BURGER KING INDIA LTD (BURGERKI) Q2 FY22 Earnings Concall Transcript

BURGER KING INDIA LTD (NSE:BURGERKI) Q2 FY22 Earnings Concall dated Nov. 12, 2021

Corporate Participants:

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Prashant Desai — Head of Strategy and Investor Relations

Sumit Zaveri — Chief Financial Officer

Kapil Grover — Chief Marketing Officer

Analysts:

Nihal Jham — Analyst

Percy Panthaki — IIFL — Analyst

Rajesh Jain — — Analyst

Deepak Gupta — Nippon Life Insurance — Analyst

Rohit Balakrishnan — iThought PMS — Analyst

Jaykumar Doshi — Kotak — Analyst

Shirish Pardeshi — Centrum Capital — Analyst

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Burger King India Q2 FY22 Earnings Conference Call hosted by Edelweiss Securities. [Operator Instructions] There will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Nihal Jham from Edelweiss Securities. Thank you, and over to you sir.

Nihal Jham — Analyst

Yes, thank you, Tanvi. On behalf of Edelweiss, I would like to welcome you all to the Burger King India Q2 FY22 result update. From the management today we have, Mr. Rajeev Varman, CEO and Whole-Time Director; Mr. Sumit Zaveri, Chief Financial Officer; Mr. Kapil Grover, Chief Marketing Officer; and Mr. Prashant Desai, Head of Strategy and Investor Relations.

I would now like to hand over the call to Mr. Rajeev Varman for his opening remarks. Over to you, sir.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Thank you very much. Good afternoon everyone, and welcome to this call. I hope everyone had a very good Diwali, and things are looking upbeat now from here for us as well. I think the sales, revenues and also the people coming out into the malls have improved significantly in the last month. So that’s very good news for us.

I also wanted to take a minute, and you know, we forget to do this all the time. You know, really congratulate the Indian audience, the Indian population, the governments, central government, the state governments for probably one of the best vaccination programs in the world. I think they have done a tremendous job getting this population vaccinated. And just to update you on Burger King where we stand, we are about 84.7% vaccinated with double vaccines, and that’s about 97% of eligible candidates have already been vaccinated. So there is — the balance will be vaccinated within the next 60 days or so as they become eligible to get vaccinated. So that’s some good news from our side, as well as everything is moving in the positive direction.

I just wanted to remind everyone what our goals are and we continue to do this on every call. As we are a growth company, you can appreciate that we started building our restaurants about seven years ago. November 9 was the first restaurant that we opened, and this was in Select City in Saket, and then we continue to build restaurants. So in the last seven years, what we have done is, build this portfolio of 274 restaurants where we stand as of Q2 of this year. And since then, in October, we have build additional two restaurants. We have a pipeline. We have 20 restaurants in construction as we speak today. We have another 38 restaurants in the pipeline for a total of 20 plus 38 which is 58 restaurants. So we are on our journey towards our target of being at 700 restaurants by December of 2026. So that journey continues as we move forward.

Just a little top line on numbers, and then Prashant and Kapil and Sumit will provide more color on these numbers. But I just wanted to share the top line on Q2. We ended up with INR245 crores in sales, which when compared to Q1 at INR149.7 crores, that’s a 64% increase in revenues that we saw quarter-over-quarter. And if you look at the recovery of the sales, 95% recovery versus pre-COVID numbers, this is the year, F ’20, so a good catch up there. The 95% is grown to 101% in October. So it’s continuing to grow in the positive direction. Now this 95% recovery has two elements in there. The delivery recovery is 165%, and the dine-in recovery is 65%. Dine-in recovery continue to go positive direction in October. We recovered 74% — 65% to 74%. And then, if you look at the delivery recovery, it stayed steady at over 160%. So that’s the kind of recovery we are excited about. We are looking forward to continuing that and we have had a good month so far moving into this month as well.

Region wise also, as we do every call, we just kind of update you on region wise as well, and then Prashant will show more color as we go through those slides. But region wise, the West is recovered at 114%, South and East is at 109%, and North recovery is sub 100%, it’s at 92%. And the reason for that is, a significant portion of our portfolio in the North sits on these metro stations, and that recovery is now slowly coming back as the metro stations are opening up. In fact, as of last week, several gates of metro stations have started opening up. So we should see that recovery also go north of 100%. So that’s just a little bit color on the revenue part of it.

And as we have outlined our GP goals, I just wanted to throw a little color on GP as well. GP from Q1 to Q2, we moved it up by 20 bps. Now you can appreciate that there is a lot of headwinds with commodities, but despite those headwinds from commodities and increase in prices, there are a lot of efficiencies that we are bringing in through volume, as well as through our proper structuring of our buying. So those offset all the headwinds and actually give us a positive improvement on BP — on GP. So that’s 20 bps putting us at 65.4% gross margin for the quarter. EBITDA, again, I’m giving you post-Ind-AS numbers. EBITDA at the restaurant level was INR40.7 crores, and company level EBITDA was at INR25..6 crores. So those were the two numbers I want to share with you.

Growth, I’ve already shared, the journey continues towards 700, 274. Two restaurants we opened in this previous month. So that puts us at, currently as we sit at 276. We have a tremendous pipeline. Lot of our restaurants that will open out of this 58 that I gave you, which is in construction, as well as in the pipeline. 25 of those restaurants have drive-through. And we spoke to you last time about shifting our strategy to build as many drive-throughs. So we have started off that with building up a pipeline of 25. High street locations 21, food court units is five restaurants, and then more like transit five and two. So that adds up to your 58 restaurants that you’re looking in terms of moving forward with that as well.

