The Indian quick service restaurant industry is set to witness strong growth in the near to medium term with expected ramp up in store additions. This industry's revenue is estimated to grow by 20-25 percent in FY 2024 over FY 2023, driven by improving average daily sales (ADS) and store additions.
However the industry's operating margin is expected to remain flat in the range of 20-22 percent for FY23-FY24, amidst inflation-related concerns.
As per a report by ICRA the top five players in the domestic quick service restaurant (QSR) industry are likely to add around 2,300 stores between FY2023-FY2025 with an estimated capital expenditure (capex) at around Rs 5,800 crore (excluding refurbishment) for this period, twice that of the levels seen during the pre-Covid era.
The report ICRA observes that due to a 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 or the IPO route in the last two fiscals to support the planned capex in the near to medium term.
“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,” said Suprio Banerjee, Vice President and Sector Head – Corporate Ratings, ICRA Limited.
“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 FY 2023-FY 2025 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 FY 2020 (pre-Covid),” Banerjee added.
Interestingly, as per the ICRA report the domestic QSR industry witnessed a sharp recovery in ADS and revenues during FY 2023, 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 of the industry.
The report pointed out that with the waning effect of the pandemic and increased vaccination coverage, the QSR industry witnessed a strong growth momentum with notable recovery seen in the ADS levels to Rs 85,789 in FY 2022 compared to Rs 67,479 in FY 2021. The ADS further rose to Rs. 97,696 in 9M FY 2023 compared to Rs. 85,355 in 9M FY 2022.
As per ICRA, growth will however somewhat moderate while remaining strong at 20-25 percent in FY 2024 on account of the demand uptick and increasing penetration driven by a rapid expansion of stores.
However, there could be challenges and risks to the estimates in case of 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 a viz ADS and sales per store in FY 2023, the gross margins were impacted due to inflation and competition. As per the ICRA report gross margins have been sequentially contracting for the sample analysed from Q1 FY 2022 till Q3 FY 2023, 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 FY 2023 and FY 2024 is, therefore, expected to be flattish (despite the benefits of scale economies) and is likely to remain in the range of 20-22 percent compared to 20 percent 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,” said Banerjee.
