Westlife Development Ltd

NSE:WESTLIFE

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Westlife Development Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions]

We would like to remind you that certain statements made by the management in today's call may be forward-looking statements. These forward-looking statements reflect management's best judgment and analysis as of today. The actual results may differ materially from the current expectations based on a number of factors affecting the business. Please refer to the safe harbor disclosure in the earnings presentation. I now hand the conference over to Mr. Chintan Jajal. Thank you, and over to you, sir.

[Chintan Jajal, executive]

Thanks, Michelle. Welcome, everyone, and thank you for joining us on the Westlife Development Earnings Conference Call for the first quarter ended 30th June 2022. I am Chintan Jajal, Lead Investor Relations at Westlife. From the management team, I have with me Mr. Amit Jatia, Vice Chairman; Ms. Smita Jatia, Managing Director; Mr. Saurav Kalra, Chief Operating Officer; Mr. Akshay Jatia, Executive Director; and Mr. Dattaprasad Tambe, General Manager Finance and Accounts. We shall commence today's call with overall operational progress highlights by Smita, followed by financial review by Dattaprasad and strategic outlook by Amit. We will be referring to the earnings presentation and financial releases, which are available on the stock exchange as well as investors page of our website. With that, I now turn the call over to Smita. Thank you, and over to you, Smita.

[Smita Jatia, executive]

Thank you, Chintan. A very good afternoon, everyone. I hope you and your families are all keeping faith. Today is a moment of great happiness and I am to proud to share that for the third time in a row, we have outperformed ourselves to post remarkable results. Our strong performance in the first quarter, irrespective of macroeconomic and inflationary challenges was underpinned by highest ever quarterly sales and operating profit, reflecting broad-based momentum across all segments. Our revenues for this quarter are up 108% year-on-year and 18% sequentially. The same-store sales growth for the quarter stands at 97% year-on-year. We have delivered a strong INR 5.38 billion revenue and reported a cash PAT of over INR 551 million. It was happening that we continued to see healthy growth across Western South markets with the average annualized sales per store, not just remaining over INR 60 million but hitting a new milestone of INR 67 million, supported by our recently opened restaurants, which are performing at par with the system average.

Our growth in both dine-in and convenience channels has been continually setting a new baseline for the business. While dine-in grew over pre-Covid levels, convenience platform business has more than doubled, underlining the success of our omnichannel strategy. Despite strong inflationary pressures, we have recorded highest ever quarterly profits. Impact on gross margin was partially mitigated by pricing actions. Our operating net EBITDA stood at 17.1% for the quarter, led by favorable operating leverage, cost optimization initiatives and improved productivity. We sustained QSR traffic share gains in most of our markets by focusing on elevating our brands, accelerating digital channels, and showcasing our core equities of burgers and chicken. Owing to our multichannel, multi-day-part strategy, we were able to serve our customers wherever they are, whenever they want it, and however they want it further cementing our market leadership position invest and inching towards leadership in South. We consistently find new ways to reach our customers where they are and make their experience more seamless and personalized. Our omnichannel strategy has given us better business predictability and in the first quarter, digital channels, which includes our mobile app, self-ordering kiosk, and delivery made up more than 55% of system-wide sales.

Building on our strength, we have renewed focus on expansion and offers a differentiated experience through reimaging our stores, creating experience of the future, while the reimaging dramatically improved the customer experience we have also seen a tangible benefit of over 30% return on incremental invested capital. This quarter, we have opened 5 new restaurants. With this, we have a total of 331 restaurants, 267 McCafe's, 65 drive-throughs, and 132 restaurants across 48 cities. We are proud to launch the gold standard drive-through with the all-women crew near the statue of Unity in Gujarat, which further strengthened our inclusivity agenda. Furthermore, I am happy to see that Tier 2 cities have grown twice the pace of metros compared to pre-Covid levels. While we were a bit shy of our intended new store opening target, 12 new stores are currently in [ Grownbrick ]. With that, I believe we should have around 17 to 19 stores in the first half and on track to add 35 to 40 new restaurants in FY '23. We have been making concerted efforts to build and strengthen our brand trust and business through menu innovation, business initiatives like real food, good food campaigns, McDonald's in every celebration amongst others.

Lastly, at Westlife, we have no stone unturned to create a great place to work for over 10,000 people strong family. And I am elated to share that we were awarded the prestigious great place to work, Laureate Awards as one of the top 3 companies for being in the top 100 list for 10 consecutive years. I now hand it over to Dattaprasad, who will take you through the financial highlights of the quarter.

[Dattaprasad Tambe, executive]

Thanks, Smita. Good afternoon, everyone. We started FY '23 on a strong note. Our revenue for the quarter was up by 108% year-on-year and 18% quarter-on-quarter to INR 5.38 billion with the same-store sales growth of 97% year-on-year. Dine-in channel grew by 4.8% year-on-year and 14% over pre-Covid base of Q1 FY '20. Convenience channels grew by 13% year-on-year and 112% over pre-Covid base. Despite significant inflationary pressures in food and papers, the impact on gross margin was limited to about 70 basis points, sequentially mitigated by price hikes and improving product mix. We have taken a blended price hike of around 5% during the latter half of the quarter. And hence, the complete flow-through will happen in Q2. Restaurant operating margins stood at 21.6%, which is 4.5x of last year and 68% jump from Q1 FY '20. Operating EBITDA was 18x of last year and grew 82% on Q1 FY '20. On a sequential basis, EBITDA grew by a strong 26%. EBITDA margin improved to 17.1% versus 16% last quarter. That is Q4 and 2% in Q1 FY '20, led by better operating leverage flow through across various line items and optimized cost structure. On an absolute basis, our EBITDA stood at $921 million, and our cash tax stood at INR 551 million, which are the best ever profit numbers we have recorded.