Now just a word, obviously, you’re all aware of our bid to acquire the Indonesian Burger King business over there. We have submitted a binding offer to acquire 83% stake in the entity there at $183 million. This was accepted by the company there, and now the process of financing it and closing that will start, and we will progress that on a speedy basis.

Then Kapil will take some time to talk to you about the BK App, I think we are extremely excited about the BK App. We have made tremendous progress in terms of downloads, in terms of, you know, our portion of delivery as we have told you that we would like to take the delivery business, wherein along with our aggregators, we continue to build the Burger King delivery business. So he will share and throw color and show you how that progress has happened on the BK App business, but extremely excited. Overall, we had more downloads. Last time we reported to you about 1 million. We have improved that by another 50%. So that will be shared by Kapil as he gets into that.

And now a very exciting news. You know, last time I shared with you that we would be launching BK Cafe in the fourth quarter, and then build 75 in the next year — next fiscal year. I’m very happy to report to you that we were able to pull that forward. We have soft launched our first BK Cafe in Churchgate. And this is cafe up and open. I invite each one of you to go, visit that location if you’re in the Bombay area. And we will continue to test different products there, we are continuing to look at different things and move that to a steady growth number. We also have 10 other BK Cafes in construction as we speak today. So that’s — that BK Cafe construction and that growth strategy is in place.

So with that said, you know I’m going to quickly hand it over to Prashant, who will carry you through the first leg of the presentation, and then we will go over to Sumit for the financials, and then Kapil will take you through all the strategy session on the marketing.

So over the — over to you, Prashant.

Prashant Desai — Head of Strategy and Investor Relations

Thank you, Raj. Welcome everyone. Before I take you through slides five and onwards, just one point for people who probably are joining the second quarter call, who were not there in the first quarter call. If you guys recollect, we had told you that we will measure ourselves against our guidance of maintaining our ADS what we did in FY ’20. And our FY20 ADS was INR110,000 per day per store. So a lot of the numbers that my colleague and I will share, keep that in mind, that is — these are all comparable to the FY ’20 ADS, and we’ve done this to make life easy for both you and us.

Slide number five talks about our ramp-up plans. Raj mentioned that we want to go to 700 as per our MFDA by December ’26. ’22, the number was 320. We are reasonably confident of touching that number. FY ’23, our guidance today, we will go to 390, and as Raj mentioned, if you add the 58 where we have visibility, we are already at about 330 to 335. So we are on track to deliver that 390 number as well. And then we take this for 390 to 470 in FY ’24, and then finally to 700 by December of ’26.

Quickly a small business update. What we have done is on, Slide 7, presented to you are ADS trades. To just give you a sense in terms of how the business got impacted on the first wave and then in the second wave year wise and quarter wise. So if you look at it, in quarter one last year, we had ADS of only INR35,000, which then this year went up to about INR74,000 rupees. If you match this with our second quarter number, the recovery was much better. So from INR112,000 we recovered better from INR35,000 to INR56,000. And as we had presented — as Raj mentioned, we are now on an overall basis for the quarter two at INR104,000 rupees.

But if you look at the October number, we’ve already crossed our FY ’20 ADS of INR110,000. We are now at INR111,000, with the festive period now continuing, December and January are two big months for us. So we are looking forward to the next three months in terms of our business.

Giving you the breakup of where the delivery and the dine-in business tax up today. We’ve made decent recovery from where we were in Q1 in terms of our dine-in business, from a 28% dine-in contribution, in Q2, the dine-in contribution moved up to 47%, and this has further moved up to 52% in October. As malls open up, as multiplexes open up, we’ve seen significant amount of anecdotals overruns on the success of Sooryavanshi film. A lot of our food courts have reported very, very strong robust performance. So we see the dine-in number going up significantly in this current quarter, and as Raj had mentioned previously, our long-term trend is, we see dine-in business will be over 60%, 65% of our business.

In terms of recovery, if you see, the dine-in business made a recovery of 65% for the quarter, but for October, this has moved up further to 74%. One interesting thing which we saw the trend last quarter and this quarter, despite the dine-in recovery growing, you will actually see that delivery recovery is still probably grow. And if you look at the quarter one versus where we stand in October, the dine-in recovery has moved up from 32% to 74%. And delivery has actually not dipped, but delivery recovery from 157%, even today stands at 162%. So overall, the businesses is looking very strong and very robust.

Coming to Slide 9, just to give you a sense, our Pan-India ADS recovery, in October, we’ve crossed 100% threshold, and now we are looking at bettering that number. Raj already mentioned our recovering on the regional basis. He also mentioned that North the recovery is kind of lagging because of our locations of the metro sites, but as the country opens up as more people start using transit, we are hopeful for a much swifter recovery in North as well. West continues to do well in terms of recovery. What I will do is, I’ll quickly now hand it over to Sumit to just quickly take you through our operating and financial performance for the quarter. Sumit?

Sumit Zaveri — Chief Financial Officer

Thank you, Prashant. I’ll quickly summarize the financial performance, the parameters have already been discussed by Prashant and Raj. At an overall level, from revenue perspective, we did a revenue of INR245 crores as compared to INR149 crores that we have done in quarter 1, so it’s 64% quarter-on-quarter growth. Our concentration has always been to keep improving on the gross profit side. And in spite of some of the headwinds that we saw on the inflation on the cost side, we still kind of achieved a 65.4% of margin improvement in the gross profit for the quarter.

As we’ve kind of started to gain — gain momentum on the revenue side and continue to improve, our revenue to get to normal state and beyond, we have also started seeing the efficiencies of scale to start getting reflected in our cost side as well. And as you can see, employee lying, kind of, looking at 10%, and other fixed costs and other expenses on store also improving by 4%. There is an element of rent benefits in both the quarters, but even after adjusting for rent benefits, the fixed cost and other cost line items would still have focus on the last improvement or reduction as a percentage to revenue.

