Devyani International Ltd (DEVYANI) Q3 FY23 Earnings Concall Transcript

Devyani International Ltd (NSE:DEVYANI) Q3 FY23 Earnings Concall dated Feb. 09, 2023.

Corporate Participants:

Ravi Kant Jaipuria — Non-Executive Director

Manish Dawar — Whole-time Director, Chief Financial Officer

Analysts:

Anoop Poojari — Citigate Dewe Rogerson — Analyst

Percy Panthaki — IIFL Securities — Analyst

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

Shirish Pardeshi — Centrum Broking Limited — Analyst

Srinath Vasan — Bellwether Capital Pvt. Ltd. — Analyst

Kaustubh Pawaskar — Sharekhan BNP Paribas Financial Services Limited — Analyst

Jaykumar Doshi — Kotak Securities — Analyst

Akshen Thakkar — Fidelity International — Analyst

Prashant Kutty — Sundaram Mutual Fund — Analyst

Unidentified Participant — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Devyani International’s Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you and over to you, sir.

Anoop Poojari — Citigate Dewe Rogerson — Analyst

Thank you. Good afternoon, everyone, and thank you for joining us on Devyani International’s Q3 and 9M FY ’23 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, CEO and Whole-time Director; Mr. Manish Dawar, CFO and Whole-time Director; and Mr. Rahul Shinde, CEO, Yum Brands, and Whole-time Director.

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 disclaimer to this effect has been included in the results presentation shared with you earlier. I would now request Mr. Ravi Jaipuria to make his opening remarks.

Ravi Kant Jaipuria — Non-Executive Director

Good afternoon, everyone. I warmly welcome you all to our earning conference call to discuss the business performance for the quarter ended, December 31, 2022. Continuing with our store expansion strategy, DIL added 81 new stores to its portfolio during the quarter. With this, our total store count stands at 1,177 stores across all our brands.

We are on target to double our store count by the end of the current fiscal year with the number of stores we have three years ago. You would recall that we we are at a store count, we were at a store count of approximately 600 stores as of year full year 2022. We recently celebrated the opening of our 100th Costa Coffee store a strong testimony to our commitment to the growth of all our core brands.

Our core brands’ footprint in India covers more than 225 cities now. We continue to target new trade areas in metros as well as upcoming cities for our store expansions. Broad-based inflation has somewhat moderated, however, cost for some of our key raw materials like milk and cheese continue to remain elevated and are still witnessing some inflationary trends. On balance, we think we will start to see margins stabilize over the next couple of quarters.

The inflation across the staples and food services seems to have a bearing on consumer sentiment and consumer demand. We are supporting our business with the requisite investments and continue to closely monitor the same. Consolidated quarterly revenues were approximately INR791 crores, a growth of nearly 37% over the corresponding period last year. Reported EBITDA, on a Post Ind AS basis reached close to INR174 crores, which is 22% of the revenues.

We have recently brought back Pizza Hut and KFC to strong consumer reception and uptake. As we have mentioned earlier, innovation remains a strong pillar of our growth strategy across our brands’ portfolio and we will continue to delight our customers with many such products in the coming quarters. We continue to remain bullish on our brands in the Indian market. We believe that the current consumer demand slowdown is temporary phenomena and once the inflation stabilizes, we expect the consumer spending to improve, which will help our business.

In the meantime, we continue to focus on our processes, product quality, and execution capabilities. With this, I would like to conclude my address and now hand over to Manish for his comments. Thank you.

Manish Dawar — Whole-time Director, Chief Financial Officer

Thank you, Mr. Jaipuria. Good evening, everyone. A warm welcome and thanks to all of you for your valuable time for attending our Q3 and nine months FY ’23 earnings conference call. Our 6th such call since the listing. As Mr. Jaipuria said We are a 1,177-strong restaurant company now. Just a few years back, this number was 610. We have opened 81 new stores across our brand portfolio in quarter three. With this globally, we have 512 stores for KFC, 487 stores for Pizza Hut, and 103 stores for Costa Coffee in our portfolio as at the end of quarter three, FY ’23.

Our metro and non-metro distribution of stores in India largely remained unchanged. The revenues for quarter three stood at INR791 crores versus INR624 crores last year clocking a healthy 27% growth on a Y-o-Y basis. Revenue growth has been led by new-store openings and some volume growth offset by some compression on the average spending. The gross margins stood at 69.3% for quarter three, the slight impact as a result of the continued input inflation and product mix change. We are working to narrow the gap in gross margins due to product mix changes and get it closer to the rest of the portfolio. This may take a few quarters.