I would like to highlight a few one-offs and provide some clarification, which may help make better sense of our numbers and operating performance. Firstly, we have recorded a one-off cost of around $27 million [indiscernible] as seen in the financial results. Please refer to [ note 1 ] our financial results for further details. Second, please note that our cash tax margin on a sequential basis is lower by 140 bps, largely on account of current tax impact in Q1 FY '23. We were accounting for deferred taxes in prior periods due to carryforward accumulated losses. However, from Q1 '21, we paid tax at normal tax rate. As a business enters a new phase of consistent profitable growth, we will be paying tax at a normal tax rate of about 25.2% year on. On a comparable basis, excluding the current tax, the cash back margin would be sequentially higher to about 11.8%. Third, our R&D rate for FY '23 will be 4%. FY '24, it will be 4.5%. FY '25 and FY '26 will be at 5%. We are in active discussions with McDonald's Corp for rate from FY '27 onwards. Our initial sense is that the increase will be progressive in nature over the years from FY '27 onwards. We have mentioned the current royalty rate on our investor base on our website, www.westlife.co.in.

Lastly, as many of you have noted that our EBITDA margins that we report in our operating performance sheet and earnings presentation is slightly different from what one would compute from semi-format financial results. If we take an example of Q4 FY '22, the EBITDA margin that we reported in our operating performance sheet and earnings presentation was 16%, while if we use the formula of sales minus COGS, staff costs, and other expenses from steady format financial results, the EBITDA margin would come to around 13.8%. There are 2 broad elements at play here. One is a mark-to-market game reversal of earlier quarters in Q4. In Q4 FY '22, we sold around INR 700 million worth of our investment and the cash was largely used in care of our debts. As per [indiscernible] investment, the [indiscernible], which are recorded in the previous period had to be reversed. And the reversal is recorded as net loss on fair value changes, which is grouped in other expenses. Simultaneously, the entire profit on sale of investment gets recorded in other income. However, since the other income is excluded in EBITDA calculation, the other expenses get included in EBITDA. It has a negative impact on EBITDA margin. But at the PAT level, it would have no impact. Please note that this is a motion accounting entry with no impact on business or cash flow. Hence, you provide more clarity, we have shown it as a separate line item in our financial results, requesting you to take a note of that.

The second element is the provisional asset write-off. When we remade or modernized our stores, we take a provision for balanced value of furnitures and pictures, which is clubbed in other expenses in SEBI format financial results. This again is a provision entry pertain to CapEx with no cash flow impact. I really say don't reinvent or modernize the stores this amount would flow below EBITDA and depreciation. In our EBITDA margin compensation, we exclude these 2 elements as well as the other income as we believe it gives us a true and fair picture of our underlying business performance. Accordingly, we are pleased to see a new operating profitability base line being created for our business with both December as well as June quarter, posting over 17% of EBITDA margin. These adjustments are visible as separate line items in our semi-format financial results. We hope this clarification will [ assume ] with your own analysis. With that, I now hand over the call to Amit. Over to you, Amit.

[Amit Jatia, executive]

Good afternoon, everybody. Thank you, Dattaprasad. Thank you, Smita, and a big thank you to each one of you for joining the call today. I hope you are keeping well. You just heard us report highest ever quarterly sales and operating profit, highest quarterly sales in the McDelivery app, the highest ever monthly sales in dine-in. We achieved a crucial milestone by crossing INR 5 billion sales this quarter. We have consistently outperforming our benchmarks every quarter and with the quarter one FY '23 numbers, I'm proud to share that Westlife development is witnessing the wave of the next wave [ of flow ], the beginning of the next wave [ of flow ]. With robust and consistent results for 3 consecutive periods despite external challenges, we demonstrate that we have built a resilient business that has delivered results and is set up for the long term.

What makes Westlife unique is the strength of our people, the scale of our supply chain, the quality of our real estate portfolio, the agility of our system, the power of the McDonald's brand, and moreover, consistency in our strategic root. We have believed in our core stood from, [ work the drop ] and execution is now paying off. Our agility to identify industry shifts early on has helped us deliver a differentiated experience. We get our experience of the future [ through ], world-class [indiscernible], our digital platforms, every engine is geared to meet the consumer experience seamless and fuel growth.

To summarize, I would like to say that while I'm proud of our progress, we are constantly challenging ourselves to invest in the future. We are on track with our expansion plan of opening over 200 stores in the next 3 to 4 years. We expect this will be a year of continued progress, focusing on our foundation of operational excellence, expanding on growing digital advantages and continuing to put the health and safety of our customers and crew first will remain critical. We will tackle any challenges with agility and a strong focus on execution. With a redefined cost structure, increased productivity, strong average unit volumes, and healthy restaurant cash flows, we are well positioned to deliver accelerated business results and create long-term value for shareholders.