And then again, general and administration expenses continue to kind of get the — gain the benefit of scale, improving from 9.7% to 6.2%, with the company EBITDA on a 14 days business for the quarter standing at 10.4%. We certainly seem excited with improvement in performance that we have seen. But obviously, this is something which is just the first step and as we continue to improve further, we should see the improvement in quarters to come as well.

So with that, I would just hand it over to Kapil to take us through the marketing updates for the quarter.

Kapil Grover — Chief Marketing Officer

Thanks, Sumit, and very good evening to everyone on the call. The last quarter, as you saw, we’ve seen a very good improvement in sales recovery, especially dine-in recovery. So as the lockdown eased off and the vaccinations increased rapidly, we saw this as an opportunity to go back on media and start to drive awareness and recall for the brand. On the last call, I had shared with you that we had soft launched a new INR50 Stunner Menu, which is a value campaign. July through September, we continue to build that with a multimedia TV and digital campaign, a fair share of digital media investments on this campaign given the changing consumer preferences. And consumers have continued to give us fantastic response. It was a five-week campaign, and we saw a lot of positive response around innovative products like ticket waste, Volcano, and very good trials. In fact, one in every three customers tried at least one product out of the Stunner Menu. So that’s a good start. It’s a long-term value strategy for us. We’ll continue to build that in the coming quarters.

Moving to slide number 14. Whopper, which is our most differentiated and signature product. We continue to focus on that and build awareness around that, not just through media, but also through fantastic social media campaigns. Whopper Fridays, which is a big property for us. We engage with social media influencers every weekend and get their feedback and comments on our products. This quarter, we launched Peri Peri Whopper, which is our way of driving excitement with the Whopper loyalists. And right now, there is Boss Whopper in the stores. That program also continues to build the Whopper franchise. In fact, over a year, we’ve increased our Whopper volumes by almost 100%. So that’s a good response from consumers to our signature product.

That brings me to slide number 15. As Raj spoke about the ad campaign, now the cricket season, which was the last quarter, was the perfect opportunity for us to engage with our customers digitally and focus on the BK App. We launched a very interesting tech-based campaign to drive BK App installs and usage. So what — and just to give you a snapshot of what that campaign was, this was an augmented reality based campaign, whereby the user had to use an AR filter and catch virtual coupons during live cricket action.

So as you’re watching live cricket, through that BK App camera filter, whenever there is a six or a four or a wicket or a run, you will actually see virtual coupons popping on your mobile screen, which you can redeem in next 48 hours exclusively on the BK App. In every match, we will change the offers to generate excitement and keep the consumers engaged. This program drove a lot of excitement and buzz with our consumers. We actually saw more than 9 million impressions and over 50,000 game plays through this program. As you heard Raj speak, quarter-on-quarter, our App sales grew by over 60%, and our App installs grew by over 50%.

Now I’m on slide number 16. We’ve spoken to you about this strategic initiative, the BK Cafe. I’ve told you last time as well that this is our way of driving an incremental occasion, driving more frequency with our customers. We have been able to manage — manage to prepone this launch on 9th of November we opened our first BK Cafe at Churchgate, Mumbai. This cafe has a range of hot and cold coffee-based beverages, non-coffee shakes, savorite and sweet, food items. We will create — tried to create a very unique customized menu for our customers to come and try these products. And as Raj mentioned, we welcome you all to come and try this whoever is in Bombay to come and try, and give your feedback. And we will already have 10 more cafes in construction. We are well on track to open 75 more cafes by FY ’23.

So just to summarize, we stay focused on our four key pillars. Value strategy led by Stunner Menu to drive traffic, strengthening the Whopper franchise, and thereby strengthening the brand Burger King, building the BK App platform, and now scaling up BK Cafe to drive incremental location in top line for the business.

At this point, I would hand over to Prashant to talk you through the future outlook.

Prashant Desai — Head of Strategy and Investor Relations

Thanks, Kapil. Our outlook continues to remain the same that we had shared with all of you last quarter. So the store outlook I mentioned, that’s our guidance on store — SSSG guidance, and our gross profit guidance which is 68% for FY ’24.

With this, I’ll open up the floor for any questions that you may have. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Percy Panthaki from IIFL. Please go ahead.

Percy Panthaki — IIFL — Analyst

Hi, sir. Just one clarification, maybe I’m reading the numbers wrong, but I’m a little confused. On Slide 3, you have written that there is a sequential revenue growth of 64%. So Q2 versus Q1 of 64%. And on Slide 5, I see that the number of stores between Q1 and Q2 is only some four or five stores have been added, 270 going to 274. So that’s not a major driver of this 64% growth. And even if I look at your ADS recovery, that’s recovered from 95% to 101%. So what is driving the 64%?

Sumit Zaveri — Chief Financial Officer

So Percy, if I can kind of take you to slide number seven, that would kind of help you understand the number. So first, yes, observation on the store count, you are right. We added four stores in the quarter. So effectively, the growth has come to us through in-store sales growth. It’s moving from INR74,000 average daily sales per store in quarter one to INR104,000 average daily sales for quarter two. So for you to look at the growth, I would suggest you look at it from the perspective of Slide 7, INR74,000 moving INR104,000.

Percy Panthaki — IIFL — Analyst

But that INR74,000 to INR104,000 is about a 40% growth, and your overall sales growth is 64%. So what explains the balance?

