Brokerage sees significant upside in Jubilant FoodWorks, Restaurant Brands Asia, Devyani International and Sapphire Foods as profitability outlook improves
India's quick-service restaurant (QSR) sector could be entering a new phase of recovery after enduring several years of weak stock performance and margin pressure. According to Motilal Oswal Financial Services (MOFSL), the sector is now trading at attractive valuations, with most concerns surrounding slower demand, aggressive expansion and weaker unit economics already reflected in stock prices.
The brokerage believes improving consumer demand, better cost control and a more disciplined store expansion strategy could drive earnings growth and trigger a valuation re-rating across leading listed restaurant companies.
Sector Underperformed Despite Massive Expansion
The listed QSR sector has significantly underperformed the broader market over the past four years. During this period, the combined market capitalisation of listed restaurant companies declined despite aggressive expansion across India.
Interestingly, the industry added more than 40% of its existing outlets during the same period, creating one of the country's largest organised retail networks. Today, listed QSR companies collectively operate over 6,600 restaurants, considerably more than several leading organised retail chains.
However, rapid expansion also increased operating costs and affected store-level profitability, leading investors to assign lower valuations to the sector.
Slower Expansion Could Improve Profitability
According to MOFSL, the next phase of growth is likely to be more sustainable.
The brokerage expects restaurant companies to moderate their pace of store additions over the next two years compared to the aggressive expansion witnessed earlier. Instead of focusing primarily on opening new outlets, operators are expected to improve the performance of existing stores through better operational efficiency, menu optimisation and cost management.
A slower rollout strategy could help improve unit economics, strengthen margins and enhance return on capital for listed restaurant companies.
Brokerage Turns Positive on Select Stocks
MOFSL remains optimistic on several leading restaurant chains and has reiterated 'Buy' ratings on Restaurant Brands Asia, Devyani International and Sapphire Foods.
The brokerage has also upgraded Jubilant FoodWorks to a 'Buy' rating after a significant correction in the stock over the past year.
Among its preferred picks, Restaurant Brands Asia is expected to offer the highest upside potential, while Jubilant FoodWorks and Devyani International also present attractive long-term investment opportunities as earnings recover.
Long-Term Consumption Story Remains Strong
Despite short-term challenges, India's organised food service industry continues to benefit from favourable structural trends.
Rising urbanisation, increasing disposable incomes, growing preference for branded food chains, expanding digital ordering platforms and higher spending on dining out continue to support long-term demand.
Premiumisation, menu innovation and technology-driven customer engagement are also helping restaurant operators improve customer retention and operational efficiency.
As inflation gradually eases and discretionary consumption strengthens, restaurant chains are expected to witness healthier sales growth and better profitability.
Valuation Gap Could Narrow
MOFSL believes listed QSR companies currently trade at a significant discount compared to organised retail businesses despite generating comparable revenues and operating much larger store networks.
If profitability improves and same-store sales continue to recover, the valuation gap could narrow over the coming years, leading to renewed investor interest in the sector.
The brokerage believes current valuations offer an attractive entry point for investors with a medium- to long-term investment horizon.
Industry Outlook Remains Positive
The Indian QSR industry is expected to remain one of the fastest-growing segments within the consumer discretionary space. Expansion into Tier-II and Tier-III cities, increasing food delivery penetration and favourable demographic trends are likely to support sustained growth over the next decade.
Companies that successfully balance expansion with profitability and maintain strong brand positioning are expected to emerge as long-term beneficiaries of India's evolving consumption landscape.
Market Outlook
India's organised QSR sector appears well-positioned for gradual recovery as consumer spending improves and restaurant operators focus on strengthening profitability rather than aggressive expansion. Investors should monitor Jubilant FoodWorks, Restaurant Brands Asia, Devyani International, Sapphire Foods, Westlife Foodworld and other consumer discretionary stocks, along with trends in same-store sales, food inflation, operating margins and discretionary spending. Sustained earnings improvement and better unit economics could support a meaningful valuation re-rating for the sector over the coming years.