Hungry no more?

Analysts turn cautious on fast food and fine dining stocks as sales growth slackens

Happy meals seem to be turning not so happy for the food services industry, with restaurant chains — both fine dining and quick-service restaurants — seeing margins under pressure, same-store sales falling and aggressive plans for promotions and expansions weakening their balance sheets. Customers tightening their purse strings has also taken a toll on the financials of firms like Westlife Development (which owns McDonald’s), Jubilant FoodWorks (Dominos Pizza and Dunkin’ Donuts), Speciality Restaurants (Mainland China and Sigree) and Yum Brands (KFC and Taco Bell). For Q2FY14, Westlife reported a same-store sales growth (SSSG) of -5.5% versus 10% in Q2FY13, with flattish growth in profit at ₹280,000. Yum Brands India’s revenues slumped in Q2FY14 to ₹186.99 crore from ₹199.45 crore in Q1FY14, with SSSG at -1% for this quarter. 

The story would have been similar for Jubilant, but its promotional offers of ‘buy one get one free’ for Dominos saved the day in terms of SSSG, which stood at 6.6% for this quarter. “Had Jubilant not gone in for aggressive sales promotions, its SSSG would have been negative. But such promotions are not viable in the long run, as the firm would end up running into losses,” says Amnish Aggarwal, senior VP of research, Prabhudas Lilladher.

Things don’t look any better for the fine dining segment either. Even as revenues grew by 17%, profits fell by 21% during Q1FY14 as inputs costs rose and footfalls declined. Speciality Restaurants founder Anjan Chatterjee says, “As far as SSSG is concerned, most of our stores are growing at a rate of 5-7%, but some of the smaller ones are at a flattish level due to the temporary economic downturn.” Passing on costs is difficult as well.

New store additions are all set to boost returns for the quick-service category, which is expected to touch ₹17,000 crore by 2018 at an average growth rate of 25%. According to McDonald’s India VP Amit Jatia, the firm plans to open around 75-100 new stores by FY15 with an investment of about ₹500 crore to add to its tally of 174 stores. Jubilant plans to add 135 Dominos outlets and 18-20 Dunkin’ Donuts ones to its current network of 650 Dominos and 19 Dunkin’ Donuts stores. In Q2FY14, the company, whose sales grew by 28%, saw its operating  margins decline by 220 basis points to 15% — its lowest in three years — due to expansion, promotional activities and higher operational expenses.

Though eating out has become popular in India, customers are increasingly wary of how much they spend each time. Though experts remain bullish on the Indian market in the long run, stock markets haven’t been kind to the sector. Jubilant is clearly no longer a market favourite, as valuations look bloated on the back of sluggish growth. Emkay Securities has put a sell call on the stock with a price target of ₹1,000 — almost 24% lower than the current price of ₹1,313.