Analysts take a bite of premium QSR stocks as restaurants hike prices

Dine-in and quick service restaurant (QSR) owners are facing a double whammy of cost pressure. Raw material costs for edible oil, fresh milk, wheat, coffee, vegetables, tea, and sugar have surged up to 60 per cent year-on-year (YoY) owing to sappy supply chains and rupee depreciation/costlier imports.

Besides, the government has also suggested restaurants to inflate menu prices rather than levying ‘service charges’.

Yet, analysts remain bullish on premium QSR players as they believe any price hike taken to offset the cost pressure, may have relatively lower adverse effects of price elasticity.

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"Continued spiraling food inflation, price hikes taken in recent months, along with weak consumer sentiments in the overall consumer discretionary category will have some pressure on same-store-sales-growth (SSSG). However, we believe QSR chains that are dine-in focus and have low ticket pricing will play out better in this crisis as consumers are looking for more outing occasions post opening up of the economy," said Naveen Kulkarni, chief investment officer at Axis Securities.

However, value players, or those catering to price sensitive customers, may see growth and profitability concerns, they said.

"QSR players largely cater to the consumers in lower and middle-income strata who will be impacted the most due to inflationary pressure, bundled with price hikes in discretionary categories like QSR. Hence, there is a risk of slowdown in new store opening; and decline in revenue per store given lower volume/footfalls," cautioned Ashish Kanodia, analyst - consumer discretionary at Ambit Capital.

He added that given the restaurant business is of high fixed cost, lower volume/footfalls will drive negative operating leverage, and hence flat or lower margins in the near-term.

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On average, restaurants have hiked prices between 20-25 per cent over the past two-three months, and are mulling another round of price hike in months ahead.

Pricing edge

According to an analysis by ICICI Securities, Jubilant Foodworks-owned Domino’s is a market leader in the pizza segment, but caters to a price sensitive audience vis-a-vis Devyani International and Sapphire Foods-owned Pizza Hut.

"The latter is premium in the range of 5-10 per cent, and continues to maintain its slightly premium positioning vs Domino’s. This premium is maintained despite Jubilant’s recent price hike of 5 per cent (after a 4-5 per cent hike in December, 2021)," the brokerage said in its report dated June 5.

As regards Restaurant Brands Asia (erstwhile Burger King India), and Westlife Development-controlled McDonald’s, the former is cheaper in the value segment by 8-10 per cent, while the latter is cheaper in the premium segment by 20 per cent.

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Meanwhile, Devyani International-owned KFC and Jubilant Foodworks-controlled Popeye’s (India) are closely priced with the latter cheaper in the range of 2-3 per cent.

Investment strategy

Against this backdrop, Kanodia of Ambit Capital says investors should focus on high-ticket or affordable premium players as they tend to do relatively better vis-à-vis low-ticket or mass-market players during an inflationary trend. He prefers Barbeque Nation given its higher spending per head (3-4x of QSR).

Motilal Oswal Financial Services, too, has a 'Neutral' rating on Barbeque Nation with a target price of Rs 1,060 as it believes BN’s price hike, along with other cost saving efforts, will be able to revive its gross margin.

The brokerage also initiated coverage on Sapphire Foods recently, with a 'Buy' rating and a target of Rs 1,420.

"With healthy SSSG and rapid store additions, we expect Sapphire Foods to deliver 29 per cent CAGR sales growth over FY22-24. We also expect it to improve its net profit margin to 5.3 per cent in FY24 from 2.7 per cent in FY22," it said.

Meanwhile, Geojit Financial Services has a ‘hold’ rating (target: Rs 590), and Axis Securities has a ‘Buy’ on Westlife Development (target: Rs 625).

"We recommend investors to have a long term approach rather than looking at the short term vagaries of the sector, as the QSR segment is on a verge of a multi-year growth trajectory driven by younger demographics, the growing participation of women in the workforce, and aggressive expansion into smaller towns," Kulkarni of Axis Securities said.