Investors around the world have been buoyed by the hope that vaccines will deliver an end to the global coronavirus pandemic. In India, they’re celebrating with burgers, pizzas and milkshakes.
In a country with its own strong culinary traditions, investors have rushed into shares of US-style fast-food companies as the broader Indian stock market has risen to new records.
India has not always had the smoothest relations with the US giants of fast food and drink. McDonald’s has had turbulent ride in the country, with growth held back for more than a decade after it became mired in a dispute with a local franchisee. Coca-Cola famously pulled out of India in 1977 for 16 years after facing pressure to reveal its formula and reduce its equity stake in the local business.
But two recent initial public offerings have turned the sector into an Indian investor favourite. Shares in Burger King’s India franchise have risen almost 200 per cent from their offer price in a hot market debut last month. In the IPO of Mrs Bectors, a biscuit and bread maker that supplies outlets including McDonald’s and KFC, demand outstripped supply 198 times for the Rs5.4bn ($74m) of shares on offer. Its shares are up 75 per cent from their offer price after their late December listing.
And shares in Jubilant FoodWorks, which owns the Domino’s Pizza franchise in India, rallied to an all-time high after it said it would launch a new biryani-and-kebab chain last month, extending gains in 2020 to more than 60 per cent.
The sector demand has highlighted a broader hunger for Indian stocks after a difficult year in which coronavirus dealt a brutal blow to the country of 1.4bn people. A strict lockdown pushed the economy into a historic contraction, weakened businesses and rattled markets — all while failing to stem the virus’s spread.
The IMF expects India, which has a Covid-19 caseload second only to the US, to shrink more than 10 per cent in the current financial year. Yet, as elsewhere, investors in India have responded enthusiastically to rapid progress in developing Covid-19 vaccines and an improving local outlook.
Everything from manufacturing activity to motorcycle demand and a string of strong corporate earnings has fuelled hopes that the economy may be getting back on track.
This has been reflected in a stock market rally that propelled the National Stock Exchange’s benchmark Nifty 50 index to new records, up 80 per cent from its March lows. Foreign investors have also piled in, with inflows into Indian equities hitting an all-time high of more than $8bn in November, according to the country’s securities depository.
Stocks in the Nifty 50 are trading on a valuation equivalent to 22 times their forecast earnings over the next 12 months, according to a report from analysts at Nomura last month. They say that figure is 23 per cent higher than its average over the past 10 years.
Such valuations have raised concerns that the market rally itself is at risk of becoming overextended, as signs that India’s recovery is still tentative are lost in the broader bullish narrative.
A similar dynamic is at play with fast-food companies. There are undoubtedly strong growth prospects for the sector in India, as demand for protein rises with incomes and newly affluent middle-class consumers gravitate towards international brands.
Since the arrival of McDonald’s in the 1990s, US chains have reinvented their menus to suit local customs and palates. Many outlets steer clear of beef, which is taboo for many Indians, opting instead for vegetarian or spice-heavy recipes such as paneer burgers or chicken-tikka pizzas.
Deep pockets also help US chains gain share of India’s mostly fragmented food retail market. Covid-19 accelerated consolidation by allowing them to scale up deliveries, which rose 10 per cent last year even as the wider sector shrank, according to consultancy Technopak.
Yet with markets overflowing with liquidity and retail investors searching eagerly for a way into the rally, risks are getting lost in the noise.
For example: Burger King India is not profitable. Its franchise agreement with the global parent obliges the local owner, Singapore private equity group Everstone Capital, to nearly triple the current number of restaurants to 700 by 2026 or face termination of the agreement. However strong its prospects, such a relentless brick-and-mortar expansion looks ambitious, to say the least, in a post-pandemic world.
Analysts at Kotak Institutional Equities say the high valuations of most consumer stocks “leave little scope for any disappointment”. At current valuations, that could be true for the broader Indian market.