Management discussion

and analysis

Indian economy

Markets that began reviving in 2013-14 gained momentum in 2014-15.

India's GDP grew by 7.3% in 2014-15 against 6.9% in 2013-14 and 5.1% in 2012-13. The growth is based on a new methodology of calculating GDP, with 2011-12 as the base year, as opposed to 2004-05.

The economy was relatively independent of the factors associated with usual economic slowdowns and evident in 2011-12 and 2012-13 - inflation, fiscal deficit, weak demand, external account imbalances and an oscillating rupee.

India's GDP growth is expected to accelerate to 7.5% in fiscal year 2015-16, which could reach 8% in 2017-18 on the back of significant acceleration of investments and favourable oil prices. - World Bank estimates.

India's growth was higher than China's 7%. The growth in the March quarter was in line with the advance estimates and the highest among large economies.

Industry overview

India's consumption growth story

From the average household meal in a small town to a fine-dining experience in a big city, India's food experience is changing as rapidly as the aspirations of its people.

The 2014 National Sample Survey Office report, (which provides an insight into India's consumption habits as of 2011-12) confirms that the share of cereals as a part of Indian household expenditures has decreased; Indians have been moving away from locally available seasonal vegetables towards high-value vegetable produce such as broccoli, cabbage, cauliflower and capsicum. Besides, the market for non-vegetarian products is expanding rapidly.

The shares of fruits and vegetables, dairy products and eggs, meat and fish have remained largely unchanged. The most substantial jump in intake consists of various hot and cold beverages, processed food like chips, biscuits, among others.

These changes highlight what is and what will be on our plates in future. As India's GDP is expected to increase 3x by 2020, the food consumption is expected to rise by 4% each year from Rs.11 trillion in 2010 to Rs. 22.5 trillion in 2020.

Informal Eating Out Industry (IEO)

Eating out has evolved from an occasion-driven activity to an occasion in itself. It has become a form of entertainment for consumers today. Urbanising double-income households, changing lifestyles and food brferences are spurring the organised market.

The industry landscape is dominated by various eating out formats - cafes, quick service restaurants, frozen dessert/ice cream, casual dining, roadside vendors and pubs, bars, clubs and lounges (PBCL). However, this does not include fine dining restaurants. Casual dining and quick service restaurants (QSRs) account for 70% of the organised segment.

Eating out is gradually becoming more of a norm for the majority. Families in Tier-I cities spend about Rs.6,000 annually on eating out, whereas families in Tier-II cities spend Rs.1,500 to Rs.2,000 annually. This spending is expected to grow significantly in the upcoming years.

A younger population, higher rate of urbanisation, larger disposable incomes, higher protein consumption, increased participation of women in the workforce, and exposure to western lifestyles are leading to an experimentation with and adoption of new dietary habits and more occasions to eat out for all levels of Indian society.

The Quick Service Restaurant (QSR) industry

Quick Service Restaurants (QSRs), also known as fast-food restaurants, feature fast-food cuisine and are marked by minimal table service.

The Indian QSR industry is one sector that has not collapsed under the twin stranglehold of increased price levels of goods and services and slow economic growth. Rather, it has grown aggressively at a rate of 25-30%. The Indian QSR industry has emerged as the fastest growing segment in the eating out market.

This growth reflects the changes transpiring in India in terms of lifestyles, food habits and consumption pattern of the population. The frequency of dining out, home deliveries as well as takeaways has risen and subsequently unleashed a plethora of opportunities for the QSR players.

The major reason for this increased brference is that the food in QSRs comes ready-to-serve. The systems and processes used are highly standardised. Even malls, food courts and multiplexes have become brferred destinations. Bigger restaurants are teaming up with small QSRs to create their own brands.

The entry of McDonald's in 1996 marked the beginning of the QSR concept in India. Many global brands have followed suit since then, either through company-owned stores or the franchisee model, or a mix of both. Over the past five or six years, many Indian QSR brands have mushroomed across the country, serving either foreign cuisine or adapting Indian cuisine to the fast food service format.

