Burger King’s appetizing guidance may support stock valuations

Now, while the company’s March quarter results are not particularly inspiring, analysts are upbeat on growth prospects.

“We are increasing our DCF (discounted cash flow)-based target price to ₹250 ( ₹221 earlier) as we factor in 1) BK Café launch by January ’22 (75 cafés by FY23), 2) superior margin delivery and upgraded guidance, 3) success of BK app (200% growth) and 4) sustained innovations with the launch of the Stunner menu at price points of ₹50 and ₹70,” wrote analysts from Prabhudas Lilladher Pvt. Ltd in their March quarter results update.

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The company is now looking at clocking a gross margin of 66% in FY22 and 68% in FY24.

For perspective: gross margin in FY21 stood at 64.5%. Burger King plans to increase its store count to 470 in FY24 from 320 in FY22. As on 31 March, the company had 265 stores.

Furthermore, from a same store sales growth (SSSG) point of view, Burger King is looking at a flat performance in FY22 vis-à-vis FY20. This is encouraging considering that the current June quarter is set to be a washout owing to the pandemic-led lockdowns.

“This implies that delivery sales are ramping up fast even when dine-in is struggling and enhances confidence on Burger King achieving average revenue per store higher than pre-pandemic levels in a more normalized environment,” said analysts from JM Financial Institutional Securities Ltd in a report on 27 May.

Coming to the March quarter, Burger King’s revenues have increased by 2.6% year-on-year to ₹196 crore. Sequentially, revenues have grown by 20%.

Even so, Burger King has underperformed Westlife Development Ltd (which runs McDonald’s in west and south India) on the SSSG front during the March quarter. The measure declined by 4.9% for Burger King, whereas Westlife saw 10.5% growth. This can be attributed to Burger King’s higher salience in shopping malls and a larger presence in the north, which was impacted owing to farmer protests.

What augurs well is that Burger King has managed to improve its gross margin by 170 basis points sequentially to 65.6% in Q4.

Going ahead, investors would track progress on the guidance. Although, the meaningful appreciation in the stock suggests that a good portion of the optimism is baked into the price. “(We) find current valuations expensive. Would await a better entry point,” said JM Financial’s analysts. On Friday, Burger King’s stock closed at ₹156.65 per share on the NSE.