Sumit Zaveri — Chief Financial Officer

And also, you know there were these operational difference between quarter one and quarter two, because there were certain closures that was there is quarter one. So that is also playing a role there.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

And by the way, the 101% that you’re seeing, that’s the October number. So we always give the month that we have completed after the quarter. So the 101% is the fourth —

Percy Panthaki — IIFL — Analyst

Comparably 67% to 95%.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

That’s right. 67% to 95% is the number you need to compare. So when you compare those numbers, add the fact that the ADS has gone from 74,000 upwards and add the ops days — additional op days. You will see that that all adds up to that, yeah.

Percy Panthaki — IIFL — Analyst

So basically the 74,000 number is only for the days which were actually operational.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Yes, sir.

Percy Panthaki — IIFL — Analyst

Okay. Okay. Got it. Got it. Secondly, I just wanted to understand the cafe initiative and how much of a upside on a per store basis do you see the cafe giving you, assuming, I mean, once it is matured in that particular store?

Sumit Zaveri — Chief Financial Officer

Just give us some time, Percy. As we had mentioned last time, right, just give us at least six months to get this piece stabilized. I know we are all — we are also eagerly awaiting what the ADS from cafe incremental is going to be. It’s a high margin product. We are just a few days old in this business. Just give us some time, we’ll come back to you with that. All we can say is, yeah, we are extremely excited. We feel we have a significantly differentiated offering. The way we have designed the cafe, our menu offering, both on the coffee side and on the snacking side. We are testing this month. We will — currently one store going up to 10 stores very soon. By end of the year, we’ll will have probably some guidance to come back to you.

Percy Panthaki — IIFL — Analyst

Right. And on the Indonesia, now that you have made a bid for the business. Can you give a little more clarity on the numbers? So two numbers are required. One is, what is the Ind-AS 116 or rather the IFRS adjusted EBITDA margins for that geography? And secondly at the net profit level, what is the profit or loss of that business?

Rajeev Varman — Chief Executive Officer and Whole-Time Director

So Percy, we will take this offline with you, if you will probably reach out to me. I’ll share those details with you.

Percy Panthaki — IIFL — Analyst

Okay. Okay. And just one more help. This slide number 11, the restaurant EBITDA margin that you report, that is on a pre-Ind-AS — I mean, taking the full rental into the EBITDA?

Sumit Zaveri — Chief Financial Officer

No, that’s on a post-Ind-AS basis, Percy. So the numbers that we are reporting as we were being discussed during our last quarterly call as well. So we would be sharing the numbers on a post-Ind-AS basis.

Percy Panthaki — IIFL — Analyst

So any rough ballpark as to how much percentage point should I sort of deduct from that to arrive at the pre-Ind-AS numbers?

Sumit Zaveri — Chief Financial Officer

About 7%.

Percy Panthaki — IIFL — Analyst

About 7%. Okay. Okay. Thank you.

Operator

Thank you. [Operator Instructions] Next question is from the line of Rajesh Jain, individual investor. Please go ahead.

Rajesh Jain — — Analyst

Yeah, good evening to you all. First of all, my congratulations to the entire team for turning out fantastic results. I’m amazed at the growth and — not only in EBITDA and revenue and net level, but also maintaining the total growth. I have one or two questions. One is, finance cost seems to be around INR37 crores every quarter. Is this something being done to control the cost?

And the second thing is more like a suggestion that going forward please maintain the quality you have and the customer experience rather than like McDonald’s, which has become the factory and without any — without any sort of attention to the customer experience as such?

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Thank you, Rajesh Ji for those kind words. Rajesh, my colleague Sumit last time mentioned that the finance cost that you are seeing is because of the Ind-AS adjustment. We don’t have any debt on the books. We have surplus cash sitting on the books from the IPO. So if you are worried that finance cost is — as an interest cost, it is not. So just wanted to leave that on the table. It’s purely an accounting entry because of the Ind-AS basis. And yes, I will pass on your feedback to all my colleagues in terms of you liking the product, and thank you for the same.

Rajesh Jain — — Analyst

Thank you.

Kapil Grover — Chief Marketing Officer

Just on the operations, we assure you that even in the last quarter, we continue to be leading in terms of operations in the Burger King system among the top few countries globally in operations and we will never drop that. We have a very strong operations team led by our leader, Cicily Thomas. And while we continue to balance our business between delivery and dine-in business, which is now recovering, I think we have done a fantastic job continuing to do that. There is a lot of room for us to continue to improve.

So I think we are in the mode of improvement versus any kind of a deterioration that anxiety — that our business will deteriorate. We are still in — we still have headroom to improve our business, improve our service, improve our delivery service. We just started our delivery service with our e-scooters. So we are — we have already acquired around 100 e-scooters. We are in the process of acquiring another 250 to 300 e-scooters. We have spend a lot of money in terms of packaging, developing up a significant money into — developing good packaging to carry our food to the restaurants, bags, boxes, wrappers, you name it. So a lot of investment going on there.

But also, you know, we spoke about this a couple of quarters ago that we have invested a lot of energy around getting the way our restaurants are built so that we can have a very good ease of delivering our food, you know. And so, we have a channel, we have a bench set up for — constructed a bench in the kitchen for delivery business. The delivery boys come from the site, they go through the window, they pickup the order. So a lot of technology has gone into this as well. And you will continue to see that we will work very hard, not only to improve our dine-in experience that — thank you for acknowledging the work that we’re doing there, but also on the delivery side, we will continue to put the emphasis on improving delivery business as well. Thank you for your question.

Operator

Thank you. The next question is from the line of Deepak C. Gupta from Reliance Nippon Life Insurance. Please go ahead.

Deepak Gupta — Nippon Life Insurance — Analyst

Hi. Thank you for taking my question. If you could perhaps just give us some information on what was the SSSG growth for the quarter? And on two-year basis what the SSSG growth would look like?

Sumit Zaveri — Chief Financial Officer

Sorry SSSG growth and —

Deepak Gupta — Nippon Life Insurance — Analyst

On a two-year basis, on FY ’20 base what was SSSG growth for the current quarter?