Even with a contribution of just ~2.3% to India's GDP, the market is pegged at Rs. 247,680 crore (USD 48 billion) and comprises franchised and licensed standalone players (quick service restaurants, full-service casual and fine dining restaurants, hotels, bars and lounges, cafes, and frozen dessert parlours) as well as unorganised players (dhabas, street stalls, halwais, roadside vendors, food carts, among others). The prospects for the segment look and bright and it has been projected to grow to Rs.408,040 crore (USD 78 billion) by 2018.

Western fast food in India

Western fast food chains are estimated to grow at 30% CAGR by end-2015 as compared to a 10% growth estimated for the overall sector in India.

WFF is a fast growing part of the QSR industry, rebrsenting about US$ 1 billion of the US$15.4 billion QSR market. The WFF category has been primarily driven by the entry of global food brands in India since 1996 and is one of the fastest growing segments within IEO. WFF is gaining wider acceptance from the Indian consumer and has witnessed high growth strides over the past 18 years, driven by a young population.

WFF is a fast growing part of the QSR industry, rebrsenting about US$ 1 billion of the US$15.4 billion QSR market. The WFF category has been primarily driven by the entry of global food brands in India since 1996 and is one of the fastest growing segments within IEO.

The factors propelling this buoyancy include the changing economic and demographic profiles of consumers in India and growing exposure to international brands and increasing awareness of global trends.

Factors catalysing sectoral growth

Income growth: About three times increase in average household income from US$6,393 in 2010 to US$18,448 in 2020

Increasing urbanisation: 40% population to live in urban cities by 2020, up from 31% in 2010. By then, India will have 68 cities with population of more than one million.

Youthful demographics: Every third person in an Indian city today is a youth. In about seven years, the median individual in India will be 29 years, very likely a city-dweller, making it the youngest country in the world. The population in the age-group of 15-34 increased from 353 million in 2001 to 430 million in 2011. Current brdictions suggest a steady increase in the youth population to 464 million by 2021.

Growing nuclearisation: Over 200 million households to be nuclear by 2020—with 25-50% higher consumption per capita spend

Company overview

Westlife Development Ltd (WDL) is a part of the B. L. Jatia Group and is engaged in developing the country's QSR industry through its wholly-owned subsidiary, Hardcastle Restaurants Pvt. Ltd (HRPL), which operates McDonald's restaurants in west and south India through a master franchisee arrangement with the McDonald's Corporation, USA.

Business overview

Hardcastle Restaurants Pvt. Ltd. (HRPL or 'the Company') operates in the QSR sub-segment of the informal eating out industry. In India, the fast food segment has benefited from increasing urbanisation and a growing young population, as citizens in the metros and urban markets adopt lifestyles that increasingly seek convenience, speed and value.

HRPL is a master franchisee, which operates McDonald's branded restaurants in west and south India. Under the master franchisee arrangement with the McDonald's Corporation, your Company is responsible for providing capital for all business operations, including the real estate interest. McDonald's Corporation offers technical, operational and business support. HRPL owns or secures long-term leases for all its restaurant sites to ensure long-term occupancy rights and to control related costs.

The Company generates revenues primarily from sales by company-operated restaurants.

At its restaurants, HRPL continuously develops and refines operating standards, marketing concepts and product and pricing strategies. This is done in a manner so that only those strategies are introduced which are most beneficial into the system to deliver a great customer experience and drive profitable growth. Your Company constantly focuses on customers by managing operations at the local level, including marketing campaigns and special offers, menu management and limited time offers and monitoring customer satisfaction.

In analysing our performance, the management considered performance-related and financial parameters (including comparable sales and system-wide growth).

Comparable sales (SSS) rebrsent sales at all restaurants operated by your Company, in operation for at least thirteen months, excluding those temporarily closed. Some of the reasons restaurants may be temporarily closed include reimaging or remodelling, rebuilding, road construction and natural disasters. The number of weekdays and weekend days, referred to as the calendar shift/trading day adjustment, can impact comparable sales. In addition, the timing of holidays also can impact comparable sales.