The combination of mix change deleveraged because of lower ADS and investments made in our business suppress the brand contribution margins. Brand contribution margins came in at 18.3% versus 19.6% in the previous quarter. Operating EBITDA on a pre-IndAS basis was INR117 crores. Operating EBITDA margin was 14.8% and grew approximately 14% on a Y-o-Y basis. Reported EBITDA on a post-IndAS basis was INR174 crores for the quarter, with margins at 22% versus INR148 crores a year ago 18% growth. Profit-after-tax for the quarter stood at INR71 crores versus INR57 crores in the previous quarter. There is an impact of deferred tax asset recognition in the PAT numbers for the quarter.

Coming to our core brands, KFC in India added 38 net-new stores, reaching a total count of 461 stores at the end-of-the quarter. Average daily sales was INR116,000 due to some weakness in consumer spending. And as a result of some deeper penetration, where we are expecting a smaller ADS. And this also had an impact of new stores and the concentrated expansion in some geographies. SSSG was 3%, revenue is at INR460 crores, grew 4% sequentially and 27% on Y-o-Y basis. Gross margins remained almost flat at 67.6%. We invested in the brand which has led to slightly lower brand contribution margin of 19.7% in the quarter.

On-premise consumption remains steady at 64% for the quarter. Pizza Hut in India added 17 net-new stores to reach a count of 483 stores. ADS declined marginally to INR43,000. Revenues came in at INR184 crores, growing 18% Y-on-Y. Cheese prices continue to trend higher as a result of this and the product mix changes. Gross margin came in slightly lower at 73.6% versus 74.5% in the previous quarter. Brand contribution margins dipped to 14.1% versus 17% in the previous quarter because of the GM dilution, slightly higher delivery sales, and investment in the brand. On-premise consumption was slightly lower at 43%.

Costa Coffee crossed the 100th store milestone. We added 15 new stores in the quarter to reach a total of 103. Revenues grew to INR29 crores. The ADS for the brand improved to INR37,000, gross margin was slightly lower at 77.8% because of the inflation in coffee and milk prices. With better operating leverage versus the previous quarter brand contribution improved from 19.6% to 26.4%. On a YTD basis, we’ve added 239 net-new stores. Consolidated revenues came in at INR2,243 crores, a 50% year-on-year growth. Gross margin at 70.2% and brand contribution margin of 19.4% as the impact of inflationary pressures.

Reported EBITDA, both on a post-IndAS basis and on a consolidated basis for the nine months has crossed INR500 crores for the first time with margins at 22.5%. YTD profit-after-tax for the year is INR203 crores. We maintain our goal of sustainable and profitable volume-led growth. While the near-term outlook for consumer sentiment in the category remains a little fluid. We are steadfast in our growth aspiration and are confident that our portfolio of fine-tested brands and our execution sense will enable us in achieving our aspiration.

On that note. I would like to request the moderator to open the forum for any questions or suggestions that you may have. Many, many thanks.

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 Securities. Please go ahead.

Percy Panthaki — IIFL Securities — Analyst

Hi, sir. Just wanted to understand the reasons behind significantly different SSSG for KFC and Pizza Hut, when KFC has grown by about 3%, Pizza Hut has declined by about 6%. So is it just that the pizza category has now become too cluttered with overall about 2,500 outlets, of the top two players put together, there is not much more room for penetration and that is why you are seeing SSSG being significantly lower versus KFC.

Manish Dawar — Whole-time Director, Chief Financial Officer

So, Percy. Percy as you know the chicken category remains a very, very strong category and right from the last six to eight quarters, we’ve been emphasizing that chicken is highly under-penetrated in the country given their consumption habits which are there for the consumers and therefore, that remains a very, very attractive category and that’s the reason we are focusing on a rapid expansion in KFC.

So on KFC also, we’ve started penetrating deeper into the country and obviously, as you go deeper, your non-metro consumption, although it has a strong potential, the consumption levels are still not equivalent to metro levels, and therefore, that kind of impacts, a little bit on the ADS numbers. Having said that, we’ve seen a general sentiment issues because of the broad inflation in this quarter, which has impacted the SSSG numbers. Although for KFC, we have still — we believe healthy at 3%. So therefore we think we are absolutely on a right track as far as KFC is concerned.