Sumit Zaveri — Chief Financial Officer

Sorry, you want FY ’20 versus FY ’19.

Deepak Gupta — Nippon Life Insurance — Analyst

Yeah I wanted — what is for the current quarter FY ’22 — Q2 FY ’22 versus Q2 FY ’21, and Q2 FY ’22 versus Q2 FY ’20?

Sumit Zaveri — Chief Financial Officer

Okay. For Q2 and Q1, it was 62% for Q2 — Q1, okay.

Deepak Gupta — Nippon Life Insurance — Analyst

And on a two-year CAGR basis if I compare Q2 FY ’22 with Q2 FY ’20?

Sumit Zaveri — Chief Financial Officer

Q2 FY ’20 versus — FY ’22 versus ’20.

Kapil Grover — Chief Marketing Officer

[Speech Overlap] FY ’20 versus Q2 FY ’20. So Deepak if I can answer that question, you know if I could kind of draw your attention to slide number 9 of our presentation. When we effectively say that the recovery for quarter two is at 95%, this is with reference to FY ’20 numbers, pre-COVID numbers. And it would translate to an SSSG of minus 5% for quarter two, vis-a-vis, FY of ’20. FY ’21, since it was honestly substantially impacted by COVID, we are literally kind of looking at trying to go back to pre-COVID levels. And hence we are looking at the numbers in that manner.

But if you — if I can draw your attention to number differences we did in last year, which is FY ’21, our September quarter, we did a revenue of INR110 crores against that we are at INR250 crores. So hence for us, the way we want to measure it is effectively to say that how do we compare ourselves to pre-COVID levels.

Deepak Gupta — Nippon Life Insurance — Analyst

Sure. Yeah, that’s very clear. So I’m taking this question a bit forward, you know you have given a forecast of 5% to 7% SSSG growth for FY ’23. Given the fact that you have extremely low base in FY ’22, because of H1, the only thing, there is a chance of potential upside on FY ’23 numbers given that if things normalizes and if COVID wave three does not happen. Do you see an upside potential to your SSSG focus?

Rajeev Varman — Chief Executive Officer and Whole-Time Director

It’s a fair observation, Deepak, and this question came up several times last quarter as well. What we told is, yeah, first, let us come up to speed with where we were before COVID hit us, which is now, seems in October we’ve recovered that ground. Let us spend this November, December, January, which are relatively big months for us at Burger King. And when we come back to you with our December numbers or March numbers, we will probably look — relook at that guidance but as of now, we want to stay at that 5% to 7% guidance. And this is — Deepak, 5% to 7% over 110,000 of ADS.

Deepak Gupta — Nippon Life Insurance — Analyst

Okay, it’s on FY ’20 numbers. Okay, you’re talking about that. Understand. Okay. And secondly, Prashant, you know on Burger King Cafe, now I believe that Churchgate outlet was a dine-in outlet which has been converted into a Cafe. So going forward, are you looking to convert some of your flagship dine-in outlet to a Cafe concept. And what could be the capex involved on the same?

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Yes. Sorry, this is Raj. No, no. We — so we have a cafe within — its a shop in shop, right. Our Burger King in Churchgate is a magnificent restaurant. It’s got a very large lobby, a lot of seating inside, a lot of seating outside in the patio area. So it’s a significantly large restaurant. So we have put a cafe on the left side of the restaurant, and it’s kind of an island cafe as we are calling it. It’s got all the bells and whistles. If you go and look at it — we continue to actually to learn and kind of make changes as we go. And that’s why we have only got 10 restaurants in construction to — the cafe constructions. As we want to make sure that we — you know clean out all the issues that we might — potentially might have. So that process is anywhere from now to end of December, but we should be opening another 10 cafes very soon, and those will include all those improvements that we do make in Churchgate.

Now the capex that we are looking at, we have three different models that we’re building of the Cafe. We are calling it just A, B, C, and you will find that — the one that is A, which has all the bells and whistles anyway around INR25 lakhs or so will be the cost. Again, this is a — it’s just preliminary numbers, because what we are — what we will do is, we’ll find efficiencies once we have finalized the cafe model and how we’re going to execute it. And then we have B and C which are lesser versions of that, which will cost us much less. We haven’t built those versions of it yet. Once we build the first few versions of it, we will start advising probably towards the Q1 of next year on proper numbers on this and it will be a responsible way of doing this communication out to our investors. And I think if you can just bear with us and have some patience, we will give you some good numbers and we will be able to give you some hard form numbers in that first quarter, yeah.

Prashant Desai — Head of Strategy and Investor Relations

Deepak, just to kind of add to what Rajeev said, Deepak, all our BK Cafes are going to be part of our Burger King store. So it’s not that we are going to be setting up standalone cafes. So from our existing stores wherever we believe there is space and an opportunity, we will convert a part of that store into a BK Cafe. All the new stores that we are signing, most of them will come with BK Cafe. So it’s not that we’ve kind of completely booked the Burger business out as setting up a cafe. So that’s the only other thing that I wanted to add.

Deepak Gupta — Nippon Life Insurance — Analyst

Sure. I understand that. And just on the last question on the Indonesia acquisition, given the fact that now the Board has approved the acquisition. What are the timelines are we looking at and how would the — how will the funding of this acquisition takes place? Thank you.

Prashant Desai — Head of Strategy and Investor Relations

So funding, Deepak, will be at equity fund raise. We’ve just finished submitting the final bid. Our view is — we should be able to complete the transaction before the end of the financial year. It could either be a preferential or a QIP.

Deepak Gupta — Nippon Life Insurance — Analyst

Sure. Okay. Thank you so much.