With that, let's open the floor for question and answers.

[Amit Jatia, executive]

[Operator Instructions] The first question is from the line of Percy Panthaki from IIFL Securities Limited.

[Percy Panthaki, analyst]

Congrats on a good set of numbers. My first question is on the dine-in business. If I look at the dine-in ADS, only the dine-in ADS on a sequential basis, Q4 versus Q1 there is a growth of around 30%. And it wasn't as if Q4 was terribly depressed. There was an Omicron impact, but it was the least intensive of the 3 waves and apart from a couple of weeks, people were up and about their business. So just wanted to understand that in one quarter, what has changed so much that the dine-in ADS has gone up by 30% in just one-quarter period? Any insights on that would be helpful, sir.

[Dattaprasad Tambe, executive]

Sure. Thank you, Percy. See, as you've noticed about Westlife, for us, it's all about consistency and sustainability and therefore, to some extent, these are building blocks. I mean, this is sort of the third quarter post-Covid, where the results have been good. And if you look at pre-Covid probably for almost, I would say, 16 quarters, we were positive same-store, same-growth, growing our average unit volume year-on-year, quarter-on-quarter. So obviously, things like this don't happen because of tactics, things like this happened because of strategy. And again, if you hear our calls or read our commentaries, it's all consistently built around 3 or 4 themes. First thing, of course, there is a structural shift in QSR and in informal eating out, where I have mentioned this before, the Western part [ too ] is taking larger share within the informal eating out itself.

The second big thing that is happening is that within Western part, brands that have a high trust score and that talk about safety, hygiene, and contactless, and I think we've done a number of campaigns around that. They are seeing a slightly bigger benefit than maybe some others. Thirdly, there are a number of strategic elements that we've consistently been following. Earlier, it was about, say, McCafe only and then it was about the experience of the future as well. But while these continue to grow, we've added new [indiscernible] new building block [ floor ]. So for example, if you look at our Slide #9, we've given a lot more context around menu relevance and its impact around consumer occasions and day parts.

We are very transparently talked about going after the meal location and the linkage to that is the launch of our -- launch of our fried chicken in South India and the gourmet business. And clearly, that has started reflecting back in our sales. So it's a combination of all of this. Last point I want to make is around McCafe that we had mentioned this in our previous calls as well that McCafe has been impacted because it's got a tremendous experiential consumption pattern as well. And as in-store feedback, McCafe seems to have bounced back pretty well as well. So this is a combination of the reason why our in dining is doing quite well.

[Percy Panthaki, analyst]

Got you. Got you and completely understand and fully appreciate the good sort of initiatives that you have continuously undertaken over the last several quarters. My question was more in the sense that see all these initiatives that you spoke about were present in Q4 as well. So just in a one-quarter period, what has really changed for the dine-in ADS to go up so sharply. Does it mean that in Q4, the Omicron impact was actually so much more huger than what we understand?

[Dattaprasad Tambe, executive]

Yes. Akshay wants to answer that.

[Akshay Jatia, executive]

As we've discussed, obviously, yes, there was an impact of Omicron in January where dine-in was partially open. There were restrictions, there was a capacity constraint, a lot of states are going in and out of lockdown. So we don't know exactly what the overall impact would have been, but there was an impact on overall quarter delivery, which will evidently ramp up in February and March. However, if you see our performance this quarter, it's largely for the first quarter of the year with summer holidays with that period to an extent, is pretty good. And secondly, obviously, the first normal period post-Covid where customers are going out again.

So dine-in has come back, not that we don't expect to continue to see this momentum because like we just discussed right before this, there's a fundamental shift that happened for the category as well as for a brand like ours where customers are a lot more familiar, they are a lot more use to eating out at the McDonald's and it's something that they now look for consistently. And we've seen that growth both in frequency as well as average ticket size when families are coming back to our restaurant. And most recently, we just put out some communications in our advertisement centered around our new campaign revolving around families.

[Percy Panthaki, analyst]

Okay. Got it. My second question is on margins, and I'll break it up into 2 parts. So one is on the gross margin front, there's a price increase which you took, but you didn't -- it wasn't effective for the full quarter. So what I wanted to understand is that now that it is sort of there for the full quarter, Q2 onwards, what kind of gross margin delta can we attribute in future to this timing effect? So that's the first part of the question. And the second part of the question is that if I look at your other expenses, occupancy, and other expenses line, that is up quite sharply at 54% Y-o-Y. And that was -- I mean, while the overall sales, et cetera, was clearly much, much above consensus and our expectation, I think this one line item is also a little bit above our estimates. And if not for that, the margins would have been even higher. So can you just throw some light on why this line item is slightly on the higher side? Yes, that's all from me.

[Dattaprasad Tambe, executive]

When you compare -- first, I'll take the second question, when you compare year-on-year, I feel it's not really comparable. And that's why we kept giving sequential data as well because at that time, you see, we have a number of real estate sites that are percentage-based. And if we look at our sales at INR 200-some crores versus INR 538 crores, that is one element of the cost increase. The other thing is you see I have said this a long time ago, maybe it's a good time to revisit that, that typically, our advertising in the year is about 5% for the whole year, 5% to 5.2%.

