 Payable Days 70 83 86 148 81 86 Cash conversion cycle (days) (56) (71) (74) (131) (72) (75) Source: Company, Edelweiss Research

Note: Inventory and payable days calculated on raw material cost

Expect free cash generation FY24 onwards

The company’s FY20 free cash flow stood at negative INR1.15bn and has been negative over the past few years owing to continuous capex for store expansion and low OCF due to relatively new operations. Going ahead, we expect capex to continue, although at a lower rate in FY21/22, OCF to increase as stores mature and scale of operations grow. All of this is likely to make the company FCF generating FY26 onwards.

Capex spend to be high given store target of 700 4,200 IPO fresh issue to help bridge 2,800 defecit

1,400

(INRmn) 0

-1,400

-2,800 FY17 FY18 FY19 FY20 FY21E FY22E FY23E OCF* Capex FCFF

Source: Company, Edelweiss Research

Note: OCF calculated after considering interest and lease payments

Debt to be repaid in FY21 post-IPO 2,500

2,000

1,500

(INRmn) 1,000

500

0 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company, Edelweiss Research

58 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

BURGER KING

Return ratios set to improve; PAT losses to moderate gradually FY20 RoE and RoCE for BKI stood at (27.5%) and (0.7)% respectively, owing to the covid-19 impact towards the fiscal end. The company’s return profiles were on an uptrend till FY19, and we expect the similar trend to continue once the business environment normalises. Going forward, we expect BKI’s RoE and RoCE to improve to 0.3% and 5.1% by FY23.

Return profile likely to inch up 10.0

0.0

-10.0 (%) -20.0

-30.0

-40.0 FY18 FY19 FY20 FY21E FY22E FY23E

RoAE RoACE - Pre Tax

Source: Company, Edelweiss Research

Note: All financials, including FY17-19, are post IND AS 116 adjustments

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 59

BURGER KING

Key Risks

Selection of sub-par real estate could dampen profitability Given that BKI is obligated to open 700 restaurants by December 31, 2026, selection of sub-optimal properties to meet the target, could erode profitability in the long run. Also, given that the pace of expansion is likely to be much faster post-FY22, profitability could remain muted over the next few years. Master Franchise and Development Agreement termination risks Since BKI is bound by the terms agreed under the Master Franchise and Development Agreement, failure to meet/comply with certain clauses could lead to the termination of the contract by BK AsiaPac.

As stated in the agreement, the key risks are: BK AsiaPac may terminate BKI’s Development Rights or the Master Franchise and Development Agreement, if BKI fails to remedy certain defaults within an agreed upon period, including, among others: failure to pay the amounts payable to BK AsiaPac, once due; failure to achieve the cumulative opening target for any development year, subject to a six month cure period, if BKI has achieved at least 70% of the difference between such target and the total number of Burger King restaurants open in India on December 31st of the prior development year; failure to comply with any material term of the Company Franchise Agreement or any unit addendum; a sub-franchisee breaches any material term of any franchise agreement to which it is a party; and BKI fails to comply with the debt to equity ratio i.e. of not more than 2:1 at any time. Competition from other QSRs/CDRs With the QSR market expected to clock strong double-digit growth over the coming years, aggressive efforts (expansion/advertising/discounting) from existing international QSR brands such as Domino’s (Jubilant Foodworks), McDonald’s (Westlife Development – West & South India, MMG Group – North & East India), YUM! Brands India (Pizza Hut, KFC, Taco Bell), Subway, etc. and many other Indian QSR brands surely remain a concern. Given that the Indian QSR market is a fast- growing one, entry of more international QSR brands also poses a concern. Uncertainty over dine-in traction Owing to the onset of covid-19 pandemic and resultant restrictions, dine-in (in- store) consumption has taken a hit as customers remain wary of going and eating out of home. While positive development on vaccines bode well, full recovery in the dine-in revenues remains uncertain. Slowdown in discretionary consumption Fast food is typically perceived as being discretionary in India. For periods, wherein the overall Indian economy is impacted, discretionary consumption too is bound to be impacted, thereby leading to lesser eating out or lower spending on out-of-home food by consumers. This could result in lower sales growth and profitability for the chain.

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BURGER KING

Company Description

Burger King India Ltd (BKI) is among the fastest growing QSR chains in India and holds the exclusive national master franchise rights to develop, establish, operate and franchise the BURGER KING® branded restaurants in India. The master franchisee arrangement provides BKI with the ability to use Burger King’s globally recognised brand name to grow their business in India, while leveraging the technical, marketing and operational expertise associated with the global Burger King brand.

The master franchisee arrangement provides BKI with flexibility to tailor their menu to Indian tastes and preferences, control their promotions and pricing, and choose their suppliers in agreement with the standards of the Burger King parent company.

As at September, 2020, BKI had 261 restaurants, including eight sub-franchised and 253 company-owned Burger King Restaurants, across 17 states and union territories and 57 cities across India. The restaurants typically operate through a mix of delivery, dine-in and takeaway. The Burger King brand is present on all key online food delivery aggregator apps such as Zomato, Swiggy and Dunzo, in addition to its own recently launched app.

BKI's store count and distribution Store Count FY15 FY16 FY17 FY18 FY19 FY20 Q2FY21 By region North 6 21 37 55 86 129 131 West 6 14 29 40 55 68 66 South 0 14 22 34 43 54 55 East 0 0 0 0 3 9 9 Total 12 49 88 129 187 260 261 By Operating Structure Company-owned 12 48 85 123 181 252 253 Sub-franchised 0 1 3 6 6 8 8 Total 12 49 88 129 187 260 261 Net Additions during the year 12 37 39 41 58 73 1 Source: Company, Edelweiss Research

The key highlights of the Master Franchise and Development Agreement (as agreed by BKI, QSR Asia and BK AsiaPac) are:

 The Master Franchise and Development Agreement is valid until December 31, 2039.

 Development obligations: BKI is obligated to develop and open at least 700 restaurants by December 31, 2026, provided that company-owned Burger King restaurants represent 60% of the total number Burger King Restaurants in India.

 One-time opening fee: BKI is required to pay BK AsiaPac a non-refundable one- time fee upon the opening of each Burger King restaurant of USD15,000, increasing to USD25,000 from calendar years 2020 to 2022 and remaining at USD35,000 for all periods thereafter while the Master Franchise and Development Agreement remains in effect.

 Royalty rate capped at 5% of sales: BKI is required to pay a monthly royalty fee based on a percentage of sales of the company-owned Burger King Restaurants. The monthly royalty fee ranges from 2.5% to 5% of such sales, depending on the

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BURGER KING

opening date of the restaurant. The royalty rate is capped at 5% until December 31, 2020.

 Advertising and marketing: The company-owned Burger King Restaurants are required to contribute 5% of the sales to marketing and advertising.

 Grant of sub-franchise for restaurants: The sub franchisees are required to enter into a franchise agreement for each sub-franchised Burger King restaurant. BKI is required to pay BK AsiaPac a non-refundable fee for the opening of such sub- franchised Burger King restaurant. Furthermore, BKI is required to pay a monthly royalty fee with respect to each sub-franchised Burger King restaurant that is equivalent to the fees for company-owned Burger King restaurants. BKI may retain the excess of royalty fee charged by the company to sub-franchisees over such amounts. BKI is also required to contribute 5% of the sub-franchised Burger King restaurants’ sales towards marketing and advertising, and track expenditures for the same.

 Menu and pricing: BKI has the authority to establish a local menu for the Burger King restaurants operating within India, subject to the essential menu items being offered and all suppliers and product ingredients being approved by BK AsiaPac. All local menu items must be approved by BK AsiaPac, subject to certain conditions.

Burger King India menu Indicative product offering as at November 18, 2020 Price Price Price Price Price Price Vegetarian Rice Non-Vegetarian Desserts Beverages Snacks (INR) (INR) (INR) (INR) (INR) (INR) Creamy Softies Crispy Veg 45 99 King Egg 49 15 Floats 39 Hash Brown 39 Paneer (Vanilla) Curried Softies Classic Veg 55 139 Crispy Chicken 69 25 Limey Fizz 39 Veggie Strips 39 Chicken (Chocodip) BK Veggie 79 Classic Chicken 89 BK Sundae 29 Pepsi 59 Crispy Veg Wraps 49 Veg Lite Chicken Lite Loaded 99 109 39 7UP 59 Chicken Fries 59 WHOPPER WHOPPER Sundae Crunchy Chicken Tandoor Brownie 139 139 59 Mirinda 59 Egg Wrap 59 WHOPPER Grill Sundae Cheese Mountain Chicken Wings (2 159 Fiery Chicken 149 59 65 Meltdown Dew pc) Paneer Spiced WHOPPER Chicken Fries (5 169 159 Ice Tea 59 69 Overload Chicken pc) Veg LTO Chicken LTO 179 189 Coffee 99 Regular Fries 69 WHOPPER WHOPPER Classic Mutton Classic 229 119 Medium Fries 79 WHOPPER Frappe Mutton LTO Thick 279 129 King Fries 89 WHOPPER Shakes BK Fried Chicken Smoothies 149 89 (1 pc) Creamy Regular Peri Peri 169 89 Shakes Fries Chicken Wings (4 119 pc) Cheesy Hi Fries 99 Chicken Keema 129 Hi Fries Source: Company, Edelweiss Research

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BURGER KING

Management Overview

Key managerial personnel Mr. Rajeev Varman, Chief Executive Officer and Whole Time Director: Mr. Varman was appointed as the CEO and Whole Time Director of BKI Ltd. on February 27, 2014. He is Bachelor of Engineering (mechanical) from the Bangalore University and a Master of Business Administration (marketing) from the Golden Gate University.

Mr. Varman is responsible for management and running of BKI, both at strategic and operational level, and for overseeing innovation across all areas including operations and production. He has more than 20 years of work experience in the food & beverage industry. Prior to joining BKI, he has worked with Tricon/Taco Bell brand, Lal Enterprises Inc., and Burger King Corporation, where he held the positions of franchisee business manager, national manager – franchise operations, senior director of franchise operations, general manager, vice president and general manager, Canada and vice president & general manager, Northwest Europe.

Mr. Sumit P. Zaveri, Chief Financial Officer: Mr. Zaveri is a Bachelor of Commerce from the University of Bombay and is an associate member of the Institute of Chartered Accountants of India. He also holds a degree from the Institute of Cost and Works Accountants of India. Mr. Zaveri has 18 years of work experience in finance control, treasury, budgeting and management information systems. He has worked with companies such as Nature’s Basket Limited and companies within the Tata Group such as Tata Starbucks Limited, Tata Global Beverages Limited and the Indian Hotels Company Limited. He joined BKI Ltd. on September 23, 2019.