Operator

Thank you. The next question is from the line of Rohit Balakrishnan from iThought PMS. Please go ahead.

Rohit Balakrishnan — iThought PMS — Analyst

Yeah, hello. Am I audible?

Prashant Desai — Head of Strategy and Investor Relations

Yeah, Rohit.

Rohit Balakrishnan — iThought PMS — Analyst

Yeah, hi. So couple of questions were already answered. My questions also in terms of the timelines, that’s already been answered. So in terms of this mix in terms of dine-in versus delivery, so we have now reached close to 52%. So I mean, given how things have been in the last two quarters with COVID and stuff, so how do you see, I mean — once we return to normal, what kind of mix do you envision? Is there any thoughts around that? That was one.

And just related to this is that, if you done anything differently to also increase your delivery mix going forward as well. I mean, is there anything — I think Mr. Raj mentioned something in his previous answer. If you can give a bit more. I mean, is there any investment or is there any change with the menu or anything else that all kind of food is more amenable to deliveries or that is not the case, it’s pretty much amenable to deliveries even now. So something around that would be very helpful.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Thank you, Very good question. So let me try to answer that. So we actually have addressed this in the last call, you know several things, right. It’s not just about the food, the packaging, the delivery vehicles, the carry bags, the process technology right. So we have handled — this is all that — the whole delivery experience has all these elements in it. And so, we have done a — not a complete job. We have done 90% of the job on packaging, we continue to tinker it a little bit to get it to the end result.

You will find that the menu is not only already been modified or will continue to be upgraded towards more delivery friendly kind of products and our marketing department along with their entire team is working on that in terms of getting that to a point wherein those become very delivery friendly products. So those are in the process and moving along. But also the efficiency of getting the products, so technology is extremely important. As in you know, when someone places the order, how quickly that is turned around and the products on the scooter. So that technology has been — a tremendous amount of work has been done. I think there we have made tremendous improvement, and I think we are there in terms of the efficiency over there. We are very proud of that.

Our marketing team and technology team have worked together, and they’ve done that. So these elements are all coming together. See, we are probably delivering one among the highest number of orders per day right now in this country as a brand. So we couldn’t be doing that unless we were doing a good job on it. And I won’t flash any numbers here, but I’m extremely proud of the kind of numbers we are throwing in the Burger King system as well, we are among the top few countries doing deliveries worldwide globally. So that kind of magnitude of work has happened. And this is by the way, we never kind of stop. We continue to improve that and you will see those improvements coming as we move forward.

What was the other question, Prashant?

Prashant Desai — Head of Strategy and Investor Relations

Delivery, dine-in mix.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Delivery, dine-in mix. This is something that Prashant actually answered the last, you know when he did the — his piece of it, which is we see this coming back very close to where it was previous to COVID. You know, there might be a 5% plus or minus shift, most probably the plus shift that we would see. But I think the landscape has changed dramatically. Today, if you look at what’s happening with the organized businesses, right, there is a significant closure of unorganized businesses, some very permanently. And you don’t see the figure in the aggregators menus. So you find that a lot of sales has shifted towards you know the organized sector, especially the sectors that are at chain restaurants.

And then, you will see the similar activity coming down on the dine-in business as well as the neighboring, you know many restaurant, mom and pop restaurants have disappeared from the landscape. So what you will see is a gradual growth of both those businesses. And hence, if you see a bigger pie, the pie will still land at where it was pre-COVID, which we think is going to be closer to 65%-35% and a few points up or down. So that’s where we see this moving forward. We are at about 52% as you can see from that graph.

We kind of — you know in Q1, we’re sitting at 28%, we climbed to Q2 47%, and we’re sitting at October ’21, we’re at 52%. And it continues to grow. Still the colleges are not open, the schools are not open. There was just a one release, a movie just recently as Prashant was saying, Sooryavanshi. Once that starts — people start visiting the malls, they go into the food courts, they watch the movies, you will find that the dine-in business will continue to grow the pie.

I think what’s important is, if you look at the graph, the graph that’s on page number 8, you will find that while we continue to gain on the dine-in business and continue to grow on that business back towards original numbers, we’ve stayed put on a very high delivery number at 160% of pre-COVID numbers. So if that stays where it is or drops very slightly, you’re looking at a much bigger pie and a much bigger business going into the next year.

Operator

Thank you. [Operator Instructions] The next question is from the line of Jaykumar Doshi from Kotak. Please go ahead.

Jaykumar Doshi — Kotak — Analyst

Yeah, hi. Thanks for the opportunity. A very simple bookkeeping question. Now when I look at your 4Q FY ’21 numbers, reported EBITDA margin was 12.5% and underlying EBITDA margin, excluding Ind-AS 116 was 0.2%. So there was a difference of 1,200 basis point. That difference has narrowed to 700 basis point in the current quarter. Did I understand it correctly?

Sumit Zaveri — Chief Financial Officer

Yeah. So Jaykumar, yes. The adjustment on account of rent between pre and post-Ind-AS effectively stand there. Prashant was talking about in the region of around 7%. When you try and do comparison with the periods which were impacted by COVID, the numbers could look different, because of the adjustment of rent reductions and all were done on the rent lines and all. But as Prashant was talking about, yes, the numbers that you are seeing of 7% is the correct number what Prashant was talking about earlier. The difference —

Jaykumar Doshi — Kotak — Analyst

Please, if I’m to assume that this number is now stabilized at 700 basis point in the coming quarters.

Prashant Desai — Head of Strategy and Investor Relations

See, it should remain in the range of that 7% to 8% range, I think. So some of our rent concessions that our development team has worked on are long-term kind of rent reduction, somewhere around a two-year basis, and so forth. So you will find some movement on it, but not significant.