• HRPL reports on a financial year-basis and, therefore, the comparability of the same month, quarter and year with the corresponding period of the prior year will be impacted by the mix of days. The number of weekdays and weekends in a given timeframe can have a positive or negative impact on comparable sales. Your Company refers to these impacts as calendar shifts/trading day adjustments. Moreover, the timing of holidays has a considerable impact on comparable sales. These impacts vary geographically due to consumer spending patterns.

• System-wide sales include sales at all restaurants and at the two sub-franchised restaurants.

Strategic direction and key growth initiatives

McDonald's is the world's leading global food service retailer with over 35,000 locations serving around 70 million customers in over 100 countries each day, with system-wide sales of US$ 28.1 billion. More than 80% of McDonald's restaurants worldwide are franchise-owned and operated.

Over the last 19 years, McDonald's India has led the western fast food sector with a network of over 375 restaurants across the country. Every year, over 325 million customers visit McDonald's restaurants in India.

HRPL has been the custodian of the McDonald's brand in west and south India since 1996 with its first restaurant in Bandra, Mumbai. In its markets, HRPL today serves approximately 185 million customers annually with a consistent focus on QSC&V (quality, service, cleanliness and value). Over the years, HRPL's success has been built on its commitment to the delivery of QSC&V to customers through its proficient restaurant employees. Getting QS&C consistently and the overwhelming apbrciation of value keep customers satisfied and sustain our competitive edge.

In India, McDonald's is an example of a global brand that has successfully become locally relevant by building consumer-centric propositions. Following the glocalisation philosophy in the country, HRPL localised the McDonald's menu. The Company's understanding of Indian sentiments led it to introduce a number of McDonald's menu items customised to Indian tastes and brferences, many for the first time across its worldwide system, such as the McAloo Tikki™ burger, VegPizza McPuff™, Maharaja Mac™ and the Masala Grill (vegetarian and non-vegetarian), besides others. Yet, every product served across its restaurants in India has the stamp of McDonald's uniqueness. Additionally, no McDonald's restaurant in India serves either beef or pork. Moreover, vegetarian and non-vegetarian ingredients are separated from the processing centres to the kitchens.

Value for money has always been McDonald's' greatest pride. The McDonald's menu is priced such that the largest segment of Indian consumers can easily afford it while at the same time, ensuring that quality is not compromised. HRPL serves hygienic and delicious food together with constant efforts to provide more to customers through various new offers and introductions in the menu. The Happy Price Menu, the Extra Value Meals and the McValue Lunch provide the most affordable food options to customers every time, every day.

Our approach to offer affordable value to our customers is complemented by a focus on driving operating efficiencies, leveraging our scale and supply chain infrastructure and our suppliers' risk management practices to manage costs. Our robust supply chain serves as a competitive advantage for the brand. Prior to the launch of its first restaurant in 1996, HRPL, along with its suppliers, invested six years to develop its unique cold chain. Several of McDonald's global vendors partnered with local players to set up the supply chain infrastructure, resulting in considerable cost optimisation for the brand through local sourcing. Over the years, we worked directly with farmers, eliminating middlemen, dealing only in the best quality ingredients and optimising costs. Integration with farms, increased farm acreage, increased capacity and plant locations nearer to raw material sources help mitigate inflationary impacts. We also remain focused on reviewing our capacities and on increasing productivity at the farms and supplier facilities to help control food inflation. Through our 19-year journey, we, along with our suppliers, invested over USD 200 million to increase capacities and to equip ourselves to meet the growing needs of our consumers in the coming years.

HRPL stepped up brand investments in the right opportunities and on driving operational efficiencies - reduction in food, paper and distribution costs along with increased efficiency in product management and menu pricing - resulting in gross margin expansion of ~80 bps in 2014-15. Your Company continued to advance its efforts around augmenting the eating out experience, offering the best food and beverage options and delivering exceptional service.

In 2014-15, our unique value platforms, great tasting brmium menu selections, locally relevant menu variety and convenience and service enhancements differentiated the McDonald's experience for our customers.

During the year under report, we continued to focus on customer needs and formulated strategies in line with our growth priorities of:

(a) Broadening accessibility of our brand by opening new restaurants and efficient business unit economics

(b) Growing baseline sales through product innovations, providing value for our customers and offering various conveniences

(c) Expanding margins by leveraging our scale and further improving our supply chain management

(d) Growing by investing in training and development of our people towards building skills for the future

We believe these priorities remain relevant and actionable to our business objectives and will drive long-term sustainable growth.

Despite a challenging economy and a relatively flat or declining informal eating out (IEO) segment, in 201415, we maintained our market share amid a more competitive environment and our results demonstrate how we dynamically navigated through the weakened economic scenario.

Initiatives supporting our growth priorities resonated with customers and drove increases in our total sales by 3.2% while system-wide comparable sales (SSSG) for the fiscal stood at (5.6%), against a backdrop of tepid consumer sentiment.

As a result, restaurant operating margin1 stood at 8.7% in 2014-15 as a percentage of total revenues, as compared with 12.6% in 2013-14, down largely on account of increased occupancy and utility costs. Over 40% of our 209 restaurants form a part of the new restaurant base, which is less than three years old. As these new restaurants mature over the coming years, they are expected to contribute positively to our cash flow.

In 2014-15, cash flow from operations was Rs. 187.7 million. Our substantial cash flow provides us flexibility to fund capital expenditure. A capex of C 1,021.8 million was invested in our business primarily to open new restaurants and increase accessibility.

We were also able to execute our strategies in our markets; however, in 2014-15, we faced top and bottomline brssures, some as a result of planned strategic decisions, and others driven by the external environment. As on March 31, 2015, HRPL's restaurant footprint stood at 209, a growth of ~14% over the brvious year. We have grown the number of restaurants by more than 25% over the past three years. These results were achieved despite a macroeconomic slowdown in the IEO segment and heightened competitive activity. In the second half of the year, we experienced softer performance; therefore, we adjusted our plans to re-energise our all-day, everyday value offerings while providing the menu variety and experience customers expect from McDonald's.

Restaurant operating margin rebrsents the total revenue of company-operated restaurants less the operating costs of these restaurants (including royalty, etc.) before debrciation and corporate overheads; exbrssed as a percentage of total revenue.

Broadening accessibility

We broadened the accessibility of our convenient locations through the addition of new restaurants, extended hours and efficient Drive Thru service. Furthermore, we increased our accessibility and convenience, initiating the utilisation of all day-parts with extended operating hours at our breakfast and highway restaurants, web and mobile ordering through McDeliveryTM and dessert kiosks, among others.

We built an efficient real estate portfolio by engaging in structured long-term deals with sites or locations and land owners. A portfolio approach drives us to build long-term competitive advantage along with huge focus on quality of real estate. This approach means building a strong diversified portfolio of restaurants by operating in food courts, malls, high street retail and free standing Drive Thru restaurants. We continue to focus our efforts on opening high quality restaurants with long leases and favourable terms while focusing on growing our Drive Thru portfolio, which gives your Company a real estate competitive advantage.

We believe that building a balanced portfolio of restaurants is the best long-term growth strategy to capitalise on the opportunity in India. We continued to pursue our aggressive but sustainable long-term growth approach backed with clear strategies and well-focused execution at the restaurants while continuously driving efficient unit economics. The growth momentum remained unabated through 2014-15 as we added 27 new restaurants, rebrsenting a ~14% unit growth over the brvious year. We entered the cities of Mangaluru, Aurangabad, Belgavi, Hubli, Mehsana, Nadiad and Thrissur in the states of Karnataka, Maharashtra, Gujarat and Kerala, respectively, with our first restaurant. While new restaurants help us get a larger number of customers into our fold, it also ensures that the brand remains an integral part of community life.

