Devyani International Ltd (DEVYANI) Q2 FY23 Earnings Concall Transcript

Devyani International Ltd (NSE:DEVYANI) Q2 FY23 Earnings Concall dated Nov. 03, 2022

Corporate Participants:

Anoop Poojari — Client Manager

Ravi Kant Jaipuria — Chairman

Manish Dawar — Wholetime Director and Chief Financial Officer

Analysts:

Nihal Jham — — Analyst

Percy Panthak — IndiaInfoline — Analyst

Devanshu Bansal — Emkay Global — Analyst

Pujan Shah — Congruence Advisers — Analyst

Sanjaya Satapathy — Ampersand Capital — Analyst

Nitin — CLS — Analyst

Vishal Gupta — PhillipCapital — Analyst

Avi Mehta — Macquarie Capital — Analyst

Tejas Shah — Spark Capital — Analyst

Amruta Deherkar Sane — Wealth Managers India Private Limited — Analyst

Shirish Pardeshi — Centrum Broking — Analyst

Unidentified Participant — — Analyst

Yashwant — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Devyani International’s Earnings Conference Call. [Operator Instructions]

I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you and over to you, sir.

Anoop Poojari — Client Manager

Thank you. Good afternoon, everyone and thank you for joining us on Devyani International’s Q2 FY 2023 earnings conference call. We have with us Mr. Ravi Jaipuria, Non-Executive Chairman of the company; Mr. Raj Gandhi, Non-Executive Director; Mr. Virag Joshi, President and CEO; and Mr. Manish Dawar, CFO and Whole-time Director of the company.

We will initiate the call with opening remarks from the management, following which we’ll have the forum open for a question-and-answer session. Before we begin, I would like to point out that some statements made in today’s call may be forward-looking in nature and a detailed statement in this regard is available in the results presentation shared with you earlier.

I would now request Mr. Ravi Jaipuria to make his opening remarks.

Ravi Kant Jaipuria — Chairman

Good afternoon, everyone. I warmly welcome you all to our earnings conference call to discuss the business performance for the quarter ended September 30th, 2022. I’m pleased to share that DIL has maintained its store opening pace and opened 88 new net new stores in the quarter, the highest ever. We are making consistent progress in expanding our reach and investing in our core brands to capitalize on the growth of — growth opportunities available. In line with our strategy, we have continued our focus on consolidating our presence in metro cities, along with the expansion in non-metro towns. At the end of quarter two, our total store count stood at 1,096 stores across the portfolio with a split of 52% in the non-metro and 48% in the metro cities.

On the demand side, we have noticed that we are coming out of the pandemic, the consumer response is mixed for various categories, continued retail inflation seems to have impacted the consumer demand to some extent in the staples and discretionary category. Although the inflation in input cost is stabilizing, the overall pricing levels continue to remain higher on a year-to-year basis. We have managed to take some judicious price corrections during early part of the financial year to protect the margins partially and are hoping that inflation will cool off as we go along, leading to enhanced consumer demand.

Consolidated quarterly revenues for the quarter were up INR747 crores, a growth of nearly 45% over the corresponding period last year. Our innovation pipeline continues to be strong. We launched Peri, Peri Chicken in KFC and the same has met with the encouraging consumer response. We are also investing in making our business future-ready with the launch of all digital KFC Smart Restaurants. DIL is the leading long-term QSR player in the country, having a portfolio of multidimensional and well-recognized global brands, and we remain confident about the potential of our brands and the food services sector in India. Our investment in the core brand expansion of our footprint and innovation will help us to achieve sustainable growth.

A recent study by one of the research outset said the market growth of Indian QSR industry to remain above 15% for the coming years, and we are confident of growing higher than the overall market growth.

With this, I’ll now hand over to Manish for his comments. Thank you.

Manish Dawar — Wholetime Director and Chief Financial Officer

Thank you, Mr. Jaipuria. Good afternoon, everyone. A very warm welcome, and thanks to all of you for sparing your valuable time to attend our Q2 and H1 FY 2021 earnings conference call, our fifth such call since the listing. We have crossed a strong 1,000-store benchmark in the current quarter for our core brands consisting of KFC, Pizza Hut and Costa Coffee. DIL opened 88 new stores across the portfolio, the highest ever in a single quarter. The revenues for quarter two stood at INR747 crores versus INR705 crores in the previous quarter, a sequential quarter-on-quarter growth of 6% in a seasonally low quarter. On a Y-o-Y basis, revenues grew 45% Revenue growth has been broad-based across various brands as a combination of new store openings, pricing and the volume growth.

The gross margins at 70.2% for 90 bps lower versus the previous quarter, this slight impact is the result of consistently high input inflation. While we’ve taken price corrections over the course of the year for our brands, the same has not been enough to offset the entire margin impact because of the increase in raw material and packing material prices. As we are going along, we are seeing the input prices stabilizing over the remainder period of the year, and therefore, we expect our margins to come back. The impact of gross margin flows down and gets reflected in the brand contribution margins, which came in at 19.6% versus 20.5% on a company consolidated basis in the previous quarter.