Mr. Abhishek Gupta, Chief of Business Development & Operations Support Officer: Mr. Gupta is a Bachelor of Engineering (civil) from the University of Roorkee and a Master of Management Studies from the Narsee Monjee Institute of Management Studies, Mumbai. He has 18 years of work experience in the areas of talent management, operations and business development. Mr. Gupta has worked with companies such as Career Forum Private Limited, North Delhi Power Limited and companies within the Tata Group such as Tata Starbucks, Tata Services Limited, and Indian Hotel Companies Limited. He joined BKI on March 12, 2014. He is responsible for securing new sites for achieving growth of new restaurants and their construction. He is also responsible for securing all licences and permissions for operations of BKI restaurants and overseeing all external interfaces/liaisons of the operations team.

Board of Directors Board Members Shivakumar Pullaya Daga Chairman & Independent Director Rajeev Varman CEO & Whole-Time Director Ajay Kaul Non-Executive Director Amit Manocha Non-Executive Director Jaspal Singh Sabharwal Non-Executive Director Peter Perdue Non-Executive Director Sandeep Chaudhary Independent Director Tara Subramaniam Independent Director Source: Company, Edelweiss Research

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BURGER KING

Organisational overview

Source: Company, Edelweiss Research

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BURGER KING

Additional Data Management Holdings – Top 10* CEO Rajeev Varman % Holding % Holding CFO Sumit P. Zaveri AIL 7.37 Aditya Birla AMC 1.15 SBI MF 2.17 Sundaram AMC 0.81 Click or tap here to enter text. Valiant 1.74 HDFC AMC 0.65 Other FIL 1.64 Invesco AMC 0.26 Auditor S.R. Batliboi FMR 1.32 ICICI Pru AMC 0.24

*Latest public data

Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Shining back to recovery; Result 10-Feb-21 Titan Company Update Margins, debt: Great going; Result 08-Feb-21 ABFRL Update Stable recovery; margins steal the 04-Feb-21 Trent show; Result Update

Rating Interpretation Daily Volume 225 200

170 180

140 135 (INR)

110 (Mn) 90

80 45 50 Dec-20 0 BURGERKI IN EQUITY Buy Hold Reduce Dec-20

Source: Bloomberg, Edelweiss research Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage Rating Rationale

Buy Hold Reduce Total Rating Expected absolute returns over 12 months

Rating Distribution* 162 65 15 242 Buy: >15%

>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%

Market Cap (INR) 196 51 4 251 Reduce: <-5% * stocks under review

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India Equity Research Retail February 17, 2021

JUBILANT FOODWORKS

COMPANY UPDATE

KEY DATA Rating BUY Still a cheesy delight Sector relative Overweight Price (INR) 2,883 12 month price target (INR) 3,575 Potential to expand Domino’s store count by ~40%, despite the robust Market cap (INR bn/USD bn) 380/4.9 16% store expansion CAGR over the past decade, imparts four-five Free float/Foreign ownership (%) 54.3/14.8 What’s Changed years of store addition visibility. Moreover, even with a mature Target Price  Rating/Risk Rating ⚊ network (average: >7 years), SSSG remains industry leading, reflecting brand popularity. Its delivery plus digital leadership bode well in the INVESTMENT METRICS post-covid era, burnishing prospects. 225 155 Overall, we forecast a strong 11%/15% revenue/EBITDA CAGR over 85 FY20-23. JFL remains our top pick in the QSR space and maintain ‘BUY’ 15 -55 with TP of INR3,575 (40x June 2022 EV/EBITDA). Recent additions– Sales Growth EPS Growth RoE PE (%) (%) (%) (x) Ekdum! and Hong’s Kitchen–will take three-four years to make any Retail JUBI IN Equity significant revenue contribution, but provide option value.

FINANCIALS (INR mn) Dominos has 4-5 years of expansion headroom; SSSG remains robust Year to March FY20A FY21E FY22E FY23E Domino’s has by far been the most successful QSR chain in India (~80% share), a Revenue 38,858 33,672 45,438 52,689 reflection of its viable store economics and popularity. Despite a mature store profile EBITDA 8,771 8,086 11,562 13,301 Adjusted profit 2,754 2,471 4,721 5,602 (average age >7 years), its SSSG has been the best in the QSR space. Overall, Diluted EPS (INR) 20.9 18.7 35.8 42.4 benchmarking its current city reach (FY20: 282 cities) and also factoring the internal EPS growth (%) (14.7) (10.3) 91.1 18.7 store potential assessment of the global brand owner of 1,800 stores (current: RoAE (%) 22.0 19.6 31.1 29.1 1,314), we believe there’s still a long runway of four-five years for store addition. P/E (x) 129.3 144.1 75.4 63.6 EV/EBITDA (x) 38.5 41.9 28.9 24.7 Digital push bolsters delivery dominance Dividend yield (%) 0.2 0.2 0.3 0.3 Domino’s delivery focused business has been enhanced by its digital initiatives. Its online presence is unparalleled and online ordering now constitutes 86% of delivery PRICE PERFORMANCE sales. It generates majority online sales via own app, a rarity, which reduces

2,950 51,000 commissions, builds loyalty and gives access to granular customer data. Domino’s 2,605 45,800 industry leading recovery during covid was driven by delivery/digital focus. 2,260 40,600 1,915 35,400 Diversifying portfolio: Key for next leg of growth 1,570 30,200 1,225 25,000 JFL is now targeting to incubate new concepts to drive the next leg of growth. It has Feb-20 May-20 Aug-20 Nov-20 now shifted focus to self-incubated brands--Hong’s Kitchen and Ekdum!. Key feature JUBI IN Equity Sensex of both is value focused pricing and a target market much higher than pizza market.

Outlook and valuations: Best play among QSRs; maintain ‘BUY’ Explore: Led by Domino’s store expansion potential (195 stores over FY20-23) and its strong SSSG (FY20:23: 6% average, FY17-20: 10%), we estimate JFL to clock 11%/15% revenue/EBITDA CAGR over FY20-23. JFL remains our top pick in the QSR space and maintain ‘BUY’ with TP of INR3,575 (40x June 2022 EV/EBITDA). The valuations reflect growth potential of delivery focused businesses like Domino’s in the post- Financial model Podcast covid scenario.

For JFL’s s new ventures–Hong’s Kitchen and Ekdum!–we do not ascribe any value. In our view, competition in the space remains aggressive. Also, given the cost structure and investments, it will require time to break-even. Thus, any significant Corporate access Video contribution to revenue is at least three-four years away, with profitability even later; as of now they provide an option value to JFL.

Nihal Mahesh Jham Abneesh Roy Prateek Barsagade +91 (22) 6623 3352 +91 (22) 6620 3141 +91 (22) 4063 5407 [email protected] [email protected] [email protected]

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JUBILANT FOODWORKS

Financial Statements

Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 38,858 33,672 45,438 52,689 Share capital 1,320 1,320 1,320 1,320 Gross profit 33,758 30,139 39,891 46,256 Reserves 10,510 12,052 15,690 20,178 Employee costs 7,846 7,383 8,923 10,164 Shareholders funds 11,829 13,372 17,009 21,498 Other expenses 9,707 7,525 10,935 12,680 Minority interest 0 0 0 0 EBITDA 8,771 8,086 11,562 13,301 Borrowings 0 0 0 0 Depreciation 3,441 3,748 4,145 4,458 Trade payables 4,485 2,937 6,350 5,809 Less: Interest expense 1,635 1,785 1,908 2,108 Other liabs & prov 16,865 17,865 19,365 20,865 Add: Other income 688 750 800 750 Total liabilities 33,179 34,174 42,724 48,172 Profit before tax 4,383 3,303 6,308 7,485 Net block 7,972 8,153 8,207 8,151 Prov for tax 1,181 832 1,587 1,883 Intangible assets 372 239 202 235 Less: Other adj (448) 0 0 0 Capital WIP 394 150 150 170 Reported profit 2,754 2,471 4,721 5,602 Total fixed assets 21,887 23,989 26,806 27,692 Less: Excp.item (net) 0 0 0 0 Non current inv 834 834 834 834 Adjusted profit 2,754 2,471 4,721 5,602 Cash/cash equivalent 6,904 6,117 10,998 16,024 Diluted shares o/s 132 132 132 132 Sundry debtors 193 268 329 393 Adjusted diluted EPS 20.9 18.7 35.8 42.4 Loans & advances 1,443 1,314 1,314 1,314 DPS (INR) 6.0 6.0 7.0 7.0 Other assets 922 521 1,276 947 Tax rate (%) 26.9 25.2 25.2 25.2 Total assets 33,179 34,174 42,724 48,172

Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E SSSG (%) 3.2 (17.1) 27.7 10.0 Reported profit 3,935 3,303 6,308 7,485 Domino's store addition 123.0 94.0 100.0 110.0 Add: Depreciation 3,441 3,748 4,145 4,458 Dunkin Donuts stores 34 37 40 40 Interest (net of tax) 1,635 1,785 1,908 2,108 EBITDA margin (%) 22.6 24.0 25.4 25.2 Others 0 0 0 0 Net profit margin (%) 7.1 7.3 10.4 10.6 Less: Changes in WC (61) (2,985) 585 (275) Revenue growth (% YoY) 10.1 (13.3) 34.9 16.0 Operating cash flow 7,320 4,269 10,559 11,142 EBITDA growth (% YoY) 44.3 (7.8) 43.0 15.0 Less: Capex (2,307) (1,659) (2,150) (2,345) Adj. profit growth (%) (14.7) (10.3) 91.1 18.7 Free cash flow 5,013 2,610 8,409 8,797

Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (4.0) 7.0 6.0 RoE (%) 22.0 19.6 31.1 29.1 Repo rate (%) 4.4 3.0 3.5 4.0 RoCE (%) 28.9 17.2 24.6 24.6 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days nm nm nm nm Domino's store addition 123.0 94.0 100.0 110.0 Receivable days 2 3 2 3 Raw material costs (%) 25.0 22.3 24.1 24.1 Payable days nm nm nm nm Staff costs (%) 20.2 21.9 19.6 19.3 Working cap (% sales) 9.8 12.2 14.1 22.2 Debtors days 2.4 2.5 2.4 2.4 Gross debt/equity (x) 0 0 0 0 Inventory days 31.1 35.0 30.0 32.0 Net debt/equity (x) (0.6) (0.5) (0.6) (0.7) Payable days 163.4 180.0 155.0 175.0 Interest coverage (x) 3.3 2.4 3.9 4.2

Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) 129.3 144.1 75.4 63.6 EPS growth (%) (14.7) (10.3) 91.1 18.7 Price/BV (x) 30.1 26.6 20.9 16.6 RoE (%) 22.0 19.6 31.1 29.1 EV/EBITDA (x) 38.5 41.9 28.9 24.7 EBITDA growth (%) 44.3 (7.8) 43.0 15.0 Dividend yield (%) 0.2 0.2 0.3 0.3 Payout ratio (%) 28.7 32.0 19.6 16.5

Source: Company and Edelweiss estimates

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JUBILANT FOODWORKS

Investment rationale

Domino’s still has enough headroom to grow

 Domino’s has by far been the most successful QSR chain in India—commands ~80% share of the organised pizza market. Its reach too is unparalleled--a reflection of its viable store economics and popularity.