We believe that the key to our Company's growth is through increase in accessibility of brand McDonald's to the Indian consumer by expanding the restaurant base. We will stay the course to open 175-250 new restaurants in the next five years across west and south India.

Growing baseline sales

Even when inflation was eating away into disposable incomes, we continued to deliver value to our customers through unique value platforms, great tasting brmium menu selections, locally relevant menu variety and convenience and service enhancements. During 2014-15, we consistently advanced our strategy on developing newer offerings that can best fulfill existing and emerging consumer needs. We introduced locally relevant menus that featured a blend of brmium burgers, classic menu favourites, limited-time offers as well as everyday value offerings. McChicken Classic Twist, McWings, McVeggie Classic Twist were added to the menu to increase guest visits and revenues. Your Company also invested in building various categories by introducing a variety of wraps, desserts and brmium burgers, thereby providing more choices to customers and leveraging existing investments and capacities. We continued to gain market share through the value platform. We believe that our approach around 'everyday value' will help grow base sales and increase the frequency of guest visits. We advanced our value initiatives by sustaining the Happy Price Menu™.

Strategic investments in formats such as Drive-Thrus and brand extensions like McCafe, McDelivery™ and breakfast platforms, dessert kiosks have helped your Company create a portfolio that builds brand differentiation and yields long-term results. Brand extensions have provided more accessibility to customers, maximising day-part utilisation and enhancing restaurant economics. It serves as an important growth lever for HRPL.

Our PiriPirilicious campaign during 2014-15 was a heartening success and enabled us to forge a strong connection with customers hailing from southern India.

Tapping into the US$ 230 million Indian cafe market, HRPL launched McCafe in Mumbai, a new brand extension that serves specialty coffees and desserts, generally located in a separate area inside restaurants. During 2014-15, your Company aggressively expanded the McCafe footprint across different markets in our region taking the total number of McCafe outlets to 37 across Mumbai, Ahmedabad, Pune, Nashik, Aurangabad, Bengaluru and Kolhapur. This brand extension is driving in new customers and giving encouraging results through better comparable sales and margins that existing restaurants. We are on track to deliver our initial target of setting up 50-75 McCafe's by December 2015.

To further build on our competitive advantage, we focused on operational excellence initiatives to drive customer satisfaction as we strived to deliver fast, accurate and friendly service with every order. We strengthened our convenience initiatives through optimising the delivery business by introducing operational efficiencies with the 29 minute delivery guarantee and by augmenting our digital engagement capabilities with the launch of web and mobile ordering facilities under McDeliveryTM. Brand extensions into online delivery has proved to be a success as almost 40% of delivery business come from mobile and web ordering. Additionally, your Company significantly stepped up investments in digital efforts, launching cashless facilities and free Wi-Fi across all HRPL restaurants.

Our breakfast business has expanded and is offered in over 125 restaurants. We sharpened our focus on the breakfast by building on advances were made in brvious years through the National Breakfast Day. Dessert continued to play a significant role with the addition of more dessert kiosks. These brand extensions will continue to add to baseline sales as your Company's offerings and reach grow in scope and scale. We continued to modernise the customer experience through our major remodelling initiatives, which provides contemporary restaurant designs and retailing efforts. The enhanced appearance and functionality of our restaurants deliver a more relevant experience to our customers.

In 2014-15, we re-imaged 22 restaurants, along with McCafe's capacity to capture additional guest visits.

Interestingly, almost 2,000 birthday parties are celebrated in a year at McDonald's restaurants across west and south India, which reflects the integral nature of the brand with consumer lives and highlights its importance as a fun destination. We also continued to focus on families, tying-up with franchises like Ben10, Penguins of Madagascar, How to Train your Dragon and Doraemon, which catalysed family footfalls.

Margin expansion

We continued to enhance the margin profile by driving the operating leverage and leveraging the cost structure through scale via effective supply chain management.