Pre IndAS EBITDA at INR113 crores for the quarter witnessed a growth of 42% on a Y-o-Y basis. The pre-index EBITDA margin came in at 15.1% versus 16.1% in the previous quarter. Reported EBITDA, which is post in that EBITDA was INR166 crores for the quarter, with margins at 22.1% versus INR123 crores a year ago, which again reflects a 34% Y-on-Y growth. Profit before tax for the quarter stood at INR59 crores versus INR47 crores last year. The PBT for the quarter was lower than the previous quarter because of the significant currency impact in Nigeria, and higher IndAS adjustment as a result of the new store openings.

Our two core brands continue to perform well. KFC with 32 new additions reached a mark of 423 stores at the end of the quarter. Being a seasonally low quarter, ADS was INR121,000 with a healthy SSSG of 13%. Revenues at INR443 crores for KFC remained robust, and have grown 4% sequentially and 47% on a year-on-year basis. The quarter saw the full impact of raw material price increases, and this led to lower gross margins at 67.9% versus 69% in previous quarter. Brand contribution margin was in line with the performance of the gross margins for KFC. On-premise consumption remained steady at 64% for the quarter. Pizza Hut added 30 new stores to reach a total account of 466 stores, ADS improved marginally to 45,000 with a triple [Indecipherable] at 3%. Revenues came in at INR181 crores, growing 36% year-on-year basis. Higher input prices and impact of changing product mix impacted the gross margins a little bit.

Gross margins came in at 74.5% versus 76.2% in the previous quarter. Brand contribution margins were 17% versus 17.5% in the previous quarter, and on-premise consumption remained steady for Pizza Hut also at 45%. Costa Coffee added 19 new stores to reach a total of 88. Revenues grew to INR22 crores. Gross margins came in at 79.6%, primarily due to higher input costs. Brand contribution at INR4 crores and brand contribution margins at 19.6% were lower due to significant addition of new stores during the quarter. As we go along, we expect this to come back to our normal levels. The ADS at the brand level was INR31,000, reflecting dilution due to new store additions.

During the first half of the current financial year, we’ve added 158 net new stores. Consolidated revenues for first half were at INR1,452 crores, a 67% year-on-year growth, gross margins at 70.6%, and brand contribution margins at 20% have remained stable despite inflationary headwinds on an H1 basis. Reported EBITDA post in debt on a consolidated basis for the six months stood at INR330 crores, representing a 22.7% margin. Profit after tax for the half year stood at INR132 crores. Overall, demand environment remains a little impacted in the face of continued inflation and elevated retail prices. We expect softer input costs in the coming quarters, which will help us with the demand, as well as the margins. We maintain our goal of sustainable and profitable volume-led growth for our brands.

On that note, I would request the moderator to open the forum for any questions or suggestions that you may have. Thank you very much.

Questions and Answers:

Operator

Thank you, very much. We will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Nihal Jham from [Indecipherable]. Please go ahead.

Nihal Jham — — Analyst

Hi, good evening. Am I audible?

Manish Dawar — Wholetime Director and Chief Financial Officer

Yes, you are.

Nihal Jham — — Analyst

Thank you so much. A couple of questions from my side. First, despite the gross margin impact that we’ve seen both for KFC and PH, brand margins have not seen that big an impact. And this is, I think, a reflection of the opex in our efficiencies that we’ve been building in. And even versus last year, there is an improvement in the opex customer when you look at both the formats. So, is it that there are new initiatives that we can to highlight the same or we have tweaked the store format, which is leading to a better store ROC more better than what we were doing last year.

Manish Dawar — Wholetime Director and Chief Financial Officer

Nihal, as we’ve said in the past, that as we continue to open stores at an aggressive pace, and you would have noticed that we’ve opened almost 158 stores. Obviously, from that perspective, the operating leverage starts to kick in, and that is what is happening. So basically, if you look at what is happening on the brand contribution and lower down EBITDA, it’s the gross margin, which is kind of slowing down. Otherwise, operationally, we are absolutely in good shape.

Nihal Jham — — Analyst

Sure. But on the brand contribution, wouldn’t be a pace of operating leverage because this is a first store for that is being taken. In fact, as the store expansion happens, it should hardly impact like it’s happened in case of Costa?

Manish Dawar — Wholetime Director and Chief Financial Officer

No. Because Costa, the difference in the base was small and the new store additions have been very aggressive in the last two quarters. And, therefore, that gets reflected much more compared to Pizza Hut and KFC, where your base store is very, very strong. And, therefore, your percentage addition versus the cost of percentage addition to the base is much lower. And that’s the reason it is there. Then let’s say, the brand contribution also, if you look at we have labor costs, which will not go up significantly as we expand. We have rentals, which is a combination of fixed and variable rentals, which gives you the operating leverage. So, that is what contributes in the brand contribution as well.

Nihal Jham — — Analyst

Understood that. The second question was on a recent SKU launch in Pizza Hut, the Flavour Fun range. If you could just highlight what is the ballpark contribution of that? And for some of the stores based on the data you see where this number could end up heading to?