Jaykumar Doshi — Kotak — Analyst

Understood. This is very helpful. Thank you so much and best wishes for BK Cafe. Thank you.

Sumit Zaveri — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Shirish Pardeshi from Centrum Capital. Please go ahead.

Shirish Pardeshi — Centrum Capital — Analyst

Hi, Prashant. Hi, sir. Good evening, and thanks for the opportunity. I have two questions. The first question is on the gross margin recovery. I think it’s heartening to know that you are inching up, but it’s fair to assume that the recovery which you have reported more than 100% and the normalization which is there on the card. Does that mean that, even if we open — openings for Burger King Cafe, our gross margin should remain in this range or there is some more room for squeezing and taking it up to maybe 67%, 68% in next two to three years?

Prashant Desai — Head of Strategy and Investor Relations

It is, right. And we’ve actually gone ahead and Shirish guided that right. We believe that, by FY ’24, excluding the Cafes, we definitely want to touch a 68% which is why we probably are the only company in this space which are actually giving guidance on gross margin side, because for us, the health of the business is very closely linked to the gross margin. That’s the quality of our business and operations we’ve had. And we are kind of shouting it out that we want to go from 66% by the end of this year to 68% over the next 24 months without the Cafes.

Shirish Pardeshi — Centrum Capital — Analyst

Okay. One quick question on Cafe. I don’t want to say per se, share out the details, but any assumptions, any target, margin, gross margin, IRR, any qualitative information you can give, and this is from the modeling perspective I’m asking?

Prashant Desai — Head of Strategy and Investor Relations

I tell you. So if you structurally see and you just don’t need to look at us, if you look at the comps, some of the guys have now reported the gross margins are doing on the coffee side of the business, it ranges from anywhere between 70% to 80% is the range from a gross margin perspective. ADS is something that, as I mentioned, give us some time, we’ll come back to you what numbers we can do. Depending on what kind of ADS numbers you deliver, your payback may stretch from three months to about a year, that’s the maximum. So if we are very lucky and if we kind of do great business of the Cafe in day 1, my payback will be less than three months. If it kind of takes time, it will still be under a year. So that’s what we can share currently.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Yeah. We will start, I think, on these numbers in the Q1 of next year. So after Q1 of next year, in the first quarter, meaning that, we will have to start guiding you on how the progress is. By the way, we will still have only 30, 40 restaurants by that time on the ground, but we’ll start kind of firming up the numbers and sharing and strategizing around it. But without those numbers, we’re still kind of looking at a positive growth on the gross margin side.

Shirish Pardeshi — Centrum Capital — Analyst

So I assume that you open 70 stores say in next 18 months. So is it fair to assume that it will have a significant contribution to our revenues or it [Speech Overlap]

Prashant Desai — Head of Strategy and Investor Relations

We will predominantly, at least, till FY ’23 and ’24 be a Burger business. So it will be incremental in nature for sure, but is it that Cafe will be 25%, 30% of our business in next 24 months, the answer to that is, no.

Shirish Pardeshi — Centrum Capital — Analyst

Thank you, Prashant, and all the best to you and the team. Thank you.

Prashant Desai — Head of Strategy and Investor Relations

Thank you.

Operator

Thank you. The next question is from the line of Chinmay Gandre from Reliance Nippon Life Insurance. Please go ahead.

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Yeah. Thank you for taking my question sir. Sir, my question is on the rental concessions. So basically, last year we would have got some waivers, but obviously some would have been for the year itself and some would have — could have be on a sustainable basis. You know, I wanted to understand like suppose pre-COVID, we were paying INR100. So on a sustainable basis, how much that — this cost has come down to?

Sumit Zaveri — Chief Financial Officer

So Chinmay, first of all, remember, we are now getting closer to the normal levels of rentals. So if you really look at the performance for quarter two there, we are now more or less kind of over that period and the rentals that won’t be pre-COVID levels, we will start. The benefit that we will still see as far as the rental lines is concerned is the benefit of expansion of revenues that we would effectively kind of start getting through quarter three and quarter four where we will see the broad basing of the rental line over a period of time. We expect that that should be anywhere between — could be in the region of around 1% or so.

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Okay.

Prashant Desai — Head of Strategy and Investor Relations

Chinmay, if I can answer the same question a little differently, maybe that will probably help all the listeners. So if you look at our current rent to revenue, Q2, it will be somewhere in the range of about 14% rent to revenue. As you know, the dine-in fix up, as you know, our SSSG kind of fix up and ADS grows, our view is over the next 12 to 24 months, you will see at least a 200 basis point of operating leverage coming on the rental side, probably that’s where you are coming from.

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Sure. Sir, my second question is on the store addition. I mean, this quarter the store addition seems to be on the weaker side. So I mean, even if I look at the competition — and how confident are we on the annual target which you have put it out at 320?

Prashant Desai — Head of Strategy and Investor Relations

So, it’s a fair observation. If you look at pure numbers, it will look on a weaker side, but which is why we shared with you where we are in terms of the number of stores that we are currently under construction, plus where we — we are already under negotiation and stuff like that. So we won’t disappoint you. We have so far never disappointed on the guidance that we’ve given and we don’t want to lose out on that. So we’re fairly confident we will give you the 320 restaurants that we’ve told you. This quarter is going to be a big quarter in terms of store openings, October, November, December. Let us open and then we will come back to you, but we will deliver the 320 and 390 number that we’ve shared with you.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Let me just reiterate, right, I mean, we have 20 restaurants right now in construction, right. So that gets us from 276 to 296, right. So 38 restaurants on top of that 28 restaurants that are in the pipeline, which will go into construction over the next 30 to 60 days, which will form the 320, in fact, we will have more restaurants in construction when we are at 320 continuing into next year, right. So we feel pretty confident that these numbers are achievable, and by — as Prashant was saying that in the last seven years, we have always delivered our MFDA numbers more, right. Every year, whatever commitments with our franchiser is we have always exceeded those numbers and we don’t look at kind of missing on those numbers in the future as well.