During 2014-15, HRPL's supply chain partners expanded and set up capacities closer to the restaurants' location helping the reduction of distribution costs. Further, gross margins were positively impacted through the better management of menu price increases and product mix. Brand extensions such as the McCafe (sales at higher margins) and McDelivery (sales at lower operating costs) facilitated an improvement in gross margins.

We continued to advance our strategy of strengthening brand extensions like breakfast, McDeliveryTM, dessert kiosks and McCafe to leverage day-part utilisation and enhance unit economics. As a result, overall gross margin improved by~ 80 bps over the brvious year.

However, in the short -term, margins would continue to be subdued largely attributed by Company's plans to broadening the accessibility of brand McDonald's by opening new restaurants and continuous investment in people to drive future business growth. While all these initiatives will impact operating margins in the near-term, it will also drive significant operating leverage once the consumer sentiment stabilises and footfalls and volumes start to grow across restaurants.

Investing in our people:

We are an employer of opportunity, providing quality employment and long-term career prospects to more than 7298 young people as of March 31, 2015. For many of our employees, we are their first employer, providing formal jobs opportunities that include benefits, medical coverage, training and flexibility. We believe in nurturing and grooming fresh talent. We make a long-term investment in our employees, imparting interpersonal and organisational skills, crucial for effective functioning on any job anywhere else.

Every employee is imparted with Skills for Life training, a strong foundation to coach them on valuable customer service and leadership skills that can be applied to a wide range of career paths in the future. On-the-job and off-the-job mentoring is provided through international learning programmes that are adapted to local training requirements.

Many of our employees are high school graduates and we encourage them to pursue higher studies. Extensive training is provided at each level to help our employees grow in rank at the organisation and build a secure future. We have developed alliances with educational institutions to provide special courses at discounted fees to employees. These courses include Veta Fluent English course, BBA in Retail and Symbiosis, Welingkars' and Richard Ivey post-graduate courses. Today, there are several examples of people who started out in the organisation as high school graduates and now head multi-crore business verticals.

We have a unique concept of flexible working hours for all. This enables employees to pursue studies while they earn. An employee can choose to come to work between 8 a.m. and 10 a.m., at the head office level. Similarly, at the restaurant level employees can choose to work in a shift that they brfer. Our talent pool continues to thrive and contribute to the growth of the organisation.

We were ranked at the first place among food retailers in India, by the Great Place to Work® Institute. The coveted ranking is India's largest annual study of workplace excellence and is based on confidential employee feedback and an audit of management processes by the Great Place to Work® Institute in partnership with the Retailers Association of India.

Our ranking among the best places to work is a testament to the relevance of our unique Employee Value Proposition of 'Fun, Flexibility and Future' and the people-positive policies that have facilitated the attraction and nurture of high-quality talent.

Challenges

Economic slowdown: Even as India's GDP improved considerably during the bygone fiscal, consumer sentiment remained stymied, impacting your Company's revenues. However, to counter this somewhat, we broadened accessibility and invested in training and development.

Food inflation: Cost of food in India increased by 5.48% in June 2015 over the same month in the brvious year. However, we didn't deviate from our path of sustained growth by launching 27 restaurants during the fiscal. We made this happen by engaging in prudent cost management practices.

Trained manpower: Lack of availability of healthy mix of people who are quick to adapt and align with the organisational philosophies is a major concern. To ease the transition of entry-level staff and reduce attrition we trained people extensively and treated them in an empathetic manner.