Manish Dawar — Wholetime Director and Chief Financial Officer

Nihal, it’s because we launched this very recently. So it’s too early to give you the exact read, but we’ve got good response from the consumers. The consumers are liking the product. And we think this is one of the growth levers that we have. If we have to grow the ADS and we have to bridge the ADS gap with the competition. So we are bullish about this. Obviously, we need to stabilize that whole piece because it’s too early in launch, and it’s a very, very important piece. So we will talk about in detail as we go along. But otherwise, good response, consumers have liked the price point, consumers have liked the quality, and therefore, it is going as per our expectations.

Nihal Jham — — Analyst

So do we have an internal target, which is possible to share about what is it that this could conclude as the percentage in ADS in the long run?

Manish Dawar — Wholetime Director and Chief Financial Officer

Nihal, we will come back to you on that one.

Nihal Jham — — Analyst

Sir, just one last question on the store addition, we are running ahead of guidance. Do we expect that this sustains or the 100 stores for each of the formats or something that ends…?

Manish Dawar — Wholetime Director and Chief Financial Officer

So as of now, we are staying with the same guidance, which is about roughly about 250 odd stores. We could reach that a little bit. But formally, we are not changing the guidance. But again, I mean, we’ve seen a good quarter, because, I mean, our pipeline was building up very strongly. So we hope to expand on an aggressive basis.

Nihal Jham — — Analyst

Sure. Thank you so much. I wish you a lovely day.

Manish Dawar — Wholetime Director and Chief Financial Officer

Thanks.

Operator

Thank you. The next question is from the line of Sameer Gupta from IndiaInfoline. Please go ahead.

Percy Panthak — IndiaInfoline — Analyst

Hi, sir, this is Percy Panthaki here. So you have a sound enough word of caution on the demand front. So just wanted to understand what’s the reason behind the same, because the Q2 number was quite decent. So are you seeing that in October, we have seen a slowdown versus what a normal festive season should be?

Manish Dawar — Wholetime Director and Chief Financial Officer

Sameer, the basic reason is, as you know, there have been high input inflation in the first half of the year. And, obviously, we’ve taken a price increase also, which we’ve alluded to in the past. And so therefore, the volume increase that we used to see in the previous years that volume growth was a little slow, and that got replaced with the pricing growth. So that is the caution that we are talking about and nothing exceptional as such. Because if you look at the SSSG numbers for KFC is very strong at 13%, which obviously is a combination of pricing and volume both, but more pricing and less of volume.

Percy Panthak — IndiaInfoline — Analyst

So there is a trade-off between volume and pricing? Sorry, there’s a trade-off between volume and pricing, I understand that part of it. But if I look at solely in total sales or total value terms, there would be no slowdown, right? The slowdown with your calling out is only for the volume part of it. Is that understanding correct?

Manish Dawar — Wholetime Director and Chief Financial Officer

You’re right. Yes.

Percy Panthak — IndiaInfoline — Analyst

Okay. Understood. And as far as margins are concerned, gross margin, there is an input cost inflation, which is being down on them. But where do you see this going? I mean are you waiting for input costs to come down for margins to restore? Or are you taking price increases to restore the margins? Or are you accepting margins at the current level.

Manish Dawar — Wholetime Director and Chief Financial Officer

So I think if you see that the basic input costs have already started coming down, chicken prices are down. Oil prices are down and even gas prices have been reduced. So I think going forward, it looks that I don’t see the inflation effect will be there. And we should — we are not looking at raising prices for the time being. And hopefully, the volumes will also start kicking in. So it should be — and of course, our second quarter is the weak quarter. So on that basis, also you’ve seen some volume dilution.

Percy Panthak — IndiaInfoline — Analyst

Understood. And last question is, if I look at your capex per store, and this is, of course, just a mathematical derivation of looking at your total capex and dividing it by the number of stores added in first half it’s about 13.5 million. So do you think this is a fair number, which will continue even for the next two to four quarters?

Manish Dawar — Wholetime Director and Chief Financial Officer

That’s what it looks like. Yes, it’s a combination of Sameer, if you — it’s a new store addition as well as we are supposed to do the refurbs as well. So therefore, there is some element of refurbishings which also sits in that, which obviously will not get reflected in the denominator from the new store perspective. But from a ratio perspective, you’re not very far off.

Percy Panthak — IndiaInfoline — Analyst

Right. That’s all for me. Thanks and I’ll leave it there.

Manish Dawar — Wholetime Director and Chief Financial Officer

Okay. Thank you very much.

Operator

Thank you. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.

Devanshu Bansal — Emkay Global — Analyst

Hi. Thanks and congratulations on the highest ever store additions in the quarter. Sir, I wanted to understand the Pizza Hut SSD performance, which was about 3%. And this is despite mid-single-digit price hikes as well as launch of Flavour Fun Pizzas. So which were not present last year. So what according to you led to a slower performance this year for Pizza Hut?