And in different quarters, it varies. So therefore, the booking is done based on that as well. So it's a resultant of that. I don't see anything really out of line there. Coming to the second -- your first question around the pricing effect and all of that. Basically, I mean, I don't like to give specifics because things keep changing. But there are 2 things that are happening. One is inflation is at least beginning to read and see is kind of flattening out and I have seen prices come down. So I feel in the coming quarters, it will be good and it will reflect back. And our immediate objective that this price increase is to kind of get back the gross margin that we've had in the previous quarters. So we are hoping that from next quarter onwards, the full effect of this will take us back to the previous quarters of gross margin.

[Operator]

The next question is from the line of Vishal Gutka from PhillipCapital.

[Vishal Gutka, analyst]

Congratulations on an excellent set of numbers. 2 questions. Just wanted to understand, in the presentation, you have stated that you are in the verge of becoming the market leader in South India. I just wanted to know who is bigger than us in the burger segment. I thought that we're one of the largest players in the burger segment in South India as well.

[Dattaprasad Tambe, executive]

So we don't look at market share from a burger point of view. Burger, we are by far the leader across the whole country. But we look at leadership in what we call informal-eating-out -- and in informal-eating-out one of the big factors is, of course, chicken. And our recent launch, which is now sort of over 12 months, is resonating extremely well and our average unit volumes there. As I've said in our calls earlier has risen [indiscernible] per year by [ 50 to 75 lakhs, 5 million to 7.5 million ] per year. And therefore, we think that it is still going to continue to grow.

We believe that the consumer in their mind have to still connect and I feel that is an opportunity. We have to still connect brand McDonald's with a fried chicken sort of a menu item. And I feel that is where the opportunity lies to take it to the next level. So I'll just add a little bit of flavor to this. In the south, we saw that the eating out was dominated by [ Women ] chicken and chicken. And hence, we took this insight, and that is where we are playing with -- along with our burger leadership -- so together, we are confident that with burger and chicken as strong portfolios, we will be able to get even higher leadership in the south market.

[Vishal Gutka, analyst]

Got it. Second question on reason you stated that Tier-2 cities have grown faster than metro. So my understanding is maybe because in those markets, [ value of share ] would be higher. That could be one of the specific reason that Tier-2 to cities have grown faster than metros. Any other reason apart from that, you are seeing on the ground, why the cities have done better than metro-city.

[Smita Jatia, executive]

Yes. Again, I will go back to what Amit mentioned. There's been a whole shift in the IO structure where organized players after Covid are getting better share of the wallet because of food safety, hygiene and contactless. And this shift is not something which was momentarily. We are seeing that it is definitely staying on. Secondly, again, convenience as a habit has got built in small towns, which was predominantly first dine-in. So because of both these factors, there is a new baseline. And as I mentioned in my commentary also, that new small towns and new cities are now coming at system average and not becoming a lag for the first one year.

[Vishal Gutka, analyst]

Okay. Okay. And just last question on [indiscernible], has the sales record the pre-Covid levels now because this was the first quarter where we saw store being operational fully for McCafe sales. So any comments on McCafe would be really [indiscernible]. Sure, [ though ] it has recovered to pre-Covid levels. And as I've always said before that we have 2 big opportunities one is, of course, to put it across our portfolio of 330 restaurants. So there's an opportunity of 18, 19 McCafe's right there, which we are, of course, doing. And on the other side, the average sales or McCafe per restaurant per annum, we believe that over time is going to double again. So there's tremendous opportunity on this beverage category there.

[Operator]

The next question is from the line of Avi Mehta from Macquarie Capital.

[Avi Mehta, analyst]

Congratulations on this performance is really good to see these numbers. Just wondering if you kind of pick your thoughts on the AUVs. For the last few months, now you're essentially stabilizing at an annual run rate of close to about INR 6 crores. I do not see any reason why this should moderate down given your initiatives, but if you could give me a sense on what could be potential risks, which could drive this down? Or how should I look at that?

[Dattaprasad Tambe, executive]

Sure. So Avi, I mean, again, we've been -- you've been on the call regularly I've seen that. And you'll see the consistency in conversation. If you look at Global McDonald's, firstly, we've given a lot of sort of insight into our thinking, across our Investor Day and particularly more in the earning [ days ]. Again, Slide 9 represents a lot more than what is sort of evident to everybody. And if you recollect, I've been always saying that the real game for McDonald's in India is yet to play out. So first, let's take coffee alone. And I just talked about how we can double it in the restaurant and double the average unit volume. Again, if you look at meals, we haven't touched the tip of an iceberg. We were leaders in snacking, and we are starting to now move towards leadership in meals. As you can see from that slide, meals is a much larger segment and a much larger occasion for the consumer than snacking. So as we grow that, all of this leads towards AUV grows.

So in the past, I have given specific ways of how we would get from INR 5 crores to INR 6 crores, INR 6.5 crores, and that was around McCafe, it was around the menu, and it was around delivery, right? And all of these 3 things have played out. Now we've added a new dimension while these are still playing out, and I believe this is what will take us from the 6.7% to the INR 7 crores, INR 7.5 crores.

We feel the game is not over. Globally, McDonald's players, of course only segments and average unit volume is $2.6 million, pretty much the highest in the category. And even if you look at Asia, Asia pretty much stays in the $2 million category. And when I compare Indian countries similar to Indian for Capita, they are at least over INR 10 crores plus. And we have a whole bunch of stores that are in that category as well. So aspirationally, we don't think that it is going to slow down. I've given you some context to how it's going to move, and Smita just want to add something.