On Pizza Hut, I agree with you that obviously the market is kind of getting cluttered and there is a competition from the other QSR segments as well. Having said that, we also kind of focused on the new launch that we had in the form of Fun Flavour pizzas. And Fun Flavour has led to our long-term aspiration of transaction increase and that is happening, but at the same time, it has led to some bit of dilution on the average realization which has led to a little reduction on the SSSG numbers.

Having said that, we are working on the gross margin piece because Fun Flavour, as of now, because it’s a new launch, is a little bit of margin dilutive as well. So in the next few quarters, we will be able to resolve that. And it will also help us to kind of grow the brand by attracting new set of consumers over a period of time which will kind of take Pizza Hut to a stronger stand.

Percy Panthaki — IIFL Securities — Analyst

Sir, just a sub-question here on Fun Flavour is it resulting any downtrading or is it that whatever sales are coming from Fun Flavour, they are all incremental sales only, which would not have come had this product not been there.

Manish Dawar — Whole-time Director, Chief Financial Officer

Percy, look. Whenever you launch a new category, it takes time to kind of attract the new set of consumers, right? And in an inflationary environment when we’ve launched this category, obviously there is some down-trading happening because consumers are seeing a cheaper option available. Now therefore, the hypothesis could well be, let’s say, if I would not have Fun Flavour pizza, these consumers could have left out of the brand, which is not the case.

So therefore, we’ve managed to retain those consumers, but at the same time it’s important over a period of time, we will be able to attract the new set of consumers, and that was the fundamental objective behind Fun Flavour and I think we’ll be able to achieve that.

Percy Panthaki — IIFL Securities — Analyst

Right. Second question from my side is, what is the store opening plan for FY ’24 across your different brands? And are you sort of tapering down the store expansion given the kind of demand environment we are in?

Manish Dawar — Whole-time Director, Chief Financial Officer

So, Percy as far as next year is concerned, in the past as you remember, we talked about 250 stores odd. In the recent times, we talked about 250 to 300 stores. We remain steadfast on that guidance. So we are talking about 250 to 300 stores for next year as well. There could well be some mix change between the brands depending on how the market is and depending on how things are. And therefore, obviously, we will be accelerating KFC more because that market is kind of responding very well and — but the overall numbers remain the same, which is 250 to 300 stores for the next year as well.

Percy Panthaki — IIFL Securities — Analyst

Okay. I have more questions, but I’ll come back in the queue. Thank you.

Operator

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

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

Yes, sir. Thanks for the opportunity and congrats on strong store additions in the quarter. Sir, for KFC on-premise mix in this quarter has remained similar to base quarter. This is against the higher traction for dining, which was expected in this quarter. So, what according to you is the reason for this?

Manish Dawar — Whole-time Director, Chief Financial Officer

Devanshu, sorry, can you please repeat your question, there was a — there was a miss in between.

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

Yeah, so. I was asking that on-premise mix for KFC has remained similar to what it was in the base quarter. However, in my opinion the mobility was much better this quarter versus the base. So what is the reason for that?

Manish Dawar — Whole-time Director, Chief Financial Officer

Devanshu, as I said. I mean, we’re kind of taking brand deeper into the country and obviously, there is more of a novelty value to order at home. So, as — let’s say your food aggregators are kind of — are expanding, people are experimenting with home delivery. So it has a novelty value and that is how it is. But having said that, we are absolutely focused on the on-premise consumption and I don’t know whether you will notice in our presentation, we’ve started opening flagship stores for the KFC as a brand.

So our objective is that over a period of time, we will open at least 10% of the stores as KFC and as KFC flagship stores and the fundamental premise and logic is that these stores are going to be bigger as far as the real estate is concerned, they’ll be more digital, they will have expanded menu, they will have some localization in terms of look and feel, which will kind of help us expand the KFC portfolio from a timing perspective. So, therefore, we’ve already started taking that initiative and during the quarter, we opened about five flagship stores already.

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

Got it, sir. And for Pizza Hut, I mean if you have been guiding for high-single-digit sort of an SSG [Phonetic] over the medium-term, but over the last two quarters the performance here has not been up to our expectation. So are we sort of revising our this SSG sort of number for the medium-term as you also indicated that this category is being impacted because of it being largely penetrated as well as because of other QSR category?