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

So basically — I mean — at the start of the quarter we were expecting around four or five restaurants will get added and this is how we had kind of blend it out or because of COVID or some of the issues there has been some postponement in terms of the quarterly additions?

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Yes, see. That’s why I gave the breakdown because people need to understand. 25 of these restaurants are drive-through restaurants. So you’re actually building up a whole building with a drive-through and the entire — it’s a complete real estate building build up, right. High street locations, 21, and then malls and food counters which used to be majority of our build two years, three years ago, is only down to five and five restaurants each. So only about 10 of those restaurants that are we going to build are going to be just fixed and open, right.

So that’s why we want to — again, we are very prudent in the way we open the restaurants. We continue to be a responsible real estate investors. We continue to do a responsible job when opening the restaurants. And we did have a whole-scale on pipeline. I think the last time I was on the phone with you, I told you there was 10 in construction. Today we have 20 in construction. We have opened six of them, two in October, and four before that. And then the other 20s will start popping in as Prashant said in this next two months. You will find a whole bunch of restaurants opening up, and then you have a significant amount of restaurants in the first quarter — in the last quarter or the first three months of next year, yeah.

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Sure. And sir, and my last question is, so pre-COVID, broadly how much percentage of our revenues used to come from mall stores?

Sumit Zaveri — Chief Financial Officer

We don’t share that data. If you want, Chinmay, we will separately share that with you.

Chinmay Gandre — Reliance Nippon Life Insurance — Analyst

Sure. Okay. Thank you, sir.

Operator

Thank you. We’ll take the last question from the line of Percy Panthaki from IIFL. Please go ahead.

Percy Panthaki — IIFL — Analyst

Sir, how much — what percentage of the days were operational this quarter?

Sumit Zaveri — Chief Financial Officer

Percy, when I share with you that Indo piece, we’ll figure — we calculate that and share it with you.

Kapil Grover — Chief Marketing Officer

This quarter though more or less we had — operational literally over 90%, 95% of fundings.

Prashant Desai — Head of Strategy and Investor Relations

But he needs that data.

Sumit Zaveri — Chief Financial Officer

We will share that with you.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Share that data.

Percy Panthaki — IIFL — Analyst

Okay. Okay. And secondly, just one clarification on this SSSG, which you are saying 5% to 7%. Now see typically when [indecipherable] companies say — let’s say 5% same store sales growth. That doesn’t mean that their average sales per store also increasing by 5% because the new store is opened at a lower level and they bring down the average. So how should I read this guidance of 5% to 7%? Is it on the total average — your system average of the stores, your ADA’s will go up 5% to 7% or will it — the ADS go up 5% to 7% for the stores which have remained operational for more than one year?

Rajeev Varman — Chief Executive Officer and Whole-Time Director

See, SSSG’s guidance on existing store, right, new store don’t have an SSSG guidance, obviously, you understand that, because they are new stores, right. So the old stores are the ones that have had a full 12 months of operation. They start comping and we have SSSG for those stores. The new stores ramp-up over time period, right. So they will not start at 100% of their ADS’ on day one. They kind of ramp-up, and like we have shared initially with you in the first call, I think many of our mall stores kind of start off and immediately pick up within the week or so they pick up to their ADS levels, whereas high street restaurants and drive-through restaurants take anywhere from 60 to 90 days to kind of, and then they continue to grow.

So they don’t ramp up and stop, and then that’s a flat matured sales. They continue to grow. Many of our restaurants even today, if you look at the Churchgate restaurant we are talking about, it continues to grow, and it will continue to grow year over year over year because there’s so much potential for us to build awareness, the awareness of our brand still continues to have a top empty portion that we can fill up, and there is also a lot of opportunities in terms of all these technologies and delivery vehicles that we are bringing in.

So you will find that ramp-up, will happen both at the drive-through restaurants, at the in-line restaurants, you will find that our restaurants up in malls will continue to grow at the 5% to 7% that we are guiding. Now look here, these are conservative numbers that we always — we do our due diligence and we want to make sure that when we speak here that those are numbers will absolutely deliver and beyond. And hopefully that we will have better idea towards the Q4 numbers. And if we have to revise our sales guidance then, we will share that with you at that time.

Percy Panthaki — IIFL — Analyst

Understood, understood, because it is 5%, 7% effectively would imply that at a system average level your sales per store would actually decline Y-o-Y, given the decent number of store openings, new store openings that you have planned.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Total revenues will continue to climb. They will not decline. They will continue to climb. ADS levels, you know we will discover those as ramp-ups. Even you have a portfolio of 50 restaurants and you build 50 restaurants, yeah, probably, you would be — you would decline. But when you have 270, 290, at that point, we’ll have 320 restaurants, and you build another 70 restaurants, the percentage of new restaurants impact to the whole portfolio is much smaller.

Percy Panthaki — IIFL — Analyst

Okay, sir. That’s all from me. Thanks, and all the best.

Prashant Desai — Head of Strategy and Investor Relations

Thanks, Percy.

Sumit Zaveri — Chief Financial Officer

Thank you. Percy,

Operator

Thank you. That was the last question. I now hand the conference over to management for closing comments.

Rajeev Varman — Chief Executive Officer and Whole-Time Director

Thank you everyone for joining us. Wish you and your family a happy Diwali and New Year, and look forward to connecting with you guys in the Q3 conference call. Thank you.

Operator

[Operator Closing Remarks]