[Smita Jatia, executive]

So just to put it very simplistically, Avi basically all our growth in AUV has come from strategic platforms. It's not at the back of any discounting or one-time promotion. And therefore, we are confident that all our strategic platforms, which Amit just mentioned, will continue to play out both on our delivery and items.

[Avi Mehta, analyst]

So if I kind of summarize kind of what I understand is logically the 6.7% should rationally move to, say, 7%, 7.5%, as these initiatives kind of gain pace. That's the right way to look at it and how -- as kind of flow through to margin. So that would be the right -- at least the expectation going forward? Would that be a fair thing?

[Dattaprasad Tambe, executive]

Absolutely, absolutely. Rather than [ saying this ] too that at least at Westlife we have 2 jobs to do. One is, of course, completely increased penetration because there's a huge opportunity there. But we also have been talking consistently about growing our average unit volume because I'll give you one example. I mean some time ago, our average unit volume was INR 5.5 crores. Today it is 6.7%. So when you take INR 1.2 crores and multiply that by 331 stores, you can see the impact of that INR 400 crores in incremental sales without putting any more CapEx while new stores will keep coming, and they capture a different set of elements of unpenetrated markets. So we believe that this double benefit is what's going to take our margins to our aspirations, which are much higher than where we are.

[Smita Jatia, executive]

So the only one small caveat I would like to put in there is that we are going to now accelerate on new store openings. So that will keep our AUV in the range of 6.5% to 7%. However, if you look at our comparable stores, definitely, we are going to be giving our comp sales, which is something which we've always been focused at.

[Avi Mehta, analyst]

Smita, if I may just defer on that logically right, you're at 6.7%, your existing stores would be much higher. So that's why I was actually moving towards what I was saying, but I take your point, I get what is the factor. Just, Amit, continuing with your approach, just on the margin front, you've always indicated that mid-teens aspiration, but that was under an earlier system of reporting. Would it be possible for you to give us what is the reported margin expectation that we can kind of look at, say, a few years down the line by if you could share a guidance from more on a reported basis.

[Amit Jatia, executive]

Sure, sure. I mean we will come out with a vision document, but I can use past an example for the future. I think we've been improving roughly about 130 basis points every year pre-Covid and then again, as we are coming out of Covid, we've been able to do that. So I'm hoping that, yes, about 100 basis points a year for the next 3 years is really what we are pushing towards. So definitely, we want to go from now the high teens under IND AS to sort of [ 20s ]. That's where our ambition lies.

[Avi Mehta, analyst]

Okay. And if I hear you correctly, you'll be sharing an updated guidance in the vision document soon. Is that [ sorry, should I put that correctly. ] Okay. I'll fix that.

[Operator]

The next question is from the line of Kapil Jagasia from Edelweiss Financial Services

[Kapil Jagasia, analyst]

Sir, my first question is like earlier, we used to follow this cluster policy of opening the stores in major metros. Around 70% is [indiscernible] in major metros and 30% in the smaller towns. Now is this intensifying competition? Have we changed our strategy there or it would continue to remain a breakup or a mix of 70-30 going forward?

[Dattaprasad Tambe, executive]

Okay. So our strategy around store openings has nothing to do with competition. It has to do with unpenetrated consumer areas that we should be focusing on. So for example, in Mumbai, today, we are by far leaders, and Mumbai is a consumption market. We have over 100 restaurants here. And at least in sort of our immediate competitor base, we have a huge market in cities like Mumbai, Puna, Ahmadabad, [ and ] 6 core cities, including some of the specialties like [ rural ] Baroda, et cetera. So we don't want to lose our leadership there. So you will continue to see openings in that area as well. Meanwhile, we are going to now accelerate the we are only in 48 cities, and I see that as a positive rather than as a negative.

Our strategy has been focused inside out. It has been clustered and so on. But as more and more clusters have opened, it has now given us the ability to go into small towns as well. So we are -- that's how the openings have moved from 25, 30 to 35, 40, which will now go towards the 50, 60 if we want to deliver our INR 200 crores over 3 or 4 years. So we will not reduce the number, just percentages keep changing. We will not reduce the number of openings in our core markets, but we will add a lot more openings in our smaller cities as well, and therefore, it will become a 60-40 kind of ratio.

[Kapil Jagasia, analyst]

Okay. And sir, as this normalcy has now resumed the restaurant space. So what can be the like same-store sales growth for next 2 years or 3 years for us, like an average ballpark number?

[Dattaprasad Tambe, executive]

See, I've always maintained that a good number, which is I feel quite aggressive because remember, inflow sales is compounding. And now if you are at INR 5 crores average unit volume and you grow 10%, that INR 50 lakhs, then you are at INR 6.7 crores and grow 10% at INR 67 lakhs is what the consumer spends, not percentages. So we are saying aspirationally we can stay above 8% same-store sales growth. I feel that sustainably, that's a good number to go by.

[Operator]

The next question is from the line of Nihal Mahesh Jham from Edelweiss Financial Services.

[Nihal Jham, analyst]

Sir, 3 questions from my side. The first one was that why don't you give an SSG number, I was just interested in understanding that if you compare the same base of stores to the precore Q1, what would be the improvement over that for the stores that are currently there?

[Dattaprasad Tambe, executive]

No, our same-store-sales growth of pre-Covid?

[Nihal Jham, analyst]

Yes.

[Dattaprasad Tambe, executive]

[indiscernible], do you want to answer that?

[Unknown Executive]

Yes. So if we take it versus pre-Covid and then we should take Q1 FY '20 as a proxy, we would be around 30% more sales to sales than that number.

[Nihal Jham, analyst]

30% on absolute level versus Q1 FY '20?

[Unknown Executive]

Yes.

[Nihal Jham, analyst]

Okay. That's helpful.

[Operator]

The next question is from the line of Gaurav Jogani from Axis Capital.

[Gaurav Jogani, analyst]

Congratulations on a strong set of numbers. My first question is with regards to a comment in your [indiscernible] that you have given that even the new stores are now performing at the same part with the system average. So if you can throw more light on it, what is leading to this? And how sustainable is this going ahead?

[Dattaprasad Tambe, executive]

Sure. I mean, see, obviously, the brand keeps getting built. And what happens is if I use a simpler example to make my point, you take Mumbai. Today, we've been in Mumbai for 25 years. And therefore, our presence and availability is there. But yes, let's say there's an underpenetrated area. Let's take [ Vasai ] right now when we open there, there's familiarity with the brand. People have consumed McDonald's somewhere or the other in the city regularly. And therefore, when we are opening there, we are seeing the average volume starting off quite well to start with. Similarly, in small towns, we are seeing that the numbers are starting off pretty strong, much different than what it was earlier. So this is what we are observing and hence the comment.

[Gaurav Jogani, analyst]

Sure. That's very heartening to know. And sir, my second question is with regards to the strong sustenance in the convenience [ panel ]. So if we see it is almost now 2x [indiscernible] and even grown at a strong base of 13-odd percent. So where do you expect this to stabilize in a normalized environment once things stabilize? What percentage contribution do you expect going ahead from this?

[Dattaprasad Tambe, executive]

I think what you are seeing today is where it's going to be. And if you recollect, I mean, again, I feel that we've been very consistent in our comments. I had always maintained, I mean, at that time, everybody was asking me why our store is not smaller this -- that and I would say that dine-in is going to come back to 100%. People are not going to just keep ordering. They need a change. There is a reason why people eat out, right?

That is sometimes to celebrate. It is about refueling on the go and things like that. So we believe that that is here to stay. And therefore, we believe, however, convenience is also here to stay. We are continuing to aggressively build right-through our on-the-go is working, takeovers is working delivery, so I think 60% and 40% is a good number. Globally, of course, our convenience channels are almost 70%. So I feel over a 5-year horizon, that's where we are going to move. But for now, I think 60-40 might be where we would be.

[Gaurav Jogani, analyst]

Sure, sir. And sir, just a follow-up to this is that now with the new contribution structure, I think 60-40 that you be expecting ahead. How does this help in our margin profile and how incrementally does it contribute to our margin profile?

[Amit Jatia, executive]

See, margin, as I mentioned to you, as we keep growing average unit volume, okay, the margin flow-through will come. I think between delivery and in-store and all now, there is not much of a difference. I have always maintained on every call over the last 5 years that if a business is happening somewhere you have to make your unit economics work there. We have to go where the consumer is. We can't have the consumer coming to our business model. So now between delivery and in-store, there are pros and cons to each and both business models for us are working well.

So we look at as long as average unit volume keeps rising and we keep cost in control, both I feel we are pretty strong in both these areas. You will see margin grow through come in. And I feel now we have history, right? I mean, even in the really difficult period of '14, '15, '16, '17, every year, we were improving our EBITDA by 130 basis points. So we -- for us, it's about sustainability, consistency and strategy, not tactical. So you will see that to come irrespective.

[Gaurav Jogani, analyst]

Sir, that's very helpful. And just one last bit on the comment earlier made in terms of the mark-to-market gain. Actually, I just missed that bit of the one-offs. If you can just repeat that, it will really helpful and how it changes the other income line item for us? Sure, sir. So DP, can you please take that?

[Dattaprasad Tambe, executive]

Yes. So basically, what has happened is in Q4 FY '22, when we sold of around INR 700 million of our investment as per the accounting standard, the mark-to-market gains, which were recorded in the previous period had to be reversed. Now when the reversal happens. It happened in the other expenses in the SEBI format, okay? Whereas the realized income was being booked in other income.

Now typically, for an EBITDA margin calculation, we exclude the other income and thereby, the mark-to-market gain reversal also has to be excluded, which when the investors you calculate the EBITDA margin through SEBI [indiscernible] it was getting excluded, which we have separately reported now in our SEBI results.

[Gaurav Jogani, analyst]

Okay. Okay. Okay. So basically, the Q4 numbers from that has been restated to the extent, right? Is that [ correct ] understanding?

[Dattaprasad Tambe, executive]

Typically on a one-off of Q4.

[Gaurav Jogani, analyst]

Yes. Sure. But just one thing here. The other income for this quarter seems to be a bit lower to that extent. And given that we are making good cash profits. So how is this other income expected to be ahead? Because from this quarter, it's just around INR 1 million odd if I total that?

