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JMFL
Westlife Development (Buy)
CMP: ₹236.45
Target: ₹315
Westlife Development is the Development Licensee for McDonalds’ South and West India business. The company, we believe, is well-placed to leverage the attractive Western Fast Food opportunity, which currently accounts for just about 2 per cent of India’s Informal Eating-Out market.
McDonalds’ steadfast focus on innovation, premiumisation and diversification into segments of the future, while simultaneously delivering a strong basic value proposition to its core consumers, are the key drivers of its success. McDonalds’ well-laid-out price-laddering strategy (the most premium product is priced at 4.5x its base product with a smooth ladder in between) would help the business enhance profitability while growing its core base of value-conscious consumers. Westlife recorded a 6 ppt gross margin expansion over the past four years, but rapid network expansion in a weak macro-environment has impacted its net operating margin in recent years.
Our analysis of single-store economics lends confidence that the business has inherent strengths to deliver healthy profitability and return-ratios once a new store is given time to stabilise; we see stores clocking 25 per cent+ ROIC by the sixth year of operation.
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