This analyst thinks QSR stocks are at risk — here are the reasons
While the QSR segment in India has experienced remarkable growth in the past, it now faces a host of challenges that demand careful consideration. The allure of high revenue and EBITDA projections must be weighed against the realities of slowing growth, margin pressure from rising costs, and the encroachment of unorganized competitors.
Kunal Vora from BNP Paribas India shared insights into the challenges facing the quick-service restaurant (QSR) segment in India. The QSR industry, once hailed as a lucrative investment, is currently navigating a turbulent landscape. Vora analysed the hurdles that QSR stocks are facing due to elevated revenue and EBITDA projections.
QSR stocks have long been favoured by investors, primarily due to their promising revenue and EBITDA projections. However, Kunal Vora's warning highlighted a significant concern: these projections may be unsustainable. The meteoric rise of the QSR sector has increased competition, and new entrants, making it increasingly challenging for established players to maintain their growth trajectories.
“We have been cautious on the space for a few quarters now and the reason has been both on revenue front as well as on margin front, there has been a disappointment,” he told CNBC-TV18.
Vora's cautionary stance on the QSR segment is rooted in the ongoing slowdown in revenue growth. Once characterised by rapid expansion and soaring profits, QSRs are now encountering headwinds that are impacting their revenue streams. Factors such as changing consumer preferences, economic uncertainties, and market saturation have contributed to this deceleration in growth.
The challenges that QSRs are facing are not limited to slowing revenue growth. Rising operational costs, particularly rental and employee expenses, are squeezing their profit margins. Rental costs, in particular, have skyrocketed in prime locations, eating into the already thin margins of QSR operators. Simultaneously, increasing employee costs, driven by rising minimum wages and employee benefits, are further eroding profits.
“We have a cautious view on the sector and we cover only one stock and on that, we have a hold rating with the expectation of a decline over the next one year in terms of stock price performance,” he mentioned.
One specific area where organised QSR players are feeling the heat is the pizza segment. Unorganised and local vendors are proving to be formidable competition, especially in Tier-2 and Tier-3 cities. This unorganised competition poses a significant threat to the dominance of QSR giants.
Abneesh Roy, Executive Director at Nuvama Institutional Equities, mentioned to CNBC-TV18 that QSR stocks are expected to experience a modest positive impact in the short term due to the upcoming cricket season. While there will be some sentimental and tangible benefits, it is unlikely to be a significant boost for QSR stocks.
Rahul Arora, CEO, Nirmal Bang Equities told CNBC-TV18: “I still do not think we have scratched the surface on QSRs because people talk about valuations. Just a case in point, Domino's same-store sales growth (SSSG) in the US for the last 6-7 years, is almost 30 quarters. The SSSG trajectory will shock people. I don't think it has reported negative SSSG for the last 30 quarters in the US. So, if that market is not saturated. I don't know if we have even scratched the surface here.”
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First Published: Aug 31, 2023 12:54 PM IST
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