Restaurant Brands Asia Stock Faces Pressure: Can Burger King India Drive Recovery Amidst Indonesia Woes?

Restaurant Brands Asia (RBA), which operates Burger King in India, has experienced a significant stock price correction of over 40% since September 2024, leaving investors concerned. The company's revenue growth has decelerated from 45.7% in FY21 to 5.1% in FY25. A major concern is the sharp increase in losses, which grew from Rs 49 crore to Rs 66 crore in the September 2024 quarter.

Indonesia Business Drag: RBA's operations in Indonesia, contributing a fifth of its revenue, have been a persistent issue. In Q2FY26, the segment incurred a loss of Rs 43 crore, with restaurant operating margin (ROM) turning negative at Rs 6.3 crore compared to a positive Rs 0.20 crore in Q1FY26, largely due to higher promotional spending. While store rationalization has improved average daily sales (ADS), the Popeyes brand also faces intense competition, leading to potential marketing expenditure without immediate store expansion. The management is focused on profitability in this region, contingent on a stable geopolitical environment.

India Business Offers Hope: The core Burger King India business shows resilience, with revenue growing 16% year-on-year to Rs 570 crore in Q2FY26, supported by a 15% expansion in store count to 533. Same-store-sales-growth (SSSG) stood at 2.8%, with ADS growth at 0.8%. RBA plans to add 60-80 stores annually, aiming for 800 restaurants by FY29. The India business is also set to benefit from GST 2.0 and menu innovation, which showed positive results in October.

Cost Management Challenges: Despite improvements in gross margins for both India (68%) and Indonesia (57%), driven by menu mix and supply chain efficiencies, overall profitability is hampered by rising manpower costs and overheads. Labor costs increased by over 18% in Q2FY26, impacting EBITDA margins, which fell to 13.6% from 14.2% year-on-year. Increased debt-funded expansion has also led to higher interest costs as a percentage of sales, pushing consolidated losses to Rs 63.3 crore and a PAT margin of -9%.

Outlook and Valuation: Revenue growth is expected to remain healthy, driven by store expansion and digital initiatives like self-ordering kiosks and app-based orders, which account for 91% of dine-in orders. Profitability improvements are anticipated as older stores mature and BK Cafes (now 507 stores) contribute margin accretively. However, the Indonesia business's profitability remains uncertain. Analysts project consolidated PAT breakeven by FY28. The stock's valuation at 7.7x EV/EBITDA (FY27 estimates) offers some comfort, and a potential divestment of the Indonesia business could trigger a re-rating.

Impact

This news has a direct impact on the Indian stock market. Restaurant Brands Asia is a publicly listed company in India, and its financial performance, operational challenges, and future outlook are closely watched by domestic investors. Developments in its core Indian market and its international ventures influence investor sentiment and can affect the company's stock price, thereby impacting indices if RBA has significant weightage. The focus on the quick-service restaurant sector also provides insights into broader consumer spending trends in India.

Rating: 7/10

Difficult Terms:

• Restaurant Operating Margin (ROM): A measure of a restaurant's profitability from its core operations before accounting for certain other expenses. It shows how much profit is generated from sales after deducting direct costs of running the restaurant.
• Average Daily Sales (ADS): The total sales generated by a store on an average day. It's a key metric to gauge a store's performance.
• Same-Store-Sales-Growth (SSSG): A metric used in the retail and restaurant industries to compare revenue from stores that have been open for at least a year. It helps assess the performance of established locations, excluding the impact of new store openings.
• Goods and Services Tax (GST) 2.0: Refers to potential future reforms or changes in India's Goods and Services Tax regime that could benefit businesses.
• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): A measure of a company's operating performance. It is used to analyze the profitability of a company's core business operations.
• EBITDA Margin: Calculated by dividing EBITDA by revenue, it indicates how much profit a company makes for every rupee of revenue after accounting for operating expenses but before interest, taxes, depreciation, and amortization.
• Profit After Tax (PAT): The net profit of a company after all expenses, taxes, and interest have been deducted.
• PAT Margin: Calculated by dividing Profit After Tax (PAT) by revenue, it represents the net profitability of a company.
• Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA): A valuation multiple used to assess a company's value relative to its operating performance. It is calculated by dividing the company's enterprise value by its EBITDA. A higher ratio generally suggests a higher valuation.