 Despite having a mature store profile (average store age in excess of seven years), JFL’s SSSG is one of the highest in the sector.  Domino’s currently reaches ~280 cities and there are potential ~500 cities that it can reach considering: a) cities with more than 0.1mn population; and b) reach of Swiggy/Zomato. Comparing this and even factoring global Domino’s assessment of a potential 1,800 stores in India (current: 1,314), there is still headroom of four-five years for store addition, besides its stable SSSG.

Domino’s has by far been the most successful QSR in India, clearly reflecting in its store count, reach and market share. This has been driven by its: a) viable store economics--stores break even in year one with a payback in three-four years, one of the best in the sector; and b) customer acceptance--Cornered ~80% share of the organised QSR chain pizza market (~70% in FY14) and despite a higher average store age profile, SSSG remains the best in the segment.

One of the best store ROCEs in the sector Domino’s share of organised QSR chain pizza market

45.0 80

36.0 77

27.0

74 (%)

18.0 (%) 71 9.0

0.0 68

KFC King

Burger 65

Subway Pizza Hut Pizza Domino’s FY14 FY20

McDonald’s

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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JUBILANT FOODWORKS

Domino’s is the largest QSR chain

Brands Core Offering Outlet count Domino’s Pizza 1,354 Subway Sandwich 541 McDonald’s Burger 481 KFC Chicken 454 Wow! Momo Momos/Chinese 317 Burger King Burger 261 Jumbo King Vada Pav 131 La Pino’z Pizza 134 Haldiram Indian Snacks 80 Bikanervala Indian Snacks 82 Source: Company, Edelweiss Research

Note: Outlet count as of September 30, 2020

Despite a mature store profile, JFL’s SSSG trajectory remains robust. It has been able to clock one of the highest SSSGs in the sector.

SSSG robust despite mature store profile SSSG remains the highest in industry as well

8.0 20.0 40.0

6.4 15.0 28.0

4.8 10.0 16.0

(%) (%) 3.2 5.0

(# of years) of (# 4.0

1.6 0.0 -8.0

0.0 -5.0 -20.0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Average store age SSSG (%) - RHS JFL WDL Yum BKI

Source: Company, Edelweiss Research Source: Company, Edelweiss Research Note: Average store age is Edelweiss estimate Store expansion potential remains robust

Domino’s saw a strong period of expansion over FY14-16, with an annual addition of 150 stores/annum. Post this, there was a slowdown in addition as it focused on getting its store economics right. The pace of expansion has picked up from FY19. In light of the changes post covid, JFL is shutting many of its dine-in focused mall stores (~100 planned in FY21), but is planning to add a similar count via new additions, keeping the store count stable.

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JUBILANT FOODWORKS

Domino’s store addition trajectory

1500 175

1200 140

900 105

(#) (#) 600 70

300 35

0 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Total stores Net addition - RHS

Source: Company, Edelweiss Research

In terms of reach, Domino’s is present only in 282 cities (FY20). There are more than 500 towns with a population of >1,00,000 (Census 2011: 465) and these ~200 cities entail expansion potential.

Even food aggregators like Swiggy and Zomato have a reach in excess of 500 cities (up ~40x in the past three years), indicating the potential market opportunity in these cities for Domino’s.

Domino’s city reach potential

600

500

400

300 (# of cities) of (# 200

100

0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 >0.1mn Swiggy Zomato

Source: Company, Ministry of Housing and Urban Affairs, Edelweiss Research

Even considering its base of ~1,300 stores by FY21, post the planned store closures and new openings, Domino’s has a potential to reach 1,800 stores (as per Domino’s Pizza Inc) i.e., visibility of store addition for at least four-five years based on current addition run rate.

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JUBILANT FOODWORKS

Domino’s store potential

2000 120

1600 90

1200 60

(#) (#) 800 30

400 0

0 -30 FY21E FY22E FY23E Potential Total stores Net addition - RHS

Source: Company, Edelweiss Research

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JUBILANT FOODWORKS

Digital backed delivery dominance: Potent catalyst in post-covid era

 Domino’s delivery focused business has been further enhanced by its digital initiatives. JFL’s digital dominance and online presence are also unparalleled and online ordering now constitutes 86% of delivery sales.

 Domino’s app continues to gain traction and as per JFL, Dominos generates majority of its online sales via own app versus aggregators. This is critical given it reduces commissions, builds loyalty and gives access to granular customer data.

 During covid too, JFL’s recovery was much better than the sector and other peers driven by its delivery/digital focus. With the potential of increasing preference for delivery, Domino’s focus puts it in a sweet spot.

Domino’s business over the past two decades has always focused on delivery, akin to its global operations. While the breakdown is not available, Dominos would have the highest share of delivery compared to all other QSR peers (excluding pure play cloud kitchens). JFL’s base of delivery aligned model has been enhanced by its digital initiatives.

As e-commerce continues to advance globally, JFL has embarked on a journey to transform into a strong food-tech company. Its digital dominance and online presence are also unparalleled and online ordering now constitutes 86% of delivery sales driven by continuous improvisations in the Domino’s app. JFL has made digital investments that will help personalise promotions, payment and ordering experience.

Online ordering % of delivery sales Cumulative app downloads (mn)

100 40

80 32

60 24 (%)

40 16

20 8

0 0 FY15 FY20 FY16 FY20 Mobile Others App downloads

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

The Domino’s app continues to be one of the highest rated food app on Google Play Store in India. Despite rising acceptance of aggregators, majority of Domino’s online sales are generated on its own platform. This is critical given it reduces commissions and builds loyalty. Also, in addition to helping drive sales, usage of own app gives access to granular customer data (not available from aggregators) which can help in better decision making via menu curation, marketing enhancements and store opening choices.

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JUBILANT FOODWORKS

Domino’s app most downloaded independent food app and one of the highest rated

Domino’s McDonald’s KFC Burger King Pizza Hut Oven Story Mojo's BBQ Nation Downloads: Play store 10mn+ 5mn+ 5mn+ 100K+ 1mn+ 1mn+ 1mn+ 1mn+ Rating: Play Store 4.3 3.5 3.7 3.5 4.6 4.0 4.5 4.5 Source: Company, Google Play store, Edelweiss Research

JFL’s digital and delivery dominance was amply visible during covid too wherein the company staged a strong recovery and business recovered to 96% of last year’s level by October, much higher than the industry and other QSR peers. This was driven by its delivery recovery.

JFL staged a strong recovery during covid

Jubilant Foodworks Sales Recovery Delivery Recovery Dine-In+Takeaway Operational Stores Total Stores Operational (%) (%) (%) (%) Apr-20 673 1,330 51 24 47 NA May-20 890 1,330 67 40 70 NA Jun-20 1,050 1,354 78 56 80 NA Jul-20 1,057 1,356 78 70 95 42 Aug-20 1,125 1,360 83 85 111 55 Sep-20 1,312 1,312 100 92 112 68 Oct-20 1,264 1,264 100 96 116 72 Source: Company, Edelweiss Research

JFL's recovery has been fastest in the QSR space

H1FY21 FY21E 0

-20

-40 (%) -60

-80

-100

Industry JFL WDL BKI

Source: Company, Edelweiss Research

Globally also, Domino’s is at the forefront of introducing innovations. It has consistently pushed the envelope with its tech offerings, enabling people to order pizza in new ways, like through social media or an Apple Watch.

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JUBILANT FOODWORKS

“Technological innovation is vital to our Platforms for ordering a Domino’s pizza (Global) brand and our long-term success. Digital ordering is critical to competing in the global pizza industry. In 2019, more than half of all global retail sales were derived from digital channels”

Domino’s Pizza, Inc. Annual Report CY19

Source: Capgemini, Edelweiss Research

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JUBILANT FOODWORKS

Diversifying portfolio: Key for next leg of growth

 JFL, after a stupendous run with Domino’s (FY10-20 revenue CAGR of 25%), is now targeting to acquire/ incubate new concepts to drive the next leg of growth.  After limited success with Dunkin Donuts, JFL has now shifted focus to self- incubated brands via Hong’s Kitchen (Chinese cuisine) and Ekdum! (Indian & biryani cuisine). Key feature of both is value focused pricing (significant offerings at INR99) in addition to a TAM which is much higher than the pizza segment.

 However, competition in the space also remains aggressive, especially from cloud kitchens and the biggest brand as of now has only reached ~INR2bn revenue. While royalty costs will be saved, lower gross margin along with investments in advertising and delivery commissions will require time to breakeven.  Thus, any significant revenue contribution is three-four years away, with profitability even later; as of now they offer an option value to JFL.

JFL, after a stupendous run with Domino’s (FY10-20 revenue CAGR: 25%), is now targeting to acquire/ incubate new concepts to drive the next leg of growth for the company.

JFL is focused on scaling up its other brands in different cuisine formats. While JFL at the start of the decade itself acquired the master franchise for Dunkin Donuts, the brand has seen limited scale-up. It is piloting the brand with low capex, small kiosk- based model, serving a combination of beverages, donuts and simple food with faster payback due to low rent and smaller format (100-200 square feet kiosks).

It has now shifted focus to self-incubated brands via Hong’s Kitchen (Chinese cuisine) and Ekdum! (Indian & biryani cuisine).

