Reduced Inflationary Pressures Could Improve QSR Companies’ Gross Margins Compared to Six Months Ago
Despite the anticipation of a strong showing in the third quarter of fiscal year 2024 (Q3FY24) due to festivals and the ICC Cricket World Cup, QSR companies continue to face challenges. The subdued demand that affected performance in the previous half-year has persisted, leading analysts to note that a significant upturn has not materialized.
The lackluster same-store sales growth projections for Q3 are attributed to the previous year’s elevated base. The anticipated tailwinds from festivals and the ICC Cricket World Cup, which were expected to drive sales, did not materialize as envisioned.
For investors in QSR companies, the current scenario presents a rather unexciting menu. While the industry had hoped for a strong uptick in sales during the festive season and sporting events, the performance in the half-year ended September and the ongoing Q3FY24 suggests otherwise.
The persistent subdued demand has proved to be a challenge for QSR companies, with the anticipated boost from festivals and the ICC Cricket World Cup not meeting expectations. Consequently, the projections for same-store sales growth in Q3 have been underwhelming due to the impact of the previous year’s high base.
Steady Demand During Festivals and ICC World Cup
Antique Stock Broking’s interaction with channel partners found increased demand during festival days and when key cricket matches, especially India’s at the ICC World Cup, took place. The matches, usually scheduled on weekends, typically attract higher footfall.
However, post the festive season and the World Cup, demand waned. Antique’s analysts noted subdued footfall across Quick Service Restaurant (QSR) companies, even during December, typically the highest revenue-generating week. Footfalls were lower compared to the previous year.
KFC Outperforms Pizza Segment
The KFC portfolio is expected to fare better than pizza, consistent with previous quarters. Devyani International Ltd’s KFC same-store sales fell 3.3%, less than Pizza Hut’s 7.9% drop in the half-year ended September. Intense competition continues to weaken the pizza segment, with no immediate relief in sight.
Challenges and Silver Linings
While there are challenges, not all hope is lost for QSR companies. Analyst Karan Taurani from Elara Securities (India) highlighted that inflationary pressures have eased, leading to improved gross margins compared to six months ago. However, the gains may not translate to Ebitda levels due to increased investment in promotional offers for better growth. Operating margins are also expected to face challenges from network expansion.
Cautious Investors and Modest Stock Growth
Investors in QSR stocks are exercising caution. Devyani, Sapphire Foods India Ltd, and Westlife Foodworld Ltd saw modest increases of 7%, 6%, and 3%, respectively in 2023. In contrast, the Nifty 50 index rose by 20%. The potential returns of QSR stocks in 2024 largely depend on the extent of a demand rebound.
In conclusion, it’s clear that QSR companies experienced a boost in demand during festivals and the ICC World Cup matches. However, sustaining this momentum post-festive season has been a challenge. While the KFC portfolio is expected to outperform the pizza segment, there are lurking challenges such as intense competition and the impact of network expansion. With investors treading cautiously, the outlook for QSR stocks in 2024 hinges on the potential for a demand rebound.