Manish Dawar — Whole-time Director, Chief Financial Officer

Devanshu, as I said, if you look at — I mean, one is obviously the market issue. The second is — when I say market issue means for pizza as a market, which is what Percy also alluded to. Second, it has been an inflationary environment and obviously, the consumers are kind of given that their wallet sizes remains the same and it’s a broad-based inflation. They are also tightening their spends in terms of various discretionary categories. And at the same time, I also mentioned that, because we launched Fun Flavour pizza during the quarter, or let’s say the kind of push it, it has had some impact on that, but otherwise the transactions are kind of up and therefore on a medium-term basis we remain confident that we will be more or less at the numbers that we’ve spoken earlier of.

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

Very well. Last question, Manish, if you could indicate the kind of inflation that we are expecting on the raw-material basket for Q4, also if you could provide any guidance for next year, full year FY ’24 on this account will be really helpful.

Manish Dawar — Whole-time Director, Chief Financial Officer

So, Devanshu, KFC portfolio seems to be stabilizing now as far as the raw material and the input prices are concerned. But having said that, I mean in today’s environment, given the geopolitical situation, given what could happen in the world. Obviously, we will not be able to kind of guide accurately what will happen, but as we see today and in the next quarter, KFC portfolio seems to be stabilizing. On Pizza Hut, there still remains a challenge as far as the milk and cheese prices are concerned, but we believe that overall as a cycle. I think inflation is stabilizing now it’s no longer the same trend that we used to see a couple of quarters back. And therefore, we are moving towards stabilization. And as Mr. Jaipuria also mentioned in his address that we see margins stabilizing over the next few quarters.

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

And on this stuff apart from this so table — on a sequential basis, you are indicating, right? The prices are stable on a sequential — okay. Got it, sir.

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah. Yeah. Yeah. Because as of now, we are not seeing any indicators, which kind of gives us that the prices are rolling back, I’m talking about the input prices. So they are just stabilizing whereas earlier they were going up on a month-to-month basis, quarter-to-quarter basis.

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

Got it, sir. Thank you.

Manish Dawar — Whole-time Director, Chief Financial Officer

Thank you so much.

Operator

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

Shirish Pardeshi — Centrum Broking Limited — Analyst

Yeah. Hi. Good afternoon, Ravi and Manish. Thanks for the opportunity. Just two questions. So, when I look at the Slide 17, which says that the gross profit, which is at 67.6%, obviously, on a Y-o-Y basis, not comparable, it’s coming down. But is it fair to assume that taking your comment that the input material is now stabilizing will inch up towards 69%, 70%, or maybe historically what we have delivered or it will remain stable at this number?

Manish Dawar — Whole-time Director, Chief Financial Officer

I assume you’re talking about KFC margins, right? Because. Slide 17 is the KFC slide.

Shirish Pardeshi — Centrum Broking Limited — Analyst

Yes. That’s right. I’m talking about KFC.

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah. So as I said, KFC as the portfolio is stabilizing, but we still not seen the prices getting rolled back and a 69% is only possible when the prices start to roll-back. We’ve still not seen that. So therefore, when we talk about stabilization, which means that we will be stabilizing around this level and as we go along — and there is a broader acceptance. Maybe we can expect something but we not alluding to that.

Shirish Pardeshi — Centrum Broking Limited — Analyst

But have you taken any price increase in quarter three or maybe early January, February — now February?

Manish Dawar — Whole-time Director, Chief Financial Officer

We have not taken any price increase on KFC.

Shirish Pardeshi — Centrum Broking Limited — Analyst

So the question here is that, is it that you think the inflation if doesn’t suffice, you will have to take at least 2%, 3% price increase?

Manish Dawar — Whole-time Director, Chief Financial Officer

Let’s see how it goes, because, for example, let’s say, if you remember, KFC pricing we took way back in April, May of last year, and after that we’ve kind of managed to hold on to KFC prices for nine months now. So, therefore, let’s see how the — how it goes. Our preference will be not to increase the pricing, because as you know I mean it’s a discretionary category, but it’s a discretionary closer to staples because that is how the consumption is happening. So let’s see how the situation pans out and then based on that we will take appropriate calls whatever is good for the business.

Shirish Pardeshi — Centrum Broking Limited — Analyst

See, the reason why I’m asking, Manish, is primarily the — when I look at there is normally the inflation, if it is subsiding. Most of the companies would up the ante on the ad spend and you’re now quite visible on the traditional media.

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah.