JFL entered the Chinese cuisine segment in 2019 with its first home-grown brand Hong’s Kitchen with four restaurants in two cities. Hong’s Kitchen is targeting the huge vacuum between street-side unorganised ‘Chinese cuisine market’ and fine dining brands. It offers dine-in as well as delivery options. Going forward, the company will expand Hong’s Kitchen’s presence, refining the current model based on its learnings.

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JUBILANT FOODWORKS

Pricing comparison of a bowl of noodles Hong’s Kitchen pricing is cheaper then peers too

350 250

280 220

210 190

(INR) (INR) 140 160

70 130

0 100 Roadstall Hong's Kitchen Casual CDR Hong's Kitchen WokExpress Mandarin Oak

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

Ekdum! will be affordably priced with biryani prices starting INR99 with a focus on value pricing. The brand will be offering 20 different biryanis. While the competition is high in the cuisine, the right to win will be contingent on cracking and implementing the right SOPs for dishes (taking out the personal skill component to enable scale) as JFL has previously well executed in pizza.

Similarly, Ekdum's pricing is sharpest in the market

Chicken

Paneer

Veg

0 350 700 1050 1400 1750 (INR/Kg)

Behrouz Charcoal Eats Biryani by Kilo Ekdum!

Source: Company, Edelweiss Research

A common aspect across both brands is its value pricing in general and compared to other peers. A key feature of both brands is the value focused pricing. There are a lot of options made available @INR99, especially in Hong’s Kitchen.

One key difference seen this time, and a learning from Dunkin, is that JFL is taking time to get unit economics right before scaling up the brand. While Hong’s Kitchen was launched in 2019, it still has only four outlets; Ekdum! and Hong’s Kitchen are only in Gurgaon as of now.

One thing certain is that the addressable market of these segments is much higher than pizza. However, JFL entered the market (1996) via Domino’s, which was a well- established brand with a proven model globally, and also at a time when it had few

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JUBILANT FOODWORKS

competitors. Here it is starting from scratch in a market which is already cluttered and leaders have still to gain size.

Total market size category wise

8,000

6,400

4,800

(INRbn) 3,200

1,600

0 Pizza Biryani Chinese

Source: Company, Press articles, Edelweiss Research

Both the formats will not have to pay royalties but spend on advertising initially and even delivery commissions will make break-even some time away. Also, given the value focused pricing, gross margins will definitely be lower than current business margins and will require scale to achieve profitability.

Behrouz, the largest player in the Biryani format, owned by Rebel Foods has still touched only ~INR2bn of revenues after four years of existence and that also after expanding reach to 35 cities. Similarly, Mandarin Oak, its Chinese brand, is still to clock INR1bn revenue. Hong Kitchen’s other peer, Wok Express (Lenexis Foodworks) did revenues of ~INR0.4bn in FY19 with 35 outlets. As a reference, see below the financials of Sky Gate hospitality (owner of Biryani by Kilo).

Sky Gate Hospitality (Biryani by Kilo)

INR mn FY16 FY17 FY18 FY19

Net Sales 9 41 122 287 Total Expenditure 12 48 136 344 EBITDA -3 -7 -13 -53 PAT -2 -7 -21 -64

Outlets(#) 2 NA NA 25 Source: VC Edge, Edelweiss Research

Looking at the base financials of these upcoming brands in both Indian and Chinese cuisines, most of them are still clocking at best INR10-20mn/outlet/annum with none of them profitable yet.

Considering JFL’s conservatism (rightfully so) in expanding these outlets, even if it adds 50-75 outlets per annum across both brands, contribution to revenue will be limited to the 3-4% range. Thus, any meaningful contribution to revenue is at least three to four years away, with profitability even later.

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JUBILANT FOODWORKS

Additional Data Management Holdings – Top 10* CEO Pratik Pota % Holding % Holding CFO Prakash Bisht Sands Capital 5.01 Vanguard Group 1.91 JP Morgan & Cha 2.65 Dimensional Fun 1.84 EVP - Operations Rajneet Kohli UTI AMC 2.64 Arisaig Global 1.71 Chairman Shyam Bhartia Kotak Mahindra 2.34 Hillhouse Capit 1.67 Auditor Deloitte Haskins & Sells LLP Motilal Oswal A 2.12 Tata AMC 1.42

*Latest public data

Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Full recovery delivered; Result Betting big on ethnic; Company 03-Feb-21 2,699 Buy 28-Jan-21 ABFRL Update Update Delivering recovery; strengthens Gaining significant ground; Result 12-Nov-20 2,339 Buy 25-Jan-21 V-Mart Retail digital; Result Update Update Covid pangs; robust recovery in Recovery better; omni in focus; 02-Sep-20 2,251 Buy 18-Jan-21 Shoppers Stop store; Result Update Result Update

Rating Interpretation Daily Volume TP 20 3325 3,315

2855 16

2385 TP 12 (INR) 2,015

TP (Mn) 1915 1,652 TP 1,529 8 1445 4 975 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 0 JUBI IN Equity Buy Hold Reduce Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20

Source: Bloomberg, Edelweiss research Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage Rating Rationale

Buy Hold Reduce Total Rating Expected absolute returns over 12 months

Rating Distribution* 163 64 14 241 Buy: >15%

>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%

Market Cap (INR) 193 53 5 251 Reduce: <-5% * stocks under review

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India Equity Research Retail February 17, 2021

WESTLIFE DEVELOPMENT

COMPANY UPDATE

KEY DATA Rating NOT RATED Expanding horizons Sector relative Price (INR) 455 12 month price target (INR) NA Westlife Development’s (WDL) relentless innovation drive and focus Market cap (INR bn/USD bn) 71/1.0 on value offerings have rendered it the leader in the burger QSR space Free float/Foreign ownership (%) 51.7/31.5 What’s Changed (~36% market share). The company is now shifting focus to: a) further Target Price ⚊ improvement in store profitability by cutting store opex/capex by Rating/Risk Rating ⚊ ~20% via ROP 2.0 (benefits visible); and b) maximising potential of INVESTMENT METRICS recent extensions like McCafe and McDelivery, which are further 210 boosting SSSG (FY18-20: 12% versus FY15-17: 0%) and store 145 80 profitability (improved store ROCE ~1.5x). 15 -50 Despite its leadership, store addition potential remains robust, which Sales Growth EPS Growth RoE PE (%) (%) (%) (x) enhances growth visibility. The stock is trading at 23x FY23E Retail WLDL IN EQUITY EV/EBITDA, with pre covid one year average of 26x. ‘NOT RATED’.

FINANCIALS (INR mn) Core focus on value; dynamic business model Year to M arch F Y17A F Y18A F Y19A F Y20A Key highlights of WDL’s journey in India (since 1996) have been its agility in evolving Revenue 9,308 11,349 14,020 15,478 EBITDA 470 774 1,190 2,140 to meet the unique customer requirements and innovation. This is amply reflected Adjusted profit -121 129 213 51 in: a) menu customisation; b) value focused offerings, which have driven strong

Diluted EPS (INR) -0.8 0.8 1.4 0.3 growth since 2008; and c) concept extensions via McCafe and McDelivery, which EPS growth (%) -5.7 -206.1 65.6 -75.9 have helped reignite growth. The company’s next initiative is the launch of RoAE (%) -2.3 2.4 3.8 0.9 Experience of the Future (EOTF) stores to increase spend per head. P/E (x) NM NM 328.866 NM EV/EBITDA (x) 149 90 59 33 Focus on store economics, brand extensions to drive performance Dividend yield (%) 0 0 0 0 Despite brand and leadership, McDonald’s store ROCE still lags other restaurants. PRICE PERFORMANCE Hence, WDL has now initiated the Restaurant Operating plan 2.0 (ROP 2.0) to further 500 50,000 improve store economics by cutting restaurant capex and opex by ~20%. In addition, 455 45,000 pick-up in the McCafe concept is driving ~INR8-10mn of sales/store at incremental 410 40,000 capex of mere INR2.0-2.5mn; this is boosting store ROCE 1.5x--from 10% to 15% 365 35,000 320 30,000 (Edelweiss estimate). McDelivery is also seeing a surge with WDL revamping the app. 275 25,000 Jan-20 Apr-20 Jul-20 Oct-20 Concentrated store network, store addition potential robust WLDL IN EQUITY Sensex We estimate the existing store potential itself to be ~440 (current: 304) with the market expanding faster than WDL’s addition of ~25 stores/annum.

Outlook and valuations: Innovating to stay ahead; ‘NOT RATED’ Explore: WDL has gone through various phases over the past decade. While FY08-13 saw strong SSSG driven by its value offerings, there was a downturn post that due to brand stagnation and overall weak consumer sentiments. However, since FY17, new extensions like McCafe and McDelivery have fuelled SSSG.

Financial model Podcast Though covid has affected the dine-in focused format of WDL, the business has staged a strong recovery. Going forward, as things normalise, business is likely to pick up and regain store expansion trajectory from FY22 (average addition of 23 stores/annum over FY15-20). The stock currently trades at 23x FY23E consensus EV/EBITDA (26x on consensus target price), with pre covid one year average of 26x. Corporate access Video WDL is ‘NOT RATED’.

Nihal Mahesh Jham Abneesh Roy Prateek Barsagade +91 (22) 6623 3352 +91 (22) 6620 3141 +91 (22) 4063 5407 [email protected] [email protected] [email protected]

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WESTLIFE DEVELOPMENT

Financial Statements

Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY17A FY18A FY19A FY20A Year to March FY17A FY18A FY19A FY20A Total operating income 9,308 11,349 14,020 15,478 Share capital 311 311 311 311 Gross profit 5,645 7,099 8,905 10,095 Reserves 4,964 5,111 5,525 5,459 Employee costs 1,407 1,716 1,975 2,192 Shareholders funds 5,275 5,422 5,837 5,770 Other expenses 3,768 4,610 5,740 5,763 Minority interest 0 0 0 0 EBITDA 470 774 1,190 2,140 Borrowings 1,904 1,835 2,339 1,837 Depreciation 637 673 797 1,384 Trade payables 742 1,084 1,178 1,280 Less: Interest expense 154 150 177 808 Other liabs & prov 885 954 823 8,530 Add: Other income 200 178 136 130 Total liabilities 8,807 9,295 10,177 17,417 Profit before tax -121 129 352 79 Net block 4,400 4,639 5,026 5,437 Prov for tax 0 0 139 -14 Intangible assets 907 901 926 8,649 Less: Other adj 0 0 0 -166 Capital WIP 172 197 284 226 Reported profit -121 129 213 -73 Total fixed assets 5,479 5,737 6,236 14,311 Less: Excp.item (net) 0 0 0 -125 Non current inv 596 1,266 849 1,293 Adjusted profit -121 129 213 51 Cash/cash equivalent 1,175 687 1,283 308 Diluted shares o/s 156 156 156 156 Sundry debtors 49 64 98 47 Adjusted diluted EPS -0.8 0.8 1.4 0.3 Loans & advances 1,098 1,107 850 845 DPS (INR) 0.0 0.0 0.0 0.0 Other assets 409 434 861 612 Total assets 8,807 9,295 10,177 17,417 Tax rate (%) 0.0 0.0 39.5 -18.1

Important Ratios (%) Free Cash Flow (INR mn) Year to March FY17A FY18A FY19A FY20A Year to March FY17A FY18A FY19A FY20A Other exp (% of rev) 40 41 41 37 Reported profit -121 129 213 -73 Con A&P (% of rev) 6 6 5 5 Add: Depreciation 637 673 797 1,384 Gross margin (%) 61 63 64 65 Interest (net of tax) 103 101 119 606 EBITDA margin (%) 5 7 8 14 Others -83 -39 115 -84 Net profit margin (%) -1 1 2 0 Less: Changes in WC -120 -508 122 -164 Revenue growth (% YoY) 12 22 24 10 Operating cash flow 657 1,371 1,121 1,996 EBITDA growth (% YoY) 10 65 54 80 Less: Capex 907 1,059 1,431 1,259 Free cash flow -251 312 -310 737 Adj. profit growth (%) NM 206 66 -76

Assumptions (%) Key Ratios Year to March FY17A FY18A FY19A FY20A Year to March FY17A FY18A FY19A FY20A GDP (YoY %) 7 7 6 5 RoE (%) -2.3 2.4 3.8 0.9 Repo rate (%) 6 6 6 4 RoCE (%) 0.5 3.9 6.8 7.5 USD/INR (average) 67 64 70 71 Inventory days 29 27 27 28 SSSG (% YoY) 4 15.8 17 4 Receivable days 2 2 2 2 Store addition (#) 22 19 19 23 Payable days 71 145 141 134 COGS % of sales (con) 39.4 37.4 36.5 34.8 Working cap (% sales) -1 -4 -2 -4 Staff cost (% of rev) Gross debt/equity (x) 0.4 0.3 0.4 0.3 Yield on cash Net debt/equity (x) 0.1 0.2 0.2 0.3 Interest coverage (x) -1.1 0.7 2.2 0.9 Dep (% of gross block) 9 9 11 12

Valuation Metrics Valuation Drivers Year to March FY17A FY18A FY19A FY20A Year to March FY17A FY18A FY19A FY20A Diluted P/E (x) NM 545 329 1,367 EPS growth (%) -5.7 -206.1 65.6 -75.9 Price/BV (x) 13 13 12 12 RoE (%) -2.3 2.4 3.8 0.9 EV/EBITDA (x) 149 90 59 33 EBITDA growth (%) 10 65 54 80 Payout ratio (%) - - - - Dividend yield (%) 0 0 0 0 Source: Company and Edelweiss estimates

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WESTLIFE DEVELOPMENT

Key Highlights

Core focus on value; business model evolving to suit changes

 Key highlight of WDL’s journey in India (since 1996) has been the agility in evolving to the unique market requirements and driving innovation.  This is reflected in: a) menu customisation; b) value focused offerings--one of the key drivers of strong growth since 2008; and c) concept extensions via McCafe and McDelivery, which have helped reignite growth.  WDL has widened its positioning from being ‘one thing to one customer’ to ‘a number of things to a number of customers.’ The next initiative is launch of Experience of the Future (EOTF) stores, a superior dining experience fused into the QSR format at affordable prices, to increase spend per head.

WDL launched McDonald’s in India in 1996 with initial focus on building visibility of the brand in the country and getting its supply chain in place. Since inception, the company has tried positioning McDonald’s as a value focused QSR chain. It has also been aggressive in regularly updating its menu and was the pioneer in building a customised menu for India--bedrock of its scale-up in India.

Dropping beef and pork from its menu--key ingredients globally--was key to scale up of McDonald’s. From the original menu, only chicken nuggets, fillet-o-fish, fries, sodas and shakes were introduced in the initial phase. It courted a larger customer base with the introduction of local menu innovations like the McAloo Tikki burger, McVeggie and Pizza McPuff in 2004 along with the launch of the ‘Happy Price Menu’. While localisation of the menu was less than 5% in other countries and 33% in Asia, in India it was more than 70%.

Product additions

Source: Company, Edelweiss Research

In the initial phase, WDL was successful in realising significant improvement in footfalls and the company’s value offerings helped the brand pick up. It was in this phase that the company launched the McAloo Tikki burger for just INR25, which made it a snacking option marginally higher than street food options, but with much better hygiene and also good ambience. Also, value dessert offerings like the soft cone for INR10 became an instant hit. Sub-INR25 items constituted more than 60% of McDonald’s sales in 2013.

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WESTLIFE DEVELOPMENT

Value focused menu offerings Majority revenues driven by value offerings

Source: Company, Edelweiss Research

Less than INR25 Greater than INR25

Source: Company, Edelweiss Research, Note: Data for 2013 McDonald’s value offering and menu resonated with Indians, reflecting in the strong SSSG that the company clocked during this phase. However, after 2013, SSSG started to contract due to a combination of weak sentiments and brand fatigue. In addition, entry of other burger brands with similar focus increased competitive intensity.

SSSG evolution across various phases

30.0 Value focused menu offerings helped drive acceptability -Weak sentiment along with consumer fatigure -Menu innovation -Entry of rivals like Burger King -Spurt from McCafe -Focus on Delivery sales 21.0 Average SSSG: 16%

12.0 Average SSSG: 11% (%) 3.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20* -6.0 Average SSSG: -1%

-15.0

Source: Company, Edelweiss Research, Note: For FY20, SSSG is for Apr-Dec

To drive SSSG again, WDL went back to the table to get a better sense. As a part of its various initiatives, WDL started McCafe, which now serves more than 25 beverages. McDelivery, which was launched in 2004, started gaining momentum only from 2015, after the roll out of an enhanced website and mobile platform to place orders. WDL has also tied up with various food aggregators such as Swiggy and Zomato to help boost online sales. In addition, it retained the product innovations pace. All of this has reflected in the turnaround in SSSG from FY17, also aided by improvement in overall consumer sentiment.

Over the last two decades of operations, WDL’s principal learning is that there is no such thing as a ‘QSR customer’. It has focused on serving every possible customer, be it a morning person looking for coffee or someone looking for have a quick snack or meal and/or a person who wishes to spend leisure time during the day. WDL has widened its positioning from being ‘one thing to one customer’ to ‘a number of things to a number of customers.’

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WESTLIFE DEVELOPMENT

New initiatives have helped drive demand New initiatives have helped drive demand

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

EOTF2.0: The SPH of dine-in with the efficiency of QSR

In the QSR sector, there is a growing premium on the need to attract customers and then lock them in for as long as possible. It enhances chances of product cross-sell through bunching and focusing on providing a full-fledged meal rather than a snacking option.

As per WDL, it is trying out many firsts– sit-down service and superior dining experience fused into the QSR format at affordable prices.

Layout of EOTF stores Layout of EOTF stores

Source: Company, Edelweiss Research Source: Company, Edelweiss Research With an eye on this, WDL has introduced a new modernised and better-looking store format with a focus on dine-in. It is trying to capture the spending per head of casual dine-in formats, which is generally 2-3x higher, with the efficiency of a QSR. For casual dining restaurants, despite lower footfalls/table turnover, revenues are higher driven by higher spend per head.

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WESTLIFE DEVELOPMENT

WDL trying to increase SPH towards a dine-in format Which also drives higher ADS/revenues

900 1,35,000

720 1,28,000

540 1,21,000

(INR) (INR) 360 1,14,000

180 1,07,000

0 1,00,000 Current McDonalds Casual Dining Current McDonalds Casual Dining

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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WESTLIFE DEVELOPMENT

Focus on store economics, brand extensions to drive performance

 Despite the brand and leadership, McDonalds Store ROCE still lags other restaurants. Thus, WDL has initiated Restaurant Operating plan 2.0 (ROP 2.0) in 2016 to further improve store economics by cutting restaurant capex and opex by ~20%.

 In addition, while not quantified, the McCafe concept has helped drive significant improvement in store economics/performance. With an incremental investment of ~INR2.0-2.5mn, WDL is generating sales of INR8-10mn helping nearly 1.5x store ROCE from 10% to 15% (Edelweiss estimate). The strong improvement in SSSG has also been accompanied by the McCafe ramp up.

 McDelivery is also seeing a surge with WDL revamping the app, and will be a key driver in a post covid era.

ROP2.0: Sharpening focus on store economics

Favourable store economics is the core of any QSR, which eventually becomes the building blocks for a company’s performance.

WDL had initiated ROP1.0 in 2003 and as a follow-up to further improve store profitability it launched ROP2.0 in January 2016 (conceptualised in 2013). Initiatives under ROP1.0 revolved around supply chain, right sizing restaurants and tax rationalisation.

Key initiatives under ROP1.0 Drove improvement in ROM and SSSG

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

Though McDonald’s is the most recognised burger brand in India, the company’s store economics lags other peers in related QSR segments. While the dine-in nature of the category naturally dents return ratios, still the gap is substantial.

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WESTLIFE DEVELOPMENT

Store ROCE comparison across major QSRs

45.0

36.0

27.0 (%) 18.0

9.0

0.0 McDonald’s KFC Pizza Hut Burger Domino’s Subway King

Source: BKI DRHP, Edelweiss Research

Note: ROCE calculated as Store EBIT/Capex per store

WDL implemented new restaurant unit economics (ROP2.0) from January 2016, wherein it reduced capex and opex in every new restaurant by ~20-25%. Moreover, management is targeting to cut capex and opex per store further through higher localisation and changes in restaurant design, utilities & kitchen processes. Capex per restaurant has now dipped to INR25-30mn from an average of INR30mn plus.

The measures implemented included:

Restaurant capex:

 Optimisation of restaurant design.

 From 3,000-4,000 sq. ft down to 2,500-3,000.

 Localisation of equipment

Restaurant opex:

 Raw material: Strengthened the supply chain to negotiate volume-based discounts.

