Growth on track but inflation a roadblock for McDonalds, Domino’s: Elara Capital

While quick service restaurants (QSRs) like McDonalds, Burger King, Domino’s and KFC are back on track in terms of growth, inflation can be a big road block going forward, says Elara Capital. In a recent industry-wide survey, Elara Capital said it expects Q1FY23 to be a subdued quarter in terms of profitability for WLDL (Westlife Development), which owns McDonalds, and JUBI (Jubilant FoodWorks), which is the owner of Domino’s, due to inflationary headwinds. It added that increased mobility and good movie content in cinema had a positive impact on mall footfalls, which has driven dine-in revenue in Q1FY23.

“Negative impact on gross margin has been partially offset by price hikes, which has been received well by the customers. Delivery remains strong for JUBI whereas dining is gradually improving even though it’s not back to pre-Covid levels; we expect JUBI to report a revenue growth of 47.5 per cent year-on-year (YoY) and 37.9 per cent vs Q1FY20 (pre-pandemic level), supported by strong store expansion initiatives,” Karan Taurani, senior vice president, Elara Capital said.

Taurani estimates JUBI to report an LFL (like-for-like) growth of 8 per cent YoY backed by strong growth in delivery channel. LFL is a measure of growth in sales, adjusted for new or divested businesses.

Elara Capital also added that WLDL is estimated to report revenue growth of 95.1 per cent YoY on a lower base (Q1FY22 was impacted due to Omicron) and growth of 32.3 per cent vs Q1FY20 (pre-pandemic level), led by momentum in the convenience channel; overall revenues are estimated to breach Q3FY22 (festive quarter) for WLDL.

“Cost pressures continue to persist during the quarter due to inflationary headwinds leading to increase in prices of raw materials, which will lead to an EBITDA margin decline of 60bps/50bps towards 24.4/13.3 per cent for JUBI/WLDL, respectively, despite positive impact of operating efficiencies and price hikes,” Taurani explains.

Elara Capital says that it foresees the cost inflationary headwinds to persist for next couple of quarters impacting the operating margins negatively.

Last month, however, brokerage firm ICICI Securities predicted that management commentary of QSR companies is far more positive vs. near-term woes for consumer staples.

“We note that most QSR stocks have corrected in the last six months (down 17-27 per cent) given expensive valuations, fears of higher competition (narrative) and overall slowdown concerns (and broader market weakness),” the brokerage firm had noted.