Shirish Pardeshi — Centrum Broking Limited — Analyst

So that’s why this assumption is that is it more to do with the customer acquisition or is it more to do with the benefits what we are getting because of the falling raw materials?

Manish Dawar — Whole-time Director, Chief Financial Officer

Look, it’s a little different hypothesis. Because if you look at the voices which are coming from staples is basically they talking about rollback of prices because they are seeing very clear trends, whereby the input materials for staples category are actually getting rolled back. And typically the discretionary segment follows the staples, whenever the prices are going up, or whenever the prices come down. So, therefore, that’s the reason we are seeing that we’ve still not seen a rollback. But let’s see how the situation pans out.

Shirish Pardeshi — Centrum Broking Limited — Analyst

Okay. Sir, my second and last question on Pizza Hut. I think…

Operator

Sorry to interrupt you, sir. May I request you to please please rejoin the queue? We have participants waiting for their turns.

Shirish Pardeshi — Centrum Broking Limited — Analyst

Okay.

Operator

Thank you. The next question is from the line of Srinath V from Bellwether Capital. Please go ahead.

Srinath Vasan — Bellwether Capital Pvt. Ltd. — Analyst

Hi, sir. I would like to understand what is working for Costa Coffee, driven SSG [Phonetic] numbers have come strong ADS is also very strong. So could you help us understand what is working in Costa Coffee and from a new store opening perspective, are these similar formats to what it was before we had to scale down a few years back? We were — are like these results I format stores or more kiosks, what would be the size of the store? anything you could probably share. And the last question on, Costa would be, is it largely a beverage-only offering or are there food offerings also and how are the top three is doing any broader perspective on product price also? Thank you, sir.

Manish Dawar — Whole-time Director, Chief Financial Officer

Sure, so let me answer your second question first, Srinath. So if you go to a Costa store, and in Bombay we’ve already opened a store at Phoenix Mall, Kurla and therefore, you’ll be able to see the complete offering there, so we have food present in not menu. So, you have sandwiches, you have wraps, you have rolls, you have cakes. So there are multiple formats of snacking items and food items there. We have pita bread and hummus so therefore I mean, you can actually go in and have a lunch there. So, therefore, it is there.

Having said that, the dominant contribution still comes from beverages. Our focus is to continue to push food as well and that’s how we are coming up with the innovation as far as Costa is concerned. So it’s kind of a well-balanced and well-mixed as far as the overall menu contribution is concerned.

Coming to your first question in terms of what is happening in Costa. Costa also because as we said, I mean, we are bullish in this — on this category coffee is an aspirational category in the country. Whatever consumer feedback we get we consistently get the feedback that Costa Coffee is probably one of the best coffees in the market from a taste perspective, from a flavor perspective, and the genuine coffee lovers prefer Costa over any other. So that is what our consumers tell us.

So having said that and having attained that position, it is a matter of making sure that we reach the consumers through our distribution network and the store’s network and that is what we are we are trying to do. So, Costa, I don’t know whether you are aware about the history. I mean it was acquired by Coke. So there was a little bit of uncertainty as far as Devyani was concerned. And that’s the reason we in between kind of started downsizing the plan, we did not expand.

But we signed the fresh agreement around the IPO time last year and since then we’ve been kind of expanding the brand and it is gaining salience now. So that is what is — that is what is happening now.

Srinath Vasan — Bellwether Capital Pvt. Ltd. — Analyst

Yes, sir. Yeah. I’m reasonably aware of the history, so, with that — the specific question was on the — lounge to combat like so we’ve seen Pizza Hut store format evolve over the past eight years, and to some extent, may not be to the same extent as Pizza Hut, we’ve seen KFC products. So could you help us understand how the Costa format from a store size or a service area, has it changed from what it was four years back before the Coke’s acquisition, how are you looking store rollouts? And the last one there is this 20% SSG price-driven or our old stores are also seeing volume growth? Thank you, sir.

Manish Dawar — Whole-time Director, Chief Financial Officer

Sure, so if you were to go back, let’s say, four, five years we used to focus on a little larger format. As far as Costa was concerned. In the new avatar it’s a good mix of whatever is working in a particular environment. So we do have a focus on a smaller store. So we are not focusing on large format lounge-type stores, these are very, very functional very accessible to consumers, very easy for consumers, but at the same time, because we need to establish Costa as a brand, we also look at some of the flagship locations. So it’s a mix of both, but our focus will be on smaller format Costa Coffee stores.