 Power: Design changes and innovation to reduce operating costs. E.g., LED lighting to save electricity. Adoption of green initiatives-solar power heaters, redesigning of HVAC for lower unit consumption.

 Driving labour productivity improvement.

 Rental: Entered into long-term lease contracts in exchange of affordable rentals, accelerating restaurant breakeven.

Additional revenue drivers:

 Revamped delivery app to further ease the ordering and delivery process.

 Created format complements that made it possible to increase services from the same store space, enhancing revenue without a corresponding increase in costs, thereby expanding margin.

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WESTLIFE DEVELOPMENT

As per WDL, it has: a) moderated fixed costs and operating cost structures by ~30% versus a target of 20-25%; and b) Store break-even in ~12 months versus a target of 12-18 months.

Improvements under ROP 2.0

2013-14 ROP 2.0 Target ROP 2.0 Actual Avg. Development Cost 1x 0.8x 0.7x Cash Break-even 24 months 12-18 months ~12 months Positive margins ROM Negative Break-even and cash flows Source: Company, Edelweiss Research

Store size moderated since launch of ROP 2.0 Similarly for employee/store

5,500 45

4,400 41

3,300 37

(#) (Sq.ft) 2,200 33

1,100 29

0 25 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

WDL has also been optimising its store size and reducing the number of employees required per store. As per our calculations, following is the difference in trajectory in ROM under new stores (ROP2.0) and earlier.

Estimated year wise store EBITDA margin

21.0

14.0

7.0 (%)

0.0

-7.0 Y1 Y2 Y3 Y4 Y5

Current - ROP 2.0 Earlier

Source: Company, Edelweiss Research

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WESTLIFE DEVELOPMENT

McCafe was Conceptualised and McCafe: Huge SSSG and profitability driver launched in Melbourne, Australia, in WDL launched McCafé in Mumbai in 2013, a brand extension that serves specialty 1993. It was launched in USA in 2001. coffees and desserts, typically located in a separate area inside restaurants. Prior to McCafé, restaurants had a limited beverage range.

The company introduced the McCafé format to address the growing coffee needs of visitors. In addition to premium-quality coffee, it enabled the company to offer a wide range of frappes and smoothies, providing it an alternative product range to attract new customers. Following favourable response in 2014-15, WDL scaled this format and extended it to non-coffee beverage offerings like frappes and smoothies.

The company did not merely widen the beverage menu, but it emphasised two points that consumers focus on--affordability (see comparison with other chains below) and concept of hand crafted.

McCafe’s pricing is among the most competitive in the market

225

200

175 (INR) 150

125

100 Barista Starbucks CCD McCafe

Source: Company, Edelweiss Research

Note: Pricing of the smallest Cappuccino Coffee serving

The jump in footfalls was led by a growing appreciation of the considerably superior price-value proposition: a wide beverage choice in a vibrant environment at a fraction of the cost in an equivalent five-star environment.

McCafe offerings Layout of a McCafe kiosk

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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WESTLIFE DEVELOPMENT

This has enabled a widening cross-sell opportunity--customers returning for coffee and graduating to full-fledged meals. McCafé beverage customers also opt for new offerings, widening the company’s revenue. Consequently, WDL’s SSSG and store economics too improved.

Globally too, McDonald’s is leveraging the McCafe brand to convert casual customers to committed ones and build stronger relationships so they visit more often.

McCafe has seen a sharp spurt over last 5 years Ramp-up of McCafe has driven higher SSSG

10.0 2.5 350 24.0

18.0 8.0 2.0 280

12.0

6.0 1.5 210 (x)

(x) 6.0 (%) 4.0 1.0 140 (# of outlets) of (# 0.0

2.0 0.5 70 -6.0

0.0 0.0 0 -12.0 FY16 FY17 FY18 FY19 FY20 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Sales (x) Average sales per day (x) - RHS McCafe Non McCafe outlets SSSG (%) - RHS

Source: Company, Edelweiss Research Source: Company, Edelweiss Research Increased its Beverage share post McCafe launch Much higher than peers

5.5 35.0 35.0

4.4 28.0 28.0

3.3 21.0 21.0

(%) (%)

(INRbn) 2.2 14.0 14.0

1.1 7.0 7.0

0 0.0 0.0 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Jubilant WDL Beverages, Desserts, Others Share of Beverage, Dessert Revenue share (%) - RHS

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

McCafe has driven significant improvement in store economics

McCafe has changed the store economics for McDonald’s in every aspect from being not just revenue/margin accretive, but most importantly store ROCE accretive. The cost of setting up a McCafe is only INR2.0-2.5mn against INR25-30mn capex for a standalone restaurant, as the company does not incur any additional store expenditure or rent as McCafe is situated in the restaurant itself.

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WESTLIFE DEVELOPMENT

Average sales per McCafe hub Estimated share of McCafe revenues

15.0 30.0 11-14 12.0 24.0 8-12 8-10 9.0 18.0

5-8 (%) 12.0

(INRmn) 6.0

6.0 3.0

0.0

FY17 FY18 FY19 FY20 FY16 FY18 Original Revised FY16

FY22E FY22E Potential

Source: Company, Edelweiss Research Source: Edelweiss Research As we note, addition of a McCafe can expand a store’s ROCE ~50% (from 10% to 15%, Edelweiss estimate).

Store economics estimate Existing INR mn/Annum McCafe Total outlet Store revenues 36.0 8.1 44.1

Gross Profit 23 6 29 Gross Margin (%) 63.0 75.0 65.2

Other costs 18.6 4.2 22.8

EBITDA 4.1 1.9 6.0 EBITDA Margin (%) 11.4 23.4 13.6

Depreciation 1.7 0.2 1.8

EBIT 2.4 1.7 4.2

Capex Cost 25.0 2.5 27.5

RoCE (%) 9.7 69.1 15.1 Source: Edelweiss Research

Note: Gross margin estimated based on beverage companies reported GM

For other costs apportioned based on revenues

Workings for a store in Year 3 of operation

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WESTLIFE DEVELOPMENT

“in some of our top markets, delivery McDelivery: App ramped up to drive delivery thrust post covid now represents as much as 10% of sales The covid-19 pandemic has propelled online delivery and even traditional non- in those restaurants” McDonalds Corp delivery categories like burgers have seen a sharp spurt. Annual Report 2019 Size of delivery market

20.0

16.0 Delvery market estimate 12.0 increased by 10% post Covid

(USD bn) (USD 8.0

4.0

0.0 2016 2020 2025 2025 PostCovid PreCovid Restaurant to Consumer Platform to Consumer

Source: Company, Edelweiss Research

McDelivery services are available through WDL’s own channel as well as third-party aggregators. However, WDL is making a stringent effort to drive the usage of its own app to get better customer data and reduce costs.

QSR app comparisons

Downloads Rating Pizza based QSR

Domino’s 10mn+ 4.3 Pizza Hut 1mn+ 4.5 Mojo's 1mn+ 3.9 Oven Story 1mn+ 3.9

Burger based QSR

KFC 5mn+ 3.8 McDonald’s 5mn+ 3.5 Burger King 500K+ 3.2 Source: Google Playstore, Edelweiss Research

WDL believes key drivers for its app usage over competitors are: a) operations– better delivery time compared to most QSR; b) variety of F&B–primarily incremental breakfast and McCafe offerings; c) reach & penetration; and d) offers.

Overall, WDL has seen 6x jump in McDelivery sales over FY16-20 and more than 80% of its stores are now equipped for delivery compared to ~60% in FY16.

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WESTLIFE DEVELOPMENT

Delivery sales ramp-up Break-up of stores

6.5 5.0 350

5.2 4.0 280

3.9 3.0 210

(x) (x)

2.6 2.0 140 (# of stores) of (#

1.3 1.0 70

0 0.0 0 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20

Sales (x) Average sales per day (x) - RHS MDS hubs Non MDS stores

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

All initiatives focused towards achieving Vision 2022

Overall, all the above initiatives for a part of the company’s longer-term focus of achieving ‘Vision 2022’. Key elements of which are

Vision 2022 key targets

Source: Company, Edelweiss Research

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WESTLIFE DEVELOPMENT

Store potential robust; market expanding at faster clip

 WDL follows a strategy of deeper penetration into a city rather than opening stores across the country. Top-6 cities (Mumbai, Bengaluru, Pune, Hyderabad, Ahmedabad and Chennai) account for ~70% stores.

 To map WDL’s store potential, we benchmark its penetration in Mumbai--its biggest and most well penetrated micro market--and apply it to the other metro and mini-metro cities. For tier-I cities, expecting lower competition, we assume McDonald’s to gain 30% share of the Chain QSR market (11% currently). Factoring these, we come to a current store count potential of ~440 for WDL.  With the chain QSR market expected to clock 20% plus revenue CAGR, assuming that 10% of this will be driven by incremental locations/new cities, the potential market will increase by ~40 stores--higher than the annual addition of WDL of 25-30 stores in the past.

WDL follows a strategy of deeper penetration into a city rather than opening stores across the country. Top-6 cities (Mumbai, Bengaluru, Pune, Hyderabad, Ahmedabad and Chennai) account for ~70% stores and WDL is planning more than 60% of incremental store additions in these cities going forward.

Store distribution has not changed much over the years

FY13 % of Total CY19 % of Total Maharashtra 78 48.4 132 43.0 Karnataka 39 24.2 55 18.0 Gujarat 14 8.7 43 14.0 AP+Telangana 14 8.7 34 11.0 Tamil Nadu 12 7.5 25 8.0 Kerala 1 0.6 9 3.0 MP 3 1.9 6 2.0 Chhattisgarh 0 0.0 1 0.3 Goa 0 0.0 1 0.3 Total 161 100.0 308 100.0 Source: Company, Edelweiss Research

Potential to open ~440 stores in the country at present

WDL has focused its expansion mainly in metro cities (top six cities account for ~70% of its outlets). WDL’s biggest and most penetrated market is Mumbai where the company has more than 90 stores and as per WDL, Mumbai can easily accommodate 150 plus McD stores.

Thus to map the store potential for WDL, we benchmark its penetration in Mumbai, the company’s biggest and most well penetrated micro market, and apply it to the other metro and mini metro cities. Using this criteria, we get the following potential store print for WDL in its top six cities. Our potential store for McDonald’s in Mumbai puts its implied market share in the city at ~14% of the Chain QSR market and ~46% of the Chain Burger & Sandwiches market.

