JM Financial

Westlife Development (Buy)

Target: ₹450

CMP: ₹435.45

The unexpected revenue stress is what possibly drove Westlife’s management team to devise means to still earn the earlier-level of operating margin even if store throughputs turn out say 10 per cent lower in a post-pandemic world. We reckon that the strategies thus devised could get tested soon given that the business is now optimistic of reaching 90-95 per cent recovery levels by exit-CY20 vs 70 per cent in Sep’20.

Our analysis of cost efficiencies seen in the H1-FY21 makes us believe that the above margin target is quite achievable; cost-savings apart, margin would also be aided by small price-hikes (2-3 per cent for ala-carte burgers, 7-8 per cent for some combo-meals) and lower sales promotions. The ability to sustain revenue from the new convenience platforms even as dine-in regained significant momentum gives the business confidence that the expectation to get closer back to pre-lockdown levels by end-2020 is not an entirely unrealistic one.

This also means that margin can start to reach early-teens level if revenue trajectory resumes its upward journey once stability vs pre-lockdown levels is achieved over the coming months.

In this backdrop, quick service restaurants space looks to be a very interesting medium-term opportunity.

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