Comments on financial performance

Results from the year

Consolidated revenues increased by 3.2 per cent year-over-year to reach Rs.7,643.3 million

Consolidated operating EBIDTA stood at Rs.354.0 million

Consolidated profit/(loss) after tax stood at C (291.1) million

Consolidated cash profit stood at C 253.9 million

A total of 209 restaurants with gross addition of 27 new restaurants

Consolidated operating results

Total revenues

The Company's revenues consist of sales by Company-operated restaurants. In FY15, Company recorded a revenue growth of 3.2% to Rs.7,643.3 million compared to Rs.7,403.1 million last year, riding on the restaurant operations of its subsidiary, Hardcastle Restaurants Pvt. Ltd. (HRPL), a master franchisee for west and south India operations of McDonald's restaurants. The increase in revenue was primarily driven by the opening of new restaurants; the Company added 27 new restaurants, taking the total restaurant count to 209 restaurants across west and south India. In FY15, comparable sales (same-store sales growth) were -5.6 per cent compared to -6.4 per cent in the brvious year; demonstrating a challenging market scenario. Weak comparable sales reflected a muted consumer sentiment across the markets amid sluggish IEO segment.

Gross margins

During the review period, food, paper and distribution costs (FPD) increased to C3,177.0 million, compared to INR 3,137.8 million in 2013-14. In order to address these rising costs, the Company strengthened its supply chain by expanding the farm acreage and increasing productivity across the supply chain and at the restaurant level. During the year, the Company delivered an improvement in gross margins by ~80 bps y-o-y, fuelled by efficiencies in supply chain through sourcing network optimisation, logistical efficiency through improved utilisations and by other such measures as improvement in energy efficiency, wastage reduction, yield improvement, better product mix and increase in menu prices. The Company has expanded gross margins by ~240 bps over the last two years (FY14 and FY15).

McDonald's menu features burgers, finger foods, wraps and hot and cold beverages besides a wide range of desserts. The Company introduced several new products like Saucy Wraps, McWings and a few limited time offers like Classics with the Twist (McVeggie and McChicken Twist) and McFlurry Brownie, at multiple price levels, catering to different customer needs.

Restaurant operating margin (EBITDA)

Restaurant operating margin rebrsent total revenues from company-operated restaurants less operating cost of these restaurants (including royalty etc.) before debrciation and corporate overheads. In FY15, Company reported restaurant EBITDA at INR 668.4 million compared to INR 931.2 million in the brvious year. Restaurant EBITDA margin amounted to 8.7 per cent compared to 12.6 per cent in fiscal 2014. This was impacted largely by inflationary brssures on the utility costs which led to an increase in utility expenses per restaurant and increased employee-related costs, mainly due to expansion in the restaurant network and rise in minimum wage rates. The Company continues to be in expansion mode as it added 27 restaurants during the year, which led to higher utility and occupancy expenses. The Company also incurred expenses pertaining to marketing, advertisement and promotions necessary for building and maintaining the brand image.

General and administration (G&A) expenses

Despite a challenging market environment, the Company continued to invest in a talent pipeline to ensure smooth management and operations of its business, both current and future. In FY15, general and administrative expenses increased to INR 463.3 million compared to INR 420.7 million in FY14.

General and administrative expenses as a percent of total revenues were 6.1% in FY15 and 5.7% in FY14. The management believes that analysing general and administrative expenses as a percent of total revenues is meaningful because these costs are incurred to support the overall McDonald's business and there will be operating leverage as the business growth happens over the coming years.

Operating EBITDA

Operating EBITDA was INR 354.0 million in fiscal 2015 compared to INR 537.8 million in fiscal 2014.

Operating EBITDA margin is defined as operating EBITDA as a percent of total revenues. Operating EBITDA margin was 4.6 per cent in fiscal 2015 and 7.3 per cent in fiscal 2014.

Financial Position and Capital Resources Cash Flows

The Company generates cash from its operations and has substantial credit availability and capacity to fund operating spending such as capital expenditures and debt repayments. The Company also needs cash primarily to fund the various requirements in its restaurants, to pay interest and taxes, and for other general corporate purposes. In addition to cash and equivalents on hand and cash generated by operations, the Company can meet these capital requirements through variety of sources, including short- and long-term lines of credit arrangements and issuance of share capital.

As of March 31, 2015, the Company had cash and cash equivalents of C1,553.3 million. This primarily rebrsents cash and balances with banks in India and investments in liquid funds/FMPs.