Manish Dawar — Wholetime Director and Chief Financial Officer

Devanshu, you see there is some bit of base effect also because obviously, as you know, that we have a higher concentration of smaller format stores. And therefore, they were kind of operational during last year as well. And therefore, to that extent, obviously, pricing has impacted a little bit, and that’s the reason we’ve made that cautionary statement also from a volume perspective, what I was talking to Sameer earlier. So therefore, we’ve seen some bit of volume drop in Pizza Hut, which is a combination of pricing, plus Fun Flavor Pizza also, but it’s too early to kind of take that read. We still believe that Fun Flavor Pizza is a good initiative. And long term, it should become one of the very, very strong growth engines that we could have. So therefore, we are not overtly worried in terms of the recent quarter triple ESG numbers.

Devanshu Bansal — Emkay Global — Analyst

Okay. Sir, just as a flavored outlook, if you can provide some trends on SSD performance during a festive it would be really helpful for both the formats.

Manish Dawar — Wholetime Director and Chief Financial Officer

Yes. So too early to say, but let’s see. I mean, the Diwali time was good time, obviously. But let’s see. I mean, we have to take the entire quarter it’s just one month gone. But so far, so good.

Devanshu Bansal — Emkay Global — Analyst

Okay. And last question is, we added a KFC smart store during the quarter. So the question is, to understand what is the outlook on this front? Will further additions in the KFC format be on these lines? If yes, then what is the revised capex per store for this format versus the normal format?

Manish Dawar — Wholetime Director and Chief Financial Officer

Devanshu, in the overall context of additions, the capex will not significantly change. Basically, we are trying to digitize the stores by minimizing the orders at the counter, whereby the consumers can actually go to the kiosk and order on their own. Very small read, because it’s not really representative. We have just about one or two stores as of now. We’ve seen that the APC tends to grow a little compared to the normal APCs in a non-digital store. But, again, we are not guiding anything. We are just sharing whatever we’ve seen so far.

Devanshu Bansal — Emkay Global — Analyst

Yeah. So I wanted to understand, as in first stores expected to open going ahead, what percentage of stores will be the smart store format and what would be the normal store on that?

Manish Dawar — Wholetime Director and Chief Financial Officer

Too early. We really want to experiment it well with this format and let’s see how it goes. So as of now, there is no fixed percentage that we are talking about. We’ve opened one store in Gurgaon another store in Bangalore. So let’s see how it kind of shapes up. So —

Devanshu Bansal — Emkay Global — Analyst

Sure, Manish. That’s helpful. That’s it from me.

Manish Dawar — Wholetime Director and Chief Financial Officer

Okay. Thanks, Devanshu.

Operator

Thank you. The next question is from the line of Pujan Shah from Congruence Advisers. Please, go ahead.

Pujan Shah — Congruence Advisers — Analyst

Hello. Am I audible?

Operator

Yes.

Ravi Kant Jaipuria — Chairman

Yeah, you are.

Pujan Shah — Congruence Advisers — Analyst

Yeah. Okay. Sir, my first question would be on the Costa Coffee side, as we have done so far good in Costa Coffee. So what are the insights you wanted to give on a suggestive basis, like, how are you planning to add the same momentum? And what will be the ADS you’re looking at in this specific segment?

Ravi Kant Jaipuria — Chairman

Pujan, as we’ve talked about in the past, Costa, we are looking at adding about 40 to 50 stores. Obviously, the current quarter has been good. We had a strong pipeline. But, overall, our guidance remains the same. The brand is doing — the brand is doing well and our near to medium-term objective for Costa is to reach an ADS of close to 40,000. So, again, it’s not going to happen next quarter, but that is what our target is.

Pujan Shah — Congruence Advisers — Analyst

Okay. And my one question would be, we have just exited two stores in Q2, right, Q2 FY 2022?

Ravi Kant Jaipuria — Chairman

You’re talking about Costa?

Pujan Shah — Congruence Advisers — Analyst

No, no. Total, we have exited stores of 49, which is showing in the presentation, slide number 29. So it’s two stores from quarter one to quarter two, right? So we have exited two stores.

Ravi Kant Jaipuria — Chairman

Yeah.

Pujan Shah — Congruence Advisers — Analyst

Yeah. Okay, okay. Thanks.

Operator

Thank you. The next question is from the line of Sanjaya Satapathy from Ampersand Capital. Please, go ahead.

Sanjaya Satapathy — Ampersand Capital — Analyst

Yeah. Sir, thanks a lot for the opportunity. So the commentary that you have given about the staples you’re repeatedly talking about Pizza Hut, right, sir?

Ravi Kant Jaipuria — Chairman

No. When we talk about staples, obviously, we are talking about the core FMCG sector. Because if you see the distinction it kind of follows staples a little bit, and that is what we kind of in terms of reading the trends, what is happening on consumer behaviors, how the consumers are reacting. We track the consumer staples also. So we — I mean, as you know, I mean, we get classified as consumer discretionary.

Sanjaya Satapathy — Ampersand Capital — Analyst

Understood. Sir, when you’re also talking about a bit of a slowness — softness in demand and you’re talking about the staples, are you essentially referring to what happened in quarter two? Or you were also giving some kind of guidance that your October was not that great and hence, things are slowing down and growth outlook is getting weaker?