[Amit Jatia, executive]

[indiscernible] I feel it's our deficiency but I feel it has just to do with the mark-to-market on our treasury. That's about it. So that keeps fluctuating. It's not a big deal, but Datta if you can answer that [indiscernible].

[Dattaprasad Tambe, executive]

So basically, what has happened is in this quarter, as you know, with the repo rate increasing by almost 90 bps, the overall valuations in investment has gone down, which is typically a market phenomenon, okay? And we are having -- if you look at the results, we are having a mark-to-market loss this time.

[Operator]

We have Mr. Nihal Mahesh Jham connected again in the queue. Please proceed with your question.

[Nihal Jham, analyst]

Sir, I was asking on the chicken part of it. I've seen the soft launch in Mumbai. I just wanted to first confirm that. And if you could share metrics where you share the run rate for the out-store, -- is it similar in Mumbai also for the stores that we've launched, the chicken [indiscernible]?

[Amit Jatia, executive]

Yes. So it is a top launch, Nihal, and we don't share sort of results this early, and it's a 5 to 6 store [indiscernible], and we have a whole process of what we do. So it's too early to talk about. And it's not even to measure sales. It is more to get all the operational aspects right and get a [ productive ] view on consumer qualitatively. -- Quantitatively 5, 6 stores don't give you enough. So it's too early Nihal. The important thing is, yes, there are some restaurants here that have the product.

[Nihal Jham, analyst]

Understood. And do we have a time-line of when we plan the rollout for the [ on the slot showroom ] number? Or that's depending on how the product [ mix ] is?

[Amit Jatia, executive]

Yes. I mean, no timelines as yet. It's all sort of our philosophy is to keep working on Horizon 2. So while Horizon one is playing out, you need to keep working on tomorrow's initiatives. And since this has done very well in [ pours ] it is part of that program. So it's all, there is a lineup and our priorities here could be quite different from maybe the price [ declared ]. So no plans as yet to sort of give out. But whenever we are ready, we will come back with that.

[Nihal Jham, analyst]

That's helpful. Just one more question from my side was that you've obviously highlighted on the menu renovation part in the presentation. And over the last 18 months, having multiple SPUs across dayparts that we've launched. So incrementally, what are the parts that you think are still missing and where you want to keep innovating and adding menu renovations?

[Amit Jatia, executive]

So that's sort of hard to explain on a call, but I'll tell you 2 years ago, 3 years ago, if I would have said [indiscernible] burgers, the context would not be understood. I believe that our menu is still a tip of iceberg. And I'll use McCafe [ media ] to explain. In McCafe alone, we just played primarily on core products right now. There is no innovation, there is no indulgence as yet. So for example, take smoothies. While we have 2 of these smoothies in there, I remember a global program where we have taken smoothies on television and sales really, really shot up for smoothies not just at McDonald's but in the whole category. So similarly, in McCafe alone, there is tremendous menu play.

Even in our core menu, there is tremendous menu play, whether it's to do with burgers, whether it's to do more work on the chicken side, whether it's to do with [indiscernible] we've not talked about our desserts. Desert again, is a $300 million, $400 million market, and we just [ keep that ] tip of an iceberg. But [indiscernible] zero there, and there's a lot of work that one can do. Breakfast is another area. So therefore, my whole point is that there is a lot of work to be done but you have to prioritize it right. Otherwise, your energies can get dissipated without results. So it's a big subject, but the important thing is we've just touched the tip of an iceberg. There's a lot of room to grow on [indiscernible]. Sure, sir, that's helpful.

[Operator]

The next question is from the line of Jay Doshi from Kotak Securities.

[Jaykumar Doshi, analyst]

Congratulations for extraordinary results and progress on [indiscernible]. My question is when I look at 1Q FY '20 versus FY '23 [indiscernible] is broadly comparable, maybe about 10%, 14% higher but delivery -- sorry, convenience channel has gone up from roughly about INR 1.5 crores annualized revenue to INR 3.8 crores. So [ INR 1.3 crores ] again in a quarter where everything has opened up and [indiscernible]. Can you provide some more color on first of book keeping question. Is take away a part of convenience or only undergoing convenience?

[Amit Jatia, executive]

No, firstly, I don't think that takeaway is part of convenience. Take away is a part of dine-in [ in order book ] please confirm that.

[Jaykumar Doshi, analyst]

Does it effectively drive through delivery and on the go. Can you sort of provide some color in terms of what when you look at these 3 substernal billing convenience, where have you seen maximum traction? And what explains this kind of [ standard ] performance? You don't think any other PSR [ caveat moments certainly ]

[Amit Jatia, executive]

Thank you, Jay. We appreciate that. So while, of course, I cannot provide specific details, but I'll tell you that remember, we are in the convenience business, right? [indiscernible] is all about convenience. And for example, we've been talking about on the go for a while after using this as an example. Now obviously, nobody really took that seriously in our comment -- but today, on the go has become a very different size of our business. Of course, we feel we want to grow that as well. Of course, as dine-in came in that sort of played down a little bit. The other big one is [ drive-through. ] Drive-through I feel is a major media play for us because even globally, we do enough business through the windows that could justify a whole restaurant.