Restaurant development and capital expenditure

In FY2015, the Company expanded its footprint with a gross addition of 27 new restaurants and also invested in re-imaging activities relating to building the interiors and exteriors to enhance the overall dining experience at its restaurants. For the same purposes, the Company invested C1,021.8 million towards capital expenditure. These were largely funded through internal cash accruals and cash reserves and minimal external borrowings. During the year, the Company closed/relocated 2 restaurants across various locations in west and south India. The Company closes/relocates restaurants for a variety of reasons, such as existing sales and profit performance or completion of real estate tenure.

Outlook

India's food and beverages (F&B) industry will expand at an average annual pace of 24% to reach C 3.8 trillion in sales by the year ending 31 March 2017. Fast food joints, which have the largest market share at 45%, will grow by 16.6% a year, said the report by consulting firm Grant Thornton India and lobby group Federation of Indian Chambers of Commerce and Industry (FICCI), followed by casual dining (32% share) expanding 10.1% annually.

Standalone restaurants, which comprise 22% of the market, is the fastest growing, the report said, while the cafe segment with 12% market share is growing at 10.7% a year.

Although fine dining constitutes only 3% of the market, the segment is seeing a renewed interest, particularly from multinational chains.

The country has 356 million people between the ages of 10 and 24, giving it the world's largest youth population, according to a United Nations report. With more young people entering the workforce daily, growth in the economy, a rising female work force, and increased mobility among consumers, the traditionally difficult Indian market has become hungry for a more diverse menu.

We are focused on delivering great-tasting, high-quality and affordable food and beverages and an exceptional experience to our customers. By leveraging our competitive advantages, we are well-positioned to pursue long-term opportunities that exist in the US$ 100 billion IEO segment.

We remain focused on matters within our control with the customer as our first and central priority. We plan to strengthen our relationship with customers through restaurant expansion and further leveraging consumer insights in our efforts for broader consumer reach.

We will continue to execute our four growth priorities to broaden accessibility to brand

McDonald's, grow our baseline sales through expanding our menu and leveraging various product platforms, margin expansion driving gross margins and operating leverage and enabling growth through our people resources.

Risk review

Economic slowdown: Any slowdown in the economy can impact the food services industry as it can impact disposable income of consumers which, in turn, will affect sales

Inflation: Any rise in inflation can lead to brssure on pricing, which would result in debrssing margins.

Supply chain: Any disruption in the supply chain can adversely impact the supply of ingredients to outlets and the freshness of finished products.

Competition: Any competition in the industry may rise further as new players enter the market and investments from foreign investors rise. As the QSR space expands further in India, competition is likely to increase.

Response in new markets: Although there is a robust expansion plan in place, the response may not be in line with expectations in certain markets.

Internal control and systems

Our elaborate internal control systems ensure the efficient use and protection of resources and compliance with policies, procedures and statutory requirements. The internal control systems comprise well-documented   guidelines,   authorisation   and approval procedures, including audit. Intrinsic to the overall governance process, HRPL has institutionalised a well-established internal audit framework which covers all aspects of financial and operational controls, covering all units, functions and departments.

Westlife Development Limited is an integral part of the global system of McDonald's Corporation, USA. As a result, it follows numerous control systems across its restaurant operations that are tried and tested internationally. There are various audits which are carried out on a consistent basis by McDonald's Corporation.

The Internal Audit (IA) team is of a wholly-owned subsidiary and key members of the Internal Audit (IA) team are also key managerial personnel of Westlife Development Limited (WDL) and keep the WDL Audit Committee and Board apprised of the Internal Audit function. There is an Internal Audit (IA) Committee comprising senior cross-functional members. The Internal Audit Committee is actively engaged in evaluating and improving various functions and activities of the Company including restaurant operations, marketing and capital expenditure.

The Committee is ably supported by external and independent Chartered Accountant firms specialised in the domain of internal audit.