Quick-service restaurant (QSR) stocks are trading at a lower valuation than organized retail giants, despite having larger store networks. Motilal Oswal Financial Services (MOFSL) suggests this valuation gap exists because rapid past expansion hurt store-level profitability. The brokerage expects the sector to re-rate as companies shift their focus from aggressive growth to stabilizing existing store performance.
The quick-service restaurant (QSR) sector in India is currently trading at a notable discount compared to large organized retail players, according to a recent analysis by Motilal Oswal Financial Services. While QSR chains have aggressively expanded their reach, boasting a combined network of 6,627 stores, their stock valuations have not kept pace with retail giants like Trent, Titan Jewellery, and Avenue Supermarts.
The Problem with Rapid Expansion
The reason for this valuation gap lies in the financial pressure created by rapid growth. Over the last four years, QSR companies focused heavily on opening new locations, with new additions making up over 40% of their total store counts. While this helped them capture market share, it placed significant stress on profitability at the individual store level. This aggressive strategy contributed to a 20% decline in the aggregate market capitalization of listed QSR players between fiscal years 2022 and 2026. In the past 12 months alone, valuations in this sector have dropped by approximately 25%.
Moving Toward Profitable Growth
Analysts now expect a shift in strategy. The pace of new store openings is projected to moderate to 10-11% for fiscal years 2027 and 2028, a slowdown from the 15% rate seen in the previous four years. This strategy aims to stabilize profit margins. The theory is that by slowing down, companies can ensure that existing stores become more efficient and profitable, which could eventually lead to better valuation multiples.
Brokerage Outlook
Motilal Oswal Financial Services has updated its views on several key QSR stocks, maintaining 'Buy' ratings for Devyani International, Restaurant Brands Asia, and Sapphire Foods. The firm also upgraded Jubilant FoodWorks to a 'Buy' rating, noting that the stock has seen a significant price correction over the past year. While these recommendations highlight the potential for recovery, investors should note that the sector faces ongoing challenges.
Risks to Consider
While the valuation gap suggests potential, the path to recovery is not without risk. QSR players are vulnerable to input cost inflation, such as rising prices for raw materials like vegetables, dairy, and edible oils, as well as increasing employee costs. Additionally, the industry deals with intense competition not just from other restaurant chains, but also from local eateries and delivery platforms, which can dilute profit margins. Investors monitoring this space should look for improvements in quarterly profit margins and evidence that the slower pace of expansion is indeed resulting in higher store-level profitability.