And we have [ 65 price rooms ] and the plan is to double that. And what happened through Covid is that the habit for using the drive-through got [ formed ] and that habit has not dropped, it's only growing. So it is things like this that outside of delivery, delivery also continues to grow. We are watching the rupee amount of delivery, which continues to grow. But if these 2, 3 other incremental things that have also helped grow our convenience channels. And therefore, we believe that it will continue to grow, particularly with the effort we are putting around drive-throughs as well. Sourabh or Akshay, you would want to add anything to this.

[Akshay Jatia, executive]

No, Amit. No addition from my side. I think you've covered it. I think drive-through is a big focus for us as we grow more and more drive-throughs, we should be able to get traction in more and more restaurants as we grew drive-throughs.

[Amit Jatia, executive]

The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher Private Limited.

[Amnish Aggarwal, analyst]

Congrats for a great set of numbers. I have 2, 3 questions. My first question is that for us, Tier-2 cities, they have done very well this time around and their throughput has grown at double the pace. So can you share with us that you can say how much is the sales contribution coming now from Tier-2 cities? And what is the throughput per restaurant there in terms of, say, like, for example, we are at INR 1.6 crores per quarter per store. So how far that your number would be for a Tier-2 [indiscernible].

[Amit Jatia, executive]

Sorry, Amni, we don't break up our sales by Tier 2 cities and all of that. And neither -- yes, sorry, I can't share that breakup.

[Amnish Aggarwal, analyst]

Okay. But just giving some direction that is it significantly different from where you can say the Tier-1 of metro cities would be?

[Amit Jatia, executive]

No, it's not like that. This is very different. It's all about each of the city as well. So particularly, it's hard to tell you that the important thing is that it starts off very well, and it continues to grow. But remember, there is a [indiscernible]. Finally, you can build one or 2 McDonald's. You can't build 5, 10, 20. And therefore, the volume that it does when it comes to system average, we are quite happy with that. So in summary, whatever best I can tell you, it is starting off very well. Earlier, it would take 2 to 3 years to build to system average. Now it is starting close to or maybe sometimes ahead of system average. And the good news is that it is continuing to grow. So remember, yes, 80% of our stores are still in Tier 1 cities. So this is building out an IP let's just show the opportunity for growth more than anything else at this point.

[Amnish Aggarwal, analyst]

Okay. Amit, that is pretty useful. Now the second thing is that if we look at the current quarter, our dining is 58 and delivery or convenience channel is 42. Now pre-Covid this number is far lower. So do you believe that now dining will stay around 58 -- or do you think that convenience will pick up from 42 -- what is the long-term trend which you are witnessing in both the channels?

[Amit Jatia, executive]

Yes. As I answered this in an earlier but I repeat that one. We are a convenience brand, and it's all about [indiscernible] purchase. So globally, also 70% of our [ cover ] is off-premise -- 70% of the consumption of our business is off-premise. So I feel it is here to stay. And as I said, 60-40 is a good base for us to work on. And longer term, if it moves towards I'm talking 5, 10 years as the category [ below ] going towards 65% is where I see India at, very long term.

[Amnish Aggarwal, analyst]

Okay. So 65% dine-in you are saying?

[Amit Jatia, executive]

No long term, long term. Right now, you please take a 60-40. I'm saying as the category matures over 10 years, that is where it could go to at best.

[Amnish Aggarwal, analyst]

Okay. Okay. And I mean, finally, fried chicken, I think we are, you can say, piloting the same in a few stores in West India, but in how many stores in South, we have launched this product?

[Amit Jatia, executive]

South is across the board. So I don't know, we have 170 stores, maybe INR 200 crores. I'm not sure of the exact number, probably 170 stores we have in South India, and it's across the board and [ if we ] invest, it might be [ INR 5 to INR 10 crores ] somewhere in Mumbai.

[Amnish Aggarwal, analyst]

Okay. Okay. Amit, final bit on the royalty. So as I think it was stated during the initial remarks that it will now move up gradually -- to say 5% by 25%, 26% and you are in negotiations with the parent company. So do you think that it will eventually go to [ weight ] or there is a probability that it goes to, say, 6, 6.5 only, which is a maximum paid by any other, you can say, your global brand in India?

[Amit Jatia, executive]

No, basically, the important thing was to just clarify, I think the rest is speculation today. The important thing is that it's that 5% in FY '26, our contract is at 8% after that. And essentially, all we are seeing right now is that it's not going to go from 5% to 8%. It is going to be a gradual increase, and we are working through it. By the way, globally, McDonald's is at 8% around the world, including in markets with similar per capita income. That's because they bring something to the table. And if you think about it more deeply that you sell as brand [ informers ], we have, for example, chicken and coffee as well. We don't need to build other brands or bring in other sort of operator licenses to be able to be leaders in these segments. And I'll just leave it at that for now. But the main point is that up to 5 there's clarity up to FY '26. And after that, all we are saying is it will not go 3% to 8%, there will be a gradual movement which is being discussed with the parent.

[Amnish Aggarwal, analyst]

Okay, Amit.

[Operator]

As that was the last question for today. I would now hand the conference over to the management for closing comments.

[Amit Jatia, executive]

I just want to take this time to thank everybody for being on the call with us today. I really appreciate it, and have a lovely weekend ahead.

[Operator]

Thank you. On behalf of Westlife Development Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.