Shares of quick-service restaurants (QSRs) are currently hovering around their 52-week lows, primarily due to a significant shortage of commercial LPG resulting from supply chain issues in the Strait of Hormuz.
Key players such as Sapphire Foods, Jubilant Foodworks, Devyani International (KFC, Pizza Hut), and Westlife Foodworld (McDonald’s) are encountering operational challenges and potential pressure on profit margins, with certain stocks declining by as much as 7%.
Investors are concerned that the disruption in cylinder supply may lead to decreased operating hours, restricted menu options, and potentially temporary closures of outlets, as quick-service restaurant kitchens rely heavily on a steady and large volume of LPG for their ovens, fryers, grills, and rapid cooking lines.
What should investors do?
Based on reports, analysts are keeping a close eye on the situation but advise against hasty sell-offs. While this development has created uncertainty for companies like Jubilant FoodWorks, Devyani International, and Westlife FoodWorld, they anticipate that the government’s proactive measures will help mitigate the risks.
According to a news report, Vinod Nair, the research head at Geojit Investments, indicated that a continued delay in the restoration of LPG supply could have an impact on earnings for the fourth quarter (January-March/Q4) of 2025-26 to a degree. Nevertheless, considering the government’s active steps to ensure supplies, the availability of LPG might be reinstated soon.
Investors ought to avoid panic selling and maintain their holdings in QSR stocks, he noted.
Analysts from JM Financial Institutional Securities suggest that the effects on major quick-service restaurant chains such as Domino’s, McDonald’s, Burger King, and KFC will be less significant than on independent eateries, although they are not completely insulated from the disruptions.
As the costs of commercial LPG cylinders have already risen by 8% month-over-month in March, we anticipate an increase in kitchen operating expenses, squeezed restaurant-level earnings before interest, tax, depreciation, and amortization (Ebitda) margins, and possible hikes in delivery or menu prices for QSR companies, according to the brokerage.
Large quick-service restaurant chains generally have centralized procurement processes, contracts with multiple cylinder suppliers, and contingency fuel arrangements. However, analysts caution that a decline in cylinder availability across the system could pose difficulties even for major chains, given their high daily cylinder usage in numerous locations.
JM Financial predicts that Westlife FoodWorld, the operator of McDonald’s, may experience a revenue impact of ₹8 lakh, while Restaurant Brands Asia (RBA), which operates Burger King, and Sapphire Foods, which manages KFC outlets, could both encounter revenue losses of ₹5 lakh each.
Devyani International, which owns KFC stores, might face a sales decline of ₹4 lakh, while Pizza Hut locations run by Sapphire Foods could see a revenue hit of ₹2 lakh.