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Burger King: Initiate coverage with ‘buy’ rating, TP of Rs 210

Given that the unorganised segment has been severely affected by Covid-19, QSRs can make further gains due to their better hygiene standards and well-positioned alternate channels, especially delivery.

Burger King India (BURGERKI) is one of the youngest and fastest growing players in India’s quick service restaurant (QSR) sector. It is focused on establishing and operating Burger King restaurants across India. The brand is globally popular for its signature product Whopper. BURGERKI offers its services via four channels — dine-in, takeaway, delivery and drive-thrus. We initiate coverage with a ‘buy’ rating and a target price of Rs 210.

Whopper of an opportunity, big shift in business model, aggressive expansion: Initiate coverage with ‘buy’. BURGERKI offers an exciting investment opportunity in the Indian QSR space on account of the following factors: The large Indian food service industry (FSI) is expected to deliver 9% CAGR over the coming years, and QSRs are best placed to tap this opportunity. With their high affordability, aspirational branding, higher convenience, scale benefits, and technological edge, QSRs are expected to grow at 19% CAGR over FY20-25E. Given that the unorganised segment has been severely affected by Covid-19, QSRs can make further gains due to their better hygiene standards and well-positioned alternate channels, especially delivery.

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BURGERKI’s “barbell” product strategy with focus on premiumisation at the top end and value products at the entry-level makes it well-placed to drive SSSG and margin expansion. The introduction of BK Café from 4QFY22 onwards will significantly elevate its SSSG and gross margin profile as seen in the case of WLDL’s McCafé. BURGERKI has an aggressive target of opening 700 stores by Dec’26 that will expand its network from the current 265 stores, thereby driving its system sales growth higher. We believe BURGERKI’s premium multiples are likely to sustain due to its strong growth profile. Initiate coverage with ‘buy’ rating and target price of Rs 210 (28x Sep’23 EV/EBITDA). Huge opportunity in FSI for QSRs with established right-to-win The Rs 4.2 trillion ($58 billion) Indian FSI is expected to grow at ~9% CAGR over FY20- 25E. Within the FSI, the QSR segment valued at Rs 348 billion ($4.7 billion) has clocked the fastest growth but constitutes just 8% of the FSI and 22% of the organized FSI.

QSRs are expected to grow at 19% CAGR over FY20-25E. The advantages for QSRs include: a) high affordability; b) globally well-known and aspirational brands; c) different cuisines to cater to evolving taste of the youth that have been adapted to Indian tastes; d) benefits of scale and better sourcing; e) convenience and quick service; and f) technological edge over peers. Their products have high volume intensity and are amenable to prompt delivery. In the post-Covid world, where 30-40% of restaurants are expected to shut down permanently, QSRs are well-placed to grab share from other FSI segments as branded players command greater trust.

Valuation and view: We expect all listed Indian QSRs — BURGERKI, WLDL and JUBI — to be significant beneficiaries of the strengthening tailwinds (led by Covid-19) in favour of QSR players. Among these, JUBI will remain the most profitable and efficient player over the next few years. However, Burger King will enjoy an attractive opportunity for both topline and margin expansion. This will be led by a big shift in its business model through introduction of barbell product strategy and BK Café. In addition, aggressive store network expansion and capped royalty rate will also be key drivers of EPS growth. We expect BURGERKI to register sales/EBITDA CAGR of 71%/286% over FY21- 23E (on a soft base) v/s 32%/38% for JUBI. Over FY21-26E, BURGERKI’s sales/EBITDA CAGR is expected to stand at 43%/110%. We believe BURGERKI’s premium multiples are likely to sustain on account of its strong growth profile. Based on a three-year perspective, we arrive at a TP of Rs 365 per share (30% CAGR), assuming 25x multiple.

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