Manish Dawar — Wholetime Director and Chief Financial Officer

No, we are not giving any guidance. We’ve only talked about the quarter, which has gone by. As I said, I mean, on Pizza Hut, for example, we talked about the volumes getting impacted a little bit. So that is the whole context.

Sanjaya Satapathy — Ampersand Capital — Analyst

And so it is a seasonally soft quarter. So I don’t know how much one can be through from that. So if you can just give us some flavor about how the festival season was in the month of October?

Manish Dawar — Wholetime Director and Chief Financial Officer

Look, the point is, one, Q2 as a standard is a seasonally soft quarter. But again, at the same time, if you go back to last two to three years, there have been COVID impacts in various quarters. In some places, the restrictions were there. Some cases, it were open, some places, those are opening faster. So obviously, from that perspective, it’s a little kind of mix read and we are not able to kind of — because various quarters because of COVID have behaved in a very, very different manner.

Sanjaya Satapathy — Ampersand Capital — Analyst

No, my question was that how has the season being?

Manish Dawar — Wholetime Director and Chief Financial Officer

It’s too early to because festival season, if you see, I mean, one is obviously the Diwali time, which has gone well. The other big festival season really is the December month, which is where you get into Christmas, you get into New Years and all — so that is the real bump up, which kind of happens.

Sanjaya Satapathy — Ampersand Capital — Analyst

Understood. Sir, if I can just ask last question that when you have talked about this cost side and also you just mentioned about the prices of various items have fallen recently, including Chicken and many other things. So should one kind of make a conclusion that cost structure is a bit behind you and you are rather looking forward to relatively a period of — period in which you would focus more on volume growth and also margin will come back?

Manish Dawar — Wholetime Director and Chief Financial Officer

I would say largely, yes. But as you know, I mean, still, for example, let’s say, where inflation is today, despite the fact that we’ve seen the prices coming down as Mr. Jaipuria said, the gas prices have come down, the oil prices — the edible oil prices have come down, the chicken prices have started to soften but they still are at an elevated level where we used to be historically. So let’s see how it kind of stabilizes. The movement has started, which is a good thing. So it is no longer kind of now going up and up and up. We’ve started — we’ve seen the piece. Now it is coming down. So let’s see how it pans out and basis that we will focus on our growth engines.

Sanjaya Satapathy — Ampersand Capital — Analyst

Understood. Thanks a lot sir. Basically, after a long time, you have made some questionary remarks. That’s why all these questions. I wish you all the best.

Manish Dawar — Wholetime Director and Chief Financial Officer

Thank you very much.

Operator

The next question is from the line of Nitin [Phonetic] from CLS. Please go ahead.

Nitin — CLS — Analyst

Yeah. Thanks for the opportunity and congrats for the good set of numbers. So from the demand perspective, just wanted to get a sense on like how do you see the demand impact on the premium end? And similarly, like how is the demand situation in the metro market?

Manish Dawar — Wholetime Director and Chief Financial Officer

Fundamentally, we’ve not seen a big difference, Nitin. So the metro markets continue to behave strongly. We’ve seen, if at all, the growth in non-metro markets is also becoming very significant. And we’ve always kind of maintained in the past that the profitability for us in the non-metro market is stronger than the metro markets because obviously, your rentals are lower, your staff cost is lower, the utility is lower and so on and so forth. And that’s how we’ve been kind of expanding our portfolio also. So today, if you look at our total store count, almost 52% of the total store count sits in the non-metro markets. So we are bullish on non-metro markets. But again, as you know, the large consumption hubs still remain in the metro markets, but the future is non-metro is what we believe. So

Nitin — CLS — Analyst

Yes. My question is from the context of stable companies where they have highlighted that the premium discretionary offerings are relatively doing better than the mass and discretionary. So something similar like we have fun flavored Pizza launch for the mass and like for recruiting a consumer. So that drive — definitely, we have launched, we might be gaining it, but just wanted to get a sense like what about the premium and offerings we have. So do you see any impact on those or those are relatively immune at this point in time?

Manish Dawar — Wholetime Director and Chief Financial Officer

Look, in the short term, there will be some impact, obviously, because they would be, let’s say, for consumer is coming into the store and there is a new product or a new SKU available, people try and experiment, right? So therefore, that’s the reason I’m saying that in such a short span of time, it is not good to kind of take these needs. We’ve launched flavor fun from a longer-term perspective. It’s more of a strategic call rather than a tactical call. And we are absolutely bullish on this. In short-term, of course, there could be some aberrations here and there because people tend to experiment with whatever is new. So…

Nitin — CLS — Analyst

Okay. Thank you. And from the KFC Smart, Digital KFC Smart Restaurant, so like apart from the self-ordering kiosk, is there anything else like we have tried out in the store from the digital…

Manish Dawar — Wholetime Director and Chief Financial Officer

It’s largely a sell for drink kiosk. That is what the big difference is. So rather than a manual order and somebody punching the order for you, you place the order on your own through the kiosk. You make the payment through the kiosk and then you go and go to the counter. So obviously, from a look and feel perspective, the store is much more futuristic. From a consumer perspective, it kind of attracts a younger generation because they want to kind of take control of things what they are doing. It is digital. And as I said earlier, we’ve also seen that there is some bit of APC increase too early, very small read — but APC, I think, tends to kind of grow a little bit because consumers tend to add other things if they are able to see it on the screen at the same time.

Nitin — CLS — Analyst

Okay. Okay. Thank you. And lastly, I just wanted to get a sense on the Vango, how has been the performance and given the unit economics is in place, so any call we have taken to sort of scale up the brand?

Manish Dawar — Wholetime Director and Chief Financial Officer

So we are scaling up the brand. Again, as we’ve said in the past, I mean, Vango is still not a destination brand. It does very well where the captive footfall is there. But even on Vango also, we are expanding the stores, albeit at a small pace because for us, the big priority is KFC, Pizza Hut and Costa now. So — but again, it’s not that we are neglecting Vango. So we are bullish about the brand. There is no other Indian QSR brand, which is available in the market. And therefore, Vango also in future, will become a sizeable category.

Nitin — CLS — Analyst

Okay. Thanks a lot. Thanks for the time.

Manish Dawar — Wholetime Director and Chief Financial Officer

Okay. Thank you.

Operator

Thank you. The next question is from the line of Vishal Gupta from PhillipCapital. Please go ahead.

Vishal Gupta — PhillipCapital — Analyst

Yes, thanks. My question has been answered. Thank you.

Operator

Thank you. The next question is from the line of Avi Mehta from Macquarie Capital. Please go ahead.

Avi Mehta — Macquarie Capital — Analyst

Hi. I just had two questions. First, I wanted to understand this demand comment in Q better. Is there any geographical divergence in the demand trends between the metros and smaller cities?

Manish Dawar — Wholetime Director and Chief Financial Officer

Not really.

Avi Mehta — Macquarie Capital — Analyst

Okay, sir. Okay. And the other bit was from your comments, would it be a fair comment to make that we are going to focus more on sustaining or supporting customer growth versus near-term margins across the segment. Is that the right read through? Or did I — I mean, was that the right understanding?

Manish Dawar — Wholetime Director and Chief Financial Officer

Look, we are focused on both sides because volumes are important, and the business can only kind of grow if there are healthy volume growth. Obviously, this time, the inflation has been unprecedented. We’ve seen this kind of inflation, I don’t know, maybe after a decade or so. And having said that, we’ve taken the pricing cases as well. But the kind of pricing increases we’ve taken, we don’t think we could have taken a pricing fees beyond this. And therefore, to that extent, we’ve taken a temporary hit in our margins. But now as the input inflation is coming down, as Mr. Jaipuria mentioned earlier that we’ve seen a reduction in gas prices. We’ve seen a reduction in chicken prices. Even the edible oils are reacting favorably. So we are absolutely confident that our margins will come back.

Avi Mehta — Macquarie Capital — Analyst

Got it, Manish. And just the last bit from my end, if you did, kind of, allude to these pressures kind of offsetting. Could you give me a sense on what’s happening on the other costs, like employee rentals for new stores. Is that broadly stable? Or is there any signs of inflation over there as well?

Manish Dawar — Wholetime Director and Chief Financial Officer

It is stable. It is standard inflation. As you know, as far as the employee cost is concerned, it typically gets driven by the state governments from a minimum wage perspective. And we’ve not seen any exceptional minimum wage revisions in the current year. If at all, last few years we saw higher minimum wage inflation compared to this year. So therefore, that is not an issue. Rentals piece, as you know, I mean, the prime commercial rental locations in the country are always in great demand. So let’s say, if you talk about, let’s say, across the country, there would not be more than 50 such locations. But outside of those 50 such locations, the rental market is much better.

The landlords attitudes are very different. They are wanting to work with the larger brands. They are wanting to kind of compromise on their demands if they want to be with the larger brands. And that’s a significant change that we’ve seen during COVID, and it continues post COVID also beyond the absolute prime commercial locations in the country.

Avi Mehta — Macquarie Capital — Analyst

Perfect. Perfect. That’s clear [Phonetic]. Thanks a lot. Thanks for this. Wish you luck.

Operator

Thank you. The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.

Tejas Shah — Spark Capital — Analyst

Thanks. A couple of questions from my side. Sir, what percent of our store capex would be directly and directly impacted by INR depreciation in terms of imported equipments that we must be using? And is [Indecipherable] pressure at large showing up in capex per store as well?

Manish Dawar — Wholetime Director and Chief Financial Officer

There is a inflation pressure on the capex also, Tejas, because as you know, all of our flyers are imported for KFC. All of the ovens are imported for Pizza Hut. And obviously, with the dollar value changing, that impacts the pricing. But again, if you look at the overall context in terms of what is the depreciation, what is the capex in the overall store economics perspective, it’s completely negligible. So…

Tejas Shah — Spark Capital — Analyst

Okay. But sir, capex like-for-like would have increased by how much on a Y-o-Y basis?

Manish Dawar — Wholetime Director and Chief Financial Officer

Last one year, which is, again, impact of COVID and the inflation, we have seen about 9% to 10% inflation in the capex level because not just the imported equipment, we saw some increase in the air conditioning plants also. So — and as I said, I mean 9% to 10% in the overall context is completely insignificant.

Tejas Shah — Spark Capital — Analyst

Sure. Sir, second, government is pushing a lot of — they are actually putting a lot of effort on digitizing the e-commerce part ONDC, so with the franchise and the network that we have, do we see any merit on logging on to on that network or are we still continuing thing?

Ravi Kant Jaipuria — Chairman

Look, it is a space we are closely watching. And let’s see how it kind of grows because you need to have the entire ecosystem to get built up before we jump into it, because we are not able to provide the intra for that. So we’re watching it closely. The moment it starts to gain traction. We will be keen on that. But as of now, we’ve not kind of taken a bet on ONDC so far.

Tejas Shah — Spark Capital — Analyst

Sure. And sir, last one, book keeping. Tax rate guidance for this year, if you can help?

Manish Dawar — Wholetime Director and Chief Financial Officer

So you will see at the end of the year or maybe next quarter onwards, the normal tax coming in the books, which is 25%. So therefore, in your modeling purposes, you can assume a 25% tax going forward.

Tejas Shah — Spark Capital — Analyst

Okay. Fair enough. Thanks and all the best sir.

Manish Dawar — Wholetime Director and Chief Financial Officer

Yes. Thanks.

Operator

Thank you. The next question is from the line of Amruta Deherkar Sane from Wealth Managers India Private Limited. Please go ahead.

Amruta Deherkar Sane — Wealth Managers India Private Limited — Analyst

Thank you for the opportunity. My question is regarding Costa Coffee. I think now that you are focusing on Costa Coffee, because the new stores, we see that the margin has is a bit lower. So on a fairly established store, what is the kind of margin profile Costa Coffee outlets have?

Manish Dawar — Wholetime Director and Chief Financial Officer

So if you look at the brand contribution level, the normal margin profile is about 28% to 30% at a brand contribution level. The current quarter obviously has got impacted because of the new store openings and a bunch of new store openings because last two quarters, we’ve opened quite a significant number of new Costa stores versus the pace, but over the next few quarters, it should get even out.

Amruta Deherkar Sane — Wealth Managers India Private Limited — Analyst

Say, what is the time period required for Costa Coffee stores who say the breakeven to become an established outlet?

Manish Dawar — Wholetime Director and Chief Financial Officer

The breakeven happens in the first six months, but it takes almost about 15 to 18 months for a store to fully mature.

Amruta Deherkar Sane — Wealth Managers India Private Limited — Analyst

My second question is regarding — in capex, you said the stocking component of refurbishing cost per store. I mean the overall capex is you are talking about. I think what would be [Indecipherable] how much is a refurbishment cost that you need to incur for a store? And how often do you need to do that after how many years?

Manish Dawar — Wholetime Director and Chief Financial Officer

Okay. So we don’t split the capex from that perspective. But let me explain you how the entire refurbishment works. So there is something called a minor refurbishment and a major refurbishment. After every five years, we typically do minor refurbishment. Minor refurbishment basically is the customer area, where we will change upholstery. We will do a new job on the paint and polish and look and feel and all of that. major refurbishment is done once in 10 years, which will also include the kitchen area as well.

Amruta Deherkar Sane — Wealth Managers India Private Limited — Analyst

Okay. Thank you.

Manish Dawar — Wholetime Director and Chief Financial Officer

Okay.

Operator

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

Shirish Pardeshi — Centrum Broking — Analyst

Yes. Hi. Good evening. Thanks for the opportunity and congratulations for the good set of numbers. Manish, I was on slide 21, where I’m seeing the Pizza Hut numbers. We have reached to almost 466 stores, but then somewhat the ADS is not showing that kind of trend. So just wanted to understand, hypothetically, if you want to reach an ADS number of not exactly the market leader, let’s say, around, say, 60, 65 what it takes? What is — what we need to do? And maybe do you think the next three years we will be able to reach there? And the related question is that, how much price increases you have taken in quarter two and maybe in the first half?

Manish Dawar — Wholetime Director and Chief Financial Officer

So in quarter two, we’ve not taken any price increase. There could have been a small marginal 0.5% or 1%, and that’s it. The majority of the price increase was taken in quarter one. So therefore, from that perspective, quarter two numbers are kind of neutral. Obviously, your question on ADS, we’ve talked about a ASC number of 7% to 8% for Pizza Hut. And we continue to have new launches. We continue to have innovation pipeline. We’ve launched the new Fun Flavor Pizza now, which will help us to kind of bridge the gap for the market lead out.

Shirish Pardeshi — Centrum Broking — Analyst

But do you think three years’ time, we will be able to reach to 65%?

Manish Dawar — Wholetime Director and Chief Financial Officer

I will not be able to commit any number. So…

Shirish Pardeshi — Centrum Broking — Analyst

No, I’m not asking for a commitment. I mean, what I’m asking to reach that level in your frame of things, what do you think? I mean, you said Fun Pizza which will get you somewhere. But then…

Manish Dawar — Wholetime Director and Chief Financial Officer

Yeah.

Shirish Pardeshi — Centrum Broking — Analyst

…do you think whatever speed at which we are growing of course, operating leverage will kick in at some stage, but do you think is it possible to reach that level in three years?

Manish Dawar — Wholetime Director and Chief Financial Officer

Look, it is possible. It is not beyond possibility. But again, I mean, you have to look at the macro environment also. I mean if you look at, let’s say, the current year, there has been a huge inflation in the first quarter. And obviously, this inflation has not been food inflation this time. It’s a very well-rounded impacted various categories. The consumer wallets have not grown so much and therefore, to some extent, the consumers get impacted as far as the sentiment and emotions are concerned and they kind of tend to pull back. So let’s see. And there are a huge amount of headwinds available globally also, if you look at what is happening in Europe, what is happening in China. I mean there are huge headwinds available. So therefore, we have to kind of be a little cautious from that perspective. But otherwise, we are bullish on our plans.

Shirish Pardeshi — Centrum Broking — Analyst

That’s really helpful. I just have one last question. It’s a fundamental question. Whenever I’ve seen the companies entering into the new space or white spaces or maybe launching new products and fill in to try and get the more customers footfall. Now what I need to understand fundamentally, this all new product introduction, is it directly targeted to premiumizing the portfolio. And hence, the assumption is that the margin expansion will happen. And we will not dilute. Is it true for both the brands in KFC and Pizza Hut?

Manish Dawar — Wholetime Director and Chief Financial Officer

It works on both brand, because one is obviously premiumization remains a key objective. But if you look at the Fun Flavor, it is to drive the footfall and the volumes. So therefore, you have to work at all the ends to be able to make the brand more salient and appealing to the consumers. And obviously, if you have to grow the margins and you have to grow the top line, you have to balance it at both the ends.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. That’s really helpful. Thank you, and all the best.

Manish Dawar — Wholetime Director and Chief Financial Officer

Yeah.

Operator

Thank you. The next question is from the line of [Indecipherable]. Please go ahead.

Unidentified Participant — — Analyst

Hi. My queries are already been resolved. So. Hello?…

Operator

Yes. We can hear you.

Unidentified Participant — — Analyst

Hello, my queries are already been resolved. So you can yeah.

Operator

[Operator Instructions] The next question is from the line of Yashwant [Phonetic], Individual Investor. Please go ahead.

Yashwant — Individual Investor — Analyst

Yeah. Hi. I have two questions. First question is about — are we planning to cater offsite the parties could be like weddings or no small get together because I have seen quite a few people who are unorganized in the sector are providing there is an opportunity out there. So that’s my first question. And the second question is are we planning for any discount program for the investors because I see there are around 3 lakh investors, retail investors. So, which is a straightly aiming of 3 lakh families on that?

Manish Dawar — Wholetime Director and Chief Financial Officer

Okay. So we are not planning to launch in the weddings or cater to the weddings and so on and so forth. So our objective and priority is to kind of continue to do what we are doing in terms of opening the store, giving consumers a good response, come out with new innovative products and so on and so forth. So that is what we are sticking to. As far as your other question on the shareholders’ family is concerned, let’s consider that, and we can come back to you.

Yashwant — Individual Investor — Analyst

Yes. Thank you.

Manish Dawar — Wholetime Director and Chief Financial Officer

Okay.

Operator

Thank you. The next question is from the line of [Indecipherable] Shah, Advisors. Please go ahead.

Unidentified Participant — — Analyst

Thanks. Thanks for the follow-up sir. One of my question, would be, if we are exiting any stores — so what are the parameters we are looking into when we are closing out the stores? And what are the — like what are the — you can say, a ratio or something like analytical thing which we look at into services of the store?

Manish Dawar — Wholetime Director and Chief Financial Officer

Typically, we look at the store profitability. And obviously, that kind of takes into account all the lines at the store P&L level. And that’s how we take a call. So whenever we open a new store, we typically try and make this successful for about 18 to 24 months period. And then beyond that, which is, let’s say, two and half years so we would take that call. So — and normally, let’s say, a reasonable amount of store closures, we normally bake in our model, and that’s how we kind of manage the entire business because not all the stores will be successful as we continue to expand, because we’ve seen at a number of places, for example, you opened a store and there is some infra development, which starts — let’s say, there is a flyover which starts to get constructed and the traffic shift or there are some road works, which come in. So — or let’s say there is a new road which gets cut out. So obviously, in India, these challenges are there, and we plan for it.

Unidentified Participant — — Analyst

Thank you, sir. That’s it for me, sir.

Operator

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

Anoop Poojari — Client Manager

Thank you, Chairman, and all the investors, analysts who have been on the call, I do hope that we have managed to respond to all your queries statistically. Should you need any further clarifications or would you like to know more about the company, please feel free to contact our investor relations team. Thank you once again for your time today to join us on this call and participate in our growth journey. Thank you very much.

Operator

[Operator Closing Remarks]