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WESTLIFE DEVELOPMENT

WDL store potential in metro and mini metro cities Chain Market Size (INR Potential McD Existing McD City BKI Outlets Dominos Outlets bn) outlets outlets Mumbai 84 119 89 37 142 Pune 26 36 36 12 66 Ahmedabad 14 20 18 6 33 Bengaluru 52 73 54 26 153 Hyderabad 18 25 24 13 68 Chennai 40 56 21 6 66 Total 233 329 242 100 528 Source: Technopak, Edelweiss Research

Note: City wise store outlet data is Edelweiss estimate

For FY20, McDonald’s had 11% market share of the chain QSR segment in India (BKI: 5%). With lower competition in T1/T2 cities, we assume McDonald’s /WDL can easily achieve a 30% market share of the Chain QSR market (Chain QSR market is ~50% of the Chain market) in these cities and taking the average store productivity of INR30mn/store, we arrive at the potential store opportunities at present.

Tier-I cities store potential Chain Market Size (INR McD Potential Store Productivity City Classification Store Potential bn) Revenues (INR bn) (INR mn/Store) Surat Tier I 1.0 0.2 30.0 5 Nagpur Tier I 1.3 0.2 30.0 7 Indore Tier I 1.6 0.2 30.0 8 Kochi Tier I 1.6 0.2 30.0 8 Coimbatore Tier I 1.2 0.2 30.0 6 Vadodara Tier I 1.6 0.2 30.0 8 Madurai Tier I 0.2 0.0 30.0 1 Vishakhapatnam Tier I 0.7 0.1 30.0 4 Bhopal Tier I 1.3 0.2 30.0 7 Rajkot Tier I 0.5 0.1 30.0 3 Trivandrum Tier I 0.3 0.0 30.0 2 Total 57 Source: Technopak, Edelweiss Research

In addition to these cities, there are 265 more cities where Dominos has already reached and the other Burger QSR’s hardly have any presence. For WDL (and other burger QSRs too) has given limited attention to cities beyond metros. This always remains an avenue for them to expand further too as they choose.

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WESTLIFE DEVELOPMENT

QSR city reach

300

240

180 (#) 120

0 Domino's McDonald's KFC Burger King

Source: Company, Edelweiss Research

If we assume, WDL/ McDonald’s can open one store in even one fifth of these locations (not all locations would be under WDL’s assigned geography), there is a potential to open 53 stores incrementally in these cities.

WDL's store potential analysis

Segment Existing Potential BKI Dominos KFC Approach Mega & Mini Metros 242 329 175 772 254 Benchmarking McD's presence in Mumbai to other cities Tier I Cities 51 57 29 271 95 Assumed 30% QSR chain market share in these cities Tier II & Other Cities 26 53 60 311 104 Based on Dominos reach beyond the above cities Total - FY20 319 439 261 1,354 454 Source: Company, Edelweiss Research, Note: Cluster wise store data for BKI, Dominos and KFC based on BKI DRHP data

Factoring all these, we come to a current store count potential of ~440 stores at present for WDL. With the Chain QSR market expected to clock a 20% plus revenue CAGR, assuming that 10% of this will be driven by incremental locations/new cities, then the potential market will increase by ~40 stores, higher than the annual addition of WDL of 25-30 stores seen in the past. Management pegs the current long-term potential for McDonald’s (West and South India) between 800 and 850.

Long-term store potential

850

680

510 (#) 340

170

0 Current Long Term Potential

Source: Company, Edelweiss Research

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WESTLIFE DEVELOPMENT

Financial Snapshot

 WDL’s performance has seen various phases over the past decade. While FY08- 13 saw strong SSSG driven by its value offerings, there was a downturn post that due to brand stagnation and overall weak consumer sentiments. However, since FY17, SSSG has improved driven by new extensions McCafe and McDelivery.

 WDL has seen sharp expansion in gross margin (1,055bps over FY13-20), only part of which has translated into EBITDA margin improvement. Given the store- based cost structure, trend in Restaurant Operating Margin (ROM) and EBITDA margin has primarily been driven by the SSSG. Since FY18, strong spurt in SSSG (FY18-20 SSSG: 12% versus FY15-17: 0%) has driven sharp improvement in ROM (FY17-20 EBITDA CAGR: 44%).

 Despite the asset-heavy nature of business, WDL has kept debt under check as after an equity infusion between FY13 and FY15, cash flows have been sufficient to fund capex. WDL’s return ratios have been subdued given the volatility in profitability. However, they have been improving, especially over the past three years, as WDL has sharpened focus on store economics and overall return structure.

Store addition consistent; however SSSG has been volatile

WDL has been consistent in its store addition over the past decade (average addition of 23 stores/annum over FY15-20) and is targeting to sustain the same run rate in the future as well.

Growth has revived since FY15

17.5 30.0

14.0 24.0

10.5 18.0 (%)

(INRbn) 7.0 12.0

3.5 6.0

0.0 0.0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Revenue (INR bn) Growth (% YoY) - RHS

Source: Company, Edelweiss Research

McDonald’s value offering and menu resonated with Indians, reflecting in the strong SSSG that the company delivered during FY08-13. However, after 2013, SSSG started contracting due to a combination of weak sentiments and brand fatigue. In addition, entry of other burger brands with similar focus impacted McDonald’s positioning. However, WDL’s sharpened focus on menu innovation, new formats like McCafe, along with benefit of GST implementation (in FY18) have helped drive a turnaround in SSSG.

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WESTLIFE DEVELOPMENT

Growth in recent years has been driven by SSSG

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Stores (#) 129 161 184 209 236 258 277 296 319 Store Addition (#) 22 32 23 25 27 22 19 19 23 Store Addition (% YoY) 20.6 24.8 14.3 13.6 12.9 9.3 7.4 6.9 7.8

SSSG (%) 22.1 6.0 -6.4 -5.9 1.8 4.0 15.8 17.0 4.0

Revenue Growth (%) 24.9 8.2 3.2 9.0 11.7 21.9 23.5 10.4 Source: Company, Edelweiss Research

WDL reported strong growth for 9mFY20 (14% YoY) and SSSG for January-February 2020 was robust at 12%. However, due to covid, it reported flat growth in Q4FY20, which led to overall revenue growth dipping to 10%.

Gross margin improving; margin a function of SSSG

WDL has seen a sharp improvement in gross margins over the past six years driven initially by a combination of menu management, prudent pricing and operational efficiencies. Later (primarily from FY17), rising share of McCafe and McDelivery also aided margin improvement. WDL’s gross margin improved 1,055bps over FY13-20.

Margin evolution

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20* Raw Material Cost 45.3 42.6 41.6 40.0 39.4 37.4 36.5 34.8 Employee Cost 11.2 13.0 14.9 14.9 15.1 15.1 14.1 14.2 Sales & Marketing 5.9 5.5 5.6 5.6 5.9 5.5 4.9 4.8 Royalty 3.1 3.1 3.5 3.5 3.9 4.2 4.6 4.6 Rent 7.8 8.6 9.4 9.0 9.2 9.3 9.6 9.5 Power and Fuel 9.2 10.3 11.0 10.1 9.1 8.3 7.4 7.4 Other Expenses 9.0 11.1 12.1 11.9 12.3 13.3 14.4 15.9 EBITDA margin (%) 8.5 5.8 2.0 5.1 5.0 6.8 8.5 9.0 Source: Company, Edelweiss Research

Note: FY20 numbers pre IND AS 116 impact

Despite the improvement in gross margin, overall margins and Restaurant Operating Margin (ROM) have remained range bound given the incremental costs due to expansion in the restaurant network and rise in minimum wage rates (seen in FY15).

Given the store-based cost structure, trend in ROM has primarily been driven by the SSSG trend. FY14 and FY15 saw weak consumer sentiment affecting SSSG, consequently leading to a contraction in store EBITDA margin. Since FY18, strong spurt in SSSG has driven sharp improvement in ROM. This improvement in performance since FY18 is also reflected in the 44% EBITDA CAGR over FY17-20.

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WESTLIFE DEVELOPMENT

Strong improvement in margins in last three years Margin improvement driven by SSSG

1.5 10.0 15.0 20

15 1.2 8.0 13.5 10

0.9 6.0 12.0 (%)

5 (%) (%)

(INR bn) (INR 0.6 4.0 10.5 0

9.0 0.3 2.0 -5

0.0 0.0 7.5 -10 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20* FY14 FY15 FY16 FY17 FY18 FY19 FY20 EBITDA (INR bn) EBITDA Margin (%) - RHS ROM (%) SSSG (%) - RHS

Source: Company, Edelweiss Research Source: Company, Edelweiss Research Note: FY20 numbers pre IND AS 116 impact

WDL’s profitability has been volatile, moving in trend with the company’s SSSG. Also, the implementation of Ind-AS 116 negatively impacted PAT (impact of INR325mn; reported adjusted PAT of INR41mn).

PAT has been volatile, was improving over the last 3 years 500 30.0

22.5 340

15.0 180 7.5

(INRmn) 20 0.0

-140 -7.5

-300 -15.0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20* FY20 Source: Company, Edelweiss Research

*Adjusted PAT before INDAS 116 impact

Leverage limited despite asset-heavy nature of business

Despite the asset-heavy nature of WDL’s business, it has managed to keep debt under check. The company accelerated its expansion during FY13-15, when it raised equity capital of INR2.2bn to fund the deficit between internal cash flows and requirement. Post that, WDL has been able to, more or less, match its capex requirement with internal cash generation. WDL’s D:E has been stable at ~0.3x over the past five years. As of FY20, the company had marginal debt of INR1.8bn.

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WESTLIFE DEVELOPMENT

Store expansion in sync with cash generation Balance sheet situation remains comfortable

1,800 Equity raise 2,500 0.50 of INR2.2bn 1,200 2,000 0.40

1,500 0.30

600 (x)

(INRmn) 1,000 0.20

(INRmn) 0

500 0.10 -600 0 0.00

-1,200

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20* FY12

CFO Capex FCFF Gross Debt D:E (x) - RHS

Source: Company, Edelweiss Research Source: Company, Edelweiss Research FY20 OCF is adjusting for lease payments Return ratios remain sub-optimal; improved recently

WDL’s return ratios have been subdued given the volatility in profitability. However, they have been improving, especially over the past three years. The company is not merely focused on store profitability, but is also targeting to cut store investments (discussed above), reflecting in the moderating gross block/store. As stores mature, the company’s ROCE will start trending towards its store ROCE’s.

