Brokerage firm Sharekhan by BNP Paribas has initiated coverage of the stock of Restaurant Brands Asia (RBA) with a buy call, fixing a target price of ₹175.
The brokerage firm highlighted that RBA is one of the emerging players in the domestic quick-service restaurant (QSR) market and is trying to establish its foothold through a strong store expansion strategy, a differential menu, expanding digital footprints and a strong promotional strategy.
With the scale-up of the business and improvement in profitability, the company’s free cash generation will get better in the medium to long run, Sharekhan pointed out.
Expansion in the Indonesian market and the introduction of BK café will incrementally add-on to the revenues and profitability in the long run.
"The stock has corrected nearly 24% from its high and is currently trading at 27.1 times and 14.1 times its FY2023E and FY24E EV/EBDITA," said Sharekhan.
Investment ratinale by Sharekhan
Emerging QSR player with strong growth strategies
RBA is an emerging domestic QSR play with a less than 5% share in India’s QSR market. It launched its first Burger King store in FY2012 and currently has 328 stores under its belt.
Unlike its closest peers such as Westlife Developers and Devyani International, it has exclusive rights to expand its reach Pan-India with a robust target of 700 stores in FY2026. This along with its ‘Barbell Menu’ strategy (focusing on value and premiumisation) and increasing sales through the digital platform (BK App) will help it scale up faster than its closest peers.
"Thus, we expect RBA’s revenues (excluding BK Café and Indonesia business) and EBIDTA to clock a CAGR of 43.3% and 160.9%, respectively, over FY2021-24E," said Sharekhan.
EBITDA margins to expand to 15% by FY2024
RBA’s dine-in and delivery business gross margins are similar due to pricing differences on two different platforms. However, EBIDTA margins of the delivery platform are lesser compared to dine-in business due to incremental costs (including delivery cost).
With the dine-in business expected to improve to historical levels in FY2023 to 60% of revenues (currently at 53%) due to improved footfalls (from 28% in Q1FY2022), more and more new stores attaining maturity and better mix with the addition of BK Cafe will lead to consistent improvement in EBIDTA margins in the coming years.
Average daily sales (ADS) of standalone business recovered to ₹1,31,000 in July-22 (targeting ₹2 lakh in the near term) from ₹74,000 in Q1FY2022, while Indonesia business ADS recovered to 78% of FY2020 levels. Thus, overall EBIDTA margins are expected to reach 15% by FY2024.
Expanding footprint in Indonesia
RBA acquired a nearly 89% stake in BK Indonesia through an equity infusion of $200 million ( ₹1,500 crore).
BK Indonesia has experienced management, which has developed a multi-pronged strategy of (1) Expansion of Full Service Drive Through (FSDT) (2) Launch BK Café & Breakfast, enhanced offerings in the chicken segment, (3) launch digital integration and (4) capitalising rapid growth opportunities in the food delivery services.
The Indonesia business is expected to grow at over 20% CAGR over FY2021-24 (with incremental addition of 25-30% to revenues in the coming years).
EBIDTA margins of the Indonesia business are expected to improve as gross margins are expected to improve to 60% in FY2023 (targeting 65% in the long run) from 58.5% in FY2022. Thus, the acquisition of BK Indonesia will make RBA one of the strongest QSR players in South-East Asia with strong fundamentals, said Sharekhan.
Disclaimer: The views and recommendations given in this article are of the broking firm. These do not represent the views of MintGenie.
