ICRA estimates that the top five players in the domestic quick-service restaurant (QSR) industry[1] are likely to add ~2,300 stores between FY2023-FY2025 with an estimated capex at around ~Rs. 5,800 crore (excluding refurbishment) for this period, twice that of the levels seen during the pre-Covid era. Given the favourable demand outlook, the domestic QSR industry is looking at aggressive store capex over the medium term. Majority of the capex is expected to be funded through internal accruals and cash on the books, having raised money through the pre-IPO /IPO route in the last two fiscals to support the planned capex in the near to medium term.
Commenting further, Mr. Suprio Banerjee, Vice President & Sector Head - Corporate Ratings, ICRA Limited, said: "The capex spree in the QSR industry is likely to be driven by favourable demographics, steady urbanisation in India, growing per-capita GDP and significant headroom available in terms of QSR penetration, compared to a developed economy like the US. Increasing formalisation of the sector is expected to improve the penetration levels considerably. Also, higher technological absorption amidst the changing consumer behaviour post Covid, wherein delivery as a medium is much more accepted, shall support the increasing penetration. The CAPEX over FY2023-FY2025 is estimated at around ~Rs. 1,800 crore to Rs. 2,000 crore (excluding refurbishment) per annum, which would be around ~2.5 times that of the levels seen in FY2020 (pre-Covid)."
The domestic QSR industry witnessed a sharp recovery in ADS and revenues during FY2023, supported by demand drivers like changing food consumption habits, favourable demographics, improving purchasing power, steady urbanisation, and new store additions. Also, other factors like better value proposition from QSR players with enhanced product and service offerings, wide adoption of user-friendly and convenient delivery applications, and tech-enabled delivery networks also fuelled growth.
With the waning effect of the pandemic and increased vaccination coverage, the industry witnessed a strong growth momentum with notable recovery seen in the ADS levels to ~Rs. 85,789 in FY2022 compared to ~Rs. 67,479 in FY2021. The ADS further rose to ~Rs. 97,696 in 9M FY2023 compared to ~Rs. 85,355 in 9M FY2022.
On the back of a robust industry revenue expansion of ~30-35% in YoY terms estimated for FY2023, ICRA projects growth to moderate somewhat while remaining strong at 20-25% in FY2024 on account of the demand uptick and increasing penetration driven by a rapid expansion of stores. However, downside risks to the estimates remain from the emergence of any further Covid waves or any material weakening in purchasing power due to a high inflationary interest-rate regime. Over the long term, revenue growth shall be supported by factors like rising QSR penetration levels, a shift from the unorganised to the organised segment with a preference for branded QSR players, given the hygiene and convenience factors (delivery over dine-in), etc.
Despite a healthy recovery in the operational metrics, viz. ADS and sales per store in FY2023, the gross margins were impacted due to inflation and competition. Gross margins have been sequentially contracting for the sample analysed from Q1 FY2022 till Q3 FY2023, reflecting the partial ability of QSR players to fully pass on the rise in raw material costs, given the stiff competition from both the organised and the unorganised segment. "India's dependence on imports for edible oils further exposes the players' margins to geo-political risks and forex fluctuations. The high lease costs, as well as rising overheads related to a growing delivery model, also impacts the cost structure. The operating margin in FY2023 and FY2024 is, therefore, expected to be flattish (despite the benefits of scale economies) and is likely to remain in the range of 20-22% compared to 20% in FY2022. The coverage metrics, however, are expected to improve in the near to medium term, given the limited borrowing levels anticipated for the store expansion and a favourable demand scenario," Mr. Banerjee added. |