WDL focused on reducing store investments Return ratios though subdued had been improving

40 3.5 18.0

32 2.4 12.0

24 1.3 6.0

(%) (INRmn) 16 0.2 (INRmn) 0.0

8 -0.9 -6.0

0 -2.0 -12.0

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20*

FY17 FY19 FY12 FY13 FY14 FY15 FY16 FY18 FY20* Gross Block (INR mn/store) EBIT (INR mn/Store) - RHS RoE RoCE

Source: Company, Edelweiss Research Source: Company, Edelweiss Research FY20 EBIT is adjusting for INDAS 116 impact

Covid recovery driven by convenience channel

Similar to other dine-in heavy QSRs, WDL was severely impacted by covid (H1FY21 revenue: -61% YoY). However, the company’s convenience channel comprising delivery, pick-up and drive through has helped business post sustained recovery and by December recovery was already at 100%. WDL here too pioneered with the launch of On-the-Go service.

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WESTLIFE DEVELOPMENT

Though covid has affected the dine-in focused format of WDL, the business has staged a strong recovery. As things normalize, WDL aims to regain store expansion trajectory from FY22 (~25-30 stores).

Recovery during covid Sales Recovery Operational Stores Total Stores Operational (%) Convenience Dine-in (%) Apr-20 119 319 37% 15-20% NA NA May-20 197 319 62% 15-20% NA NA Jun-20 261 319 82% 40-45% 55-60% 10-15% Jul-20 270 319 85% 40-45% 100-105% 30-35% Aug-20 278 319 87% 65-70% 100-105% 30-35% Sep-20 287 319 90% 65-70% 100-105% 30-35% Oct-20 305 319 96% 78-85% 120-125% 70-75% Nov-20 303 304 100% 78-85% 120-125% 70-75% Dec-20 304 304 100% 95%+ 120-125% 70-75% Source: Company, Edelweiss Research

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WESTLIFE DEVELOPMENT

Valuation

WDL has a limited trading and estimate history. However, its valuation and for that matter most QSRs, has moved in sync with the company’s SSSG, which has been a key driver of performance.

Post covid, WDL has seen a much sharper contraction than JFL (only listed peer during the period) due to its dine-in focused business model. However, as the business has recovered (sales recovery at 95% plus by December), valuations have bounced back to pre-covid level.

WDL’s valuation has been cyclical, similar to its performance

70 32.0

60 24.0 16.0

50 (x) 8.0 (%) 40 0.0

30 -8.0

20 -16.0

Jun-17 Jun-18 Jun-19 Jun-20

Sep-16 Sep-17 Sep-18 Sep-19 Sep-20

Dec-16 Dec-17 Dec-18 Dec-19 Dec-20

Mar-17 Mar-18 Mar-19 Mar-20 1 Yr Frwd EV/EBITDA (x) SSSG - RHS

Source: Company, Edelweiss Research

The stock currently trades at 23x FY23E consensus EV/EBITDA (26x on consensus target price), with pre covid one year average of 26x. WDL is ‘NOT RATED’.

QSR valuation comparison

CAGR RoCE Target FY23 EV/EBITDA Mcap Sales: EBITDA: CMP TP Pre Company Rating (INR % Upside 17- 17-20/20- Post INDAS (INR) (INR) FY20/23E INDAS bn) 20/20-23 23 Jubilant Foodworks BUY 380 2,883 3,575 24 15/11 33/15 29/25 36 53 Burger King India HOLD 55 144 143 -1 54/18 NM/33 -1/5 25 39 Westlife Development* NR 71 455 NA NA 18/8 44/17 8/13 26 32 Source: Company, Edelweiss Research, Bloomberg

Note: FY17-20 EBITDA CAGR based on pre INDAS 116 adjustments; FY20-23 post INDAS 116 adjustments

For Westlife Development, Sales/EBITDA CAGR based on consensus numbers and multiples based on consensus TP

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WESTLIFE DEVELOPMENT

Key Risks

Weakness in consumer sentiment affecting SSSG

As seen in the company’s historical performance, SSSG remains a key driver of profitability given the store heavy/fixed cost nature of the business. Thus, any weakness in consumer sentiment and consequent impact on SSSG/store economics will have a much higher impact on the company’s profitability.

Aggressive competition plans

With Burger King having an aggressive store expansion target, increasing store openings from competition next to existing WDL stores could dent existing store throughput.

Increase in royalty payment could negate margin improvement

WDL’s royalty to McDonald’s is expected to increase to 8% (4% currently) from FY27, which is already amongst the highest in the QSR segment. While the company’s margin has improved over the past three years, such a step-up in royalty could negate any improvement in margin or even lead to margin contraction.

Revised royalty structure Apr 2019- Apr 2020- Apr 2021- Apr 2022- Apr 2023- Apr 2024- Apr 2025- Apr 2026- Apr 2030- % Mar 2020 Mar 2021 Mar 2022 Mar 2023 Mar 2024 Mar 2025 Mar 2026 Mar 2030 Mar 2040* Earlier 4.0 4.0 4.5 4.5 5.0 5.0 8.0 8.0 8.0 Revised 4.0 4.0 4.0 4.5 4.5 5.0 5.0 8.0 8.0 Source: Company, Edelweiss Research, * if extended

Higher aggregator share could increase dependency and affect margin

Food aggregators like Swiggy and Zomato have seen an increase in business share over the past three-four years. The burgeoning share is already reflecting in higher commission expenses and further increase could impact margin further. More importantly, rising dependence could lead to limited bargaining potential and limited access to consumer data.

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WESTLIFE DEVELOPMENT

Company Description

WDL is a part of the B.L. Jatia Group. WDL, through its 100% subsidiary Hardcastle Restaurants, owns and operates a chain of McDonald’s restaurants in West and South India, being the master franchisee of McDonald’s Corporation, USA. WDL’s footprint covers Andhra Pradesh, Telangana, Gujarat, Karnataka, Maharashtra, Tamil Nadu, Kerala and parts of Madhya Pradesh.

WDL’s area of operation

Source: Edelweiss Research, Company

Note: India Map prior to split of Andhra Pradesh

The company’s service formats and brand extensions comprise standalone restaurants, drive-thrus, 24x7 restaurants, breakfast, McDelivery (web order placement, mobile apps) and kiosks at major transit points. McCafé, a popular brand extension, also serves a host of beverages. The menu features burgers, finger foods, wraps as well as hot & cold beverages, besides a range of desserts.

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WESTLIFE DEVELOPMENT

Stores seen a ~3x increase over last decade Majority of stores located in three states

350

280

210 (#) 140

0 Maharashtra Karnataka Gujarat

AP+Telangana Tamil Nadu Kerala

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 MP Source: Company, Edelweiss Research Source: Company, Edelweiss Research Menu summary

No. Key Items Classic Burgers 13 McChicken, McAloo, McVeggie Wraps 3 Big Spicy Chicken Wrap, Big Spicy Paneer Wrap Naan & Sides 12 Chatpata Naan - Aloo, Chatpata Naan - Kebab, Fries Desserts 13 Chocodip Sundae, Soft Serve Hot Fudge Rice Platform 2 Cheesy Rice Bowl, Spicy Rice Bowl Beverages 18 Coke, Coke Float, Iced Tea

Breakfast 13 Sausage McMuffin, Veg McMuffin

McCafe Hot Beverage 8 Hot Chocolate, English Breakfast Tea Cold Beverage 19 Chocolate Shake, American Mud Pie Desserts 2 Chocolate Chip Muffin Source: Company, Edelweiss Research

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WESTLIFE DEVELOPMENT

Management Overview

Mr. Amit Jatia, Vice Chairman

Mr. Amit Jatia has over 26 years of experience in the QSR industry. As Vice-Chairman of WDL, he has been responsible for all aspects of the establishment and operation of McDonald’s restaurants in western and southern India, including site location and acquisition, site development and equipment installation, supply chain management, product development and marketing strategy, among others. He holds a B.Sc in Business Administration (Finance) from the University of Southern California. He has completed programmes on Management Control Systems at the Indian Institute of Management and on strategy, leadership and governance at Harvard Business School.

Ms. Smita Jatia, Managing Director

Ms Smita Jatia comes with two decades of experience in the QSR industry. She has been an active member of the McDonald’s India team since the commencement of its operations. Ms. Jatia is responsible for charting out and leading growth of McDonald’s India operations across West and South India. She has been instrumental in launching, indigenizing and building the McDonald’s brand over the past 18 years. She joined Hardcastle Restaurants as Director, Marketing, in 1996 and was the Chief Operating Officer for Hardcastle Restaurants. A commerce graduate from Sydenham College, Mumbai, Ms. Jatia has also completed an 18-week executive management programme from Harvard Business School, Boston, and has undergone a rigorous Marketing and Restaurant Leadership programme at the Hamburger University, USA.

Mr. Pankaj Roongta, VP-Finance

Mr. Pankaj Roongta joined WDL in April 2020 as CFO. He has over 20 years of leadership experience in Finance & Accounting, Controllership, Financial Planning & Analysis including Business Development, Purchasing & Process efficiency. Prior to joining WDL, he was Finance Director of LÓreal Asia Pacific.

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WESTLIFE DEVELOPMENT

Additional Data Management Holdings – Top 10* CEO Amit Jatia % Holding % Holding CFO Pankaj Roongta SBI Funds 6.99 Capital Group 1.28 ICICI Pru Life 5.53 Wellington Mgmt 1.11 COO Arisaig India 3.89 HSBC Holdings 0.94 Chairman B. L. Jatia Sundaram AMC 2.64 Mirae Global 0.87 Auditor B S R & Associates DSP Invst 2.15 Daiwa AMC 0.79

*Latest public data

Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Recovery better; omni in focus; 18-Jan-21 Shoppers Stop Result Update QSRs: Bird flu queers sales pitch; 15-Jan-21 Retail Sector Update Covid blues behind; pushing online 09-Jan-21 Avenue Supermarts pedal; Result Update

Rating Interpretation Daily Volume 10 500

450 8

400 6 (INR)

350 (Mn) 4

300 2 250 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 0 WLDL IN EQUITY Buy Hold Reduce Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

Source: Bloomberg, Edelweiss research Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage Rating Rationale

Buy Hold Reduce Total Rating Expected absolute returns over 12 months

Rating Distribution* 163 64 14 241 Buy: >15%

>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%

Market Cap (INR) 190 57 4 251 Reduce: <-5% * stocks under review

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