Srinath Vasan — Bellwether Capital Pvt. Ltd. — Analyst

Thank you. Sir, I’ll get back into the queue. And just for this last one would be, the SSG, is it price-driven, volume-driven, and any broad qualitative feedback you can give? And I’ll get back in the question queue. Thank you.

Manish Dawar — Whole-time Director, Chief Financial Officer

Sure, it’s largely volume-driven. Very small. Very, very small impact of pricing.

Srinath Vasan — Bellwether Capital Pvt. Ltd. — Analyst

Thanks.

Operator

Thank you. The next question is from the line of Kaustubh Pawaskar from Sharekhan by BNP Paribas. Please go ahead.

Kaustubh Pawaskar — Sharekhan BNP Paribas Financial Services Limited — Analyst

Yeah. Good afternoon, sir. Thanks for giving me the opportunity. Sir, my question is on the gross margins again. In your initial comment, you get to the point that product mix change has had some bit of impact on the gross margin. So can you just explain that point and is it specifically towards or Pizza Hut or for the overall portfolio, sir?

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah, Kaustubh. It is specifically for Pizza Hut and the product mix that we talked about was basically the Fun Flavour’s portion that we — that I talked about in the earlier answers.

Kaustubh Pawaskar — Sharekhan BNP Paribas Financial Services Limited — Analyst

Right. Also in that case, for Pizza Hut, we used to generate around 74% to 75% gross margins. So, if now the product mix is tied up a margin dilutive. So should we expect our gross margin in Pizza Hut to stabilize at around 72% to 73% going ahead once you’re raw material prices stabilize or there is a scope of margin improvement once inflationary environment recedes?

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah. So as far as Pizza Hut category is concerned, you know that milk prices even, let’s say, for example, a few days back, there is a INR3 increase in the milk prices, which would lead to almost INR30 to INR40 cheese prices, so therefore that environment still remains. And at the same time Fun Flavour is also diluting the margins a little bit, thereby, I said that we are working on correcting that. And it will take us a few quarters to kind of get the Fun Flavour margins in line with the rest of the portfolio.

And post that, let’s say, once the milk prices and cheese prices are stabilizing or they’re getting rolled back. We could see the gross margins inching up.

Kaustubh Pawaskar — Sharekhan BNP Paribas Financial Services Limited — Analyst

Okay. And my second question is on KFC. You mentioned that you are also looking for some large format in some of the markets, so whether it will initially have impact on the from the cost front, because normally if the store size is higher, it will it normally have a little lower — how the cost is on a higher side. So considering that, I just wanted to understand that what exactly the would be the size of the stores and how the store is fundamentally smooth, it could be for these KFC branches?

Manish Dawar — Whole-time Director, Chief Financial Officer

So on a — at a store-level profitability, what you’re saying is right, that there could be small impact because of the rentals and all, but the reason why we’re doing it because we expect that because of the larger format and expanded menu, we will have the increase in ADS for these stores, which will more than makeup for the increase in costs.

So, therefore, there could be some timing mismatch because obviously we have to first put up the stores and then the consumers will start to walk in. But otherwise, in general, we do expect that this will result into high ADS. This will result into higher brand acceptance and gaining prominence and therefore it will be good for the P&L as well.

Kaustubh Pawaskar — Sharekhan BNP Paribas Financial Services Limited — Analyst

Okay. Got your point, sir. Thank you so much and all the best for the future quarters.

Manish Dawar — Whole-time Director, Chief Financial Officer

Thank you so much.

Operator

Thank you. The next question is from the line of Jay Kumar Doshi from Kotak. Please go ahead.

Jaykumar Doshi — Kotak Securities — Analyst

Hi. Good afternoon. Sorry, I joined the call late, so if I’m repeating the question that was already answered, I’ll go back in the queue and read the transcript. There is some weakness in general in ADS across the space. So how do you think about store opening targets that you have set for this year and next year rather — I mean for FY ’24 or calendar year ’23 await your target. That’s my first question. And second is, in case of KFC or maybe even Pizza Hut, what percentage of your stores will open in new cities that are in essentially current demand environment may not matter as much, you’re opening store in — the year single city store and how many stores will be open in the existing markets and you already have stores and there could be some cannibalization.

Manish Dawar — Whole-time Director, Chief Financial Officer

Sure, Jay. So, Jay, I did on first, the earlier question on the number of stores, but let me just kind of repeat it, so pardon, let me ask for the pardