QSR stocks: Indian quick-service restaurant (QSR) companies could see growth as consumer demand is improving, according to brokerage Macquarie. As a result, the brokerage has turned its attention to the sector as its channel checks showed that second-quarter same-store sales growth (SSSG) could be better than the first quarter.
Macquarie expects demand to improve and more dine-in and operating leverage to underpin earnings in its QSR coverage. The brokerage estimates that these factors could contribute to 20% or more FY26-FY29E EBITDA CAGR across the companies it tracks.
Among the main restaurant stocks, Devyani International is the favorite pick of Macquarie, followed by Sapphire Foods and Westlife Foodworld. Jubilant FoodWorks, on the other hand, has been upgraded to Neutral, but the upside on the stock based on the new target price is limited.
Devyani International: The Top Pick of Macquarie
Macquarie retained its Outperform rating on Devyani International and increased the target price to ₹190 from ₹130.
Based on the stock's close price of ₹149 on 24 August, the new target represents an implied upside of approximately 27.5%.
Devyani has emerged as the brokerage’s preferred stock among the QSR companies it covers.
The positive impact on the KFC and Pizza Hut business is a factor to be considered. Macquarie expects a rise in consumer demand to drive sales to be a key factor in sales growth, and further earnings growth comes from Pizza Hut's recovery.
The brokerage also highlighted the merger of Yum franchisees, which would provide further operational improvement and earnings growth.
Sapphire Foods: 20% Upside
Macquarie has maintained an Outperform rating for Sapphire Foods and raised the target price to ₹300 from ₹200.
With the stock currently trading around ₹250, the new target indicates an upside of approximately 20%.
Sapphire's exposure to the KFC format is one of the key factors supporting Macquarie's constructive outlook.
As consumer demand improves, better restaurant traffic and same-store sales could provide operating leverage to the company. The brokerage expects the recovery in demand over the past two quarters to become more detectable in financial performance.
Westlife Foodworld: Raise target to ₹730
Westlife Foodworld also remains an Outperform pick for Macquarie.
The brokerage increased its target price to ₹730 from ₹520. Based on the stock’s close on 24 August at ₹583, a 25% upside is expected.
Westlife’s business is closely linked to the McDonald's franchise in western and southern India.
A recovery in discretionary consumption and restaurant traffic could therefore benefit the firm. Macquarie sees dine-in-led growth and operating leverage to drive earnings from demand situations as demand improves.
The combination of better sales and operating leverage could become more important for QSR companies because fixed operating costs can result in stronger earnings growth when restaurant sales recover.
Jubilant FoodWorks: Upgraded To Neutral
Jubilant FoodWorks has been given a rating upgrade from Macquarie, though it remains the least attractive stock among the four based on the brokerage's target-price framework.
Macquarie upgraded Jubilant FoodWorks to Neutral from Underperform and increased its target price to ₹520 from ₹375.
However, with the stock trading around ₹508, the revised target implies only about 2.4% upside.
This compares with 27.5% potential upside for Devyani, 20% for Sapphire and around 25% for Westlife.
Macquarie's new preference in the sector is therefore:
Devyani International / Sapphire Foods > Westlife Foodworld > Jubilant FoodWorks
Why Macquarie’s positive on QSR stocks
As shown by the brokerage's positive outlook, the brokerage largely depends on improving consumer demand.
Channel checks suggest that second-quarter SSSG could improve from first-quarter levels, indicating that restaurant traffic and consumption may be recovering.
A stronger demand environment could have an outsized impact on QSR earnings because higher sales may help to utilise restaurant infrastructure and spread fixed costs over a larger revenue base.
Macquarie expects dine-in-led growth to be an important component of the recovery. And operating leverage would also lead to earnings growth in the medium period, it says.
From a financial perspective, the brokerage expects these factors to drive more than 20% annualised EBITDA growth in its QSR coverage between FY26 and FY29 estimates.
KFC And McDonald's Formats in Focus
Macquarie sees the KFC and McDonald's formats as important drivers for Devyani and Sapphire.
Both brands are in a segment where restaurant traffic and discretionary consumption are the key variables to performance.
If consumers become more comfortable with discretionary spending, QSR operators could benefit by driving more sales in store, greater order volume and better same-store sales.
Devyani also sees another possible catalyst in Pizza Hut recovery. The brokerage believes a turnaround in the Pizza Hut business could provide another earnings tailwind after the merger of the relevant Yum franchisees.
Jubilant Faces Additional Earnings Volatility
Although Jubilant FoodWorks could benefit from a better like-for-like performance in India and from expanding its Popeyes business, Macquarie still sees earnings volatility related to Domino’s Turkey exposure.
This exposure makes Jubilant's earnings profile different from those of its peers.
The brokerage’s upgrade to Neutral indicates that it sees less downside risk than previously expected. However, the relatively small gap between the current market price and its revised target limits the upside under Macquarie’s approach.
What Investors Should Watch
For QSR investors, the key indicator over the coming quarters will be whether the good news of the consumer demand translates into sustained growth in same-store sales.
Investors are also entitled to track restaurant growth, average revenue per store, operating margin, and promotional intensity as well.
Devyani and Sapphire will continue to focus on KFC performance. Westlife investors will be interested in the recovery of McDonald’s operations and Jubilant shareholders will be interested in India’s Domino’s performance alongside Turkey and Popeyes.
Another key aspect is how much better sales translate into operating leverage. If revenue growth is not accompanied by margin improvement, the earnings gain from the demand recovery could be limited.
Macquarie’s QSR outlook for Indian restaurant companies is promising, with earnings outlook that is likely to be better with demand recovering.
The brokerage’s favourite pick is Devyani International (₹190) with 27.5% upside from the August 24 closing price. Sapphire Foods has a ₹300 target on which 20% upside is in place, while Westlife Foodworld has a ₹730 target with 25% upside.
Jubilant FoodWorks has been upgraded to Neutral, but its ₹520 target only provides around 2.4% upside from ₹508.
Comments
Please to leave a comment on this article.