The Challenges of Investing in Quick Service Restaurant Stocks in India

Quick Service Restaurants (QSRs) have gained popularity in India, with brands like McDonald’s, KFC, Burger King, Domino’s, and Subway attracting a large customer base. However, investing in QSR stocks is not as straightforward as it may seem.

One of the main challenges is the expensive valuations of these stocks. Despite having a market value of ₹90,000 crore, the top five QSR companies in India only generate ₹650 crore in profits from ₹14,900 crore in sales. While the recent online ordering and delivery trend boosted interest in QSR stocks, the performance of individual companies has been divergent. For example, Restaurant Brands Asia, formerly Burger King India, has seen a 113% increase in its stock since its IPO in 2020, while Sapphire Foods, another franchisee of KFC and Pizza Hut, has only seen a 25% increase since its IPO in 2021.

One key dynamic to consider when investing in QSR stocks is the store-sales conundrum. QSR companies rely on physical stores to generate revenue, and expanding store count requires significant capital investment. However, the success of new stores is not guaranteed, and underperforming stores may need to be rationalized or decommissioned. Store count growth does not necessarily translate to revenue growth, as seen in the case of Jubilant FoodWorks, where store count grew by 10.3% CAGR but topline growth lagged at 9.2% CAGR. A soft demand environment can also impact store sales, as evidenced by negative same-store sales growth in Q1 of FY24 for most QSR majors.

Another challenge is the volatile margins of QSR stocks. While gross margins range from 65-75%, EBITDA margins are more volatile at 11-23%. Factors such as input cost inflation can significantly impact margins, and QSR chains often have to absorb these costs. For example, Jubilant Foodworks’ operating profit margins slipped from 24% to 19.6% in FY23 due to increased prices of ingredients like cheese, flour, chicken, and packaging materials. Other QSRs also faced inflationary pressures, leading to margin declines. Dietary preferences and seasonal factors can also impact certain QSRs more than others.

In conclusion, investing in QSR stocks in India comes with its challenges, including expensive valuations, the unpredictability of store sales, and volatile margins. Investors should carefully analyze the dynamics of individual QSR companies before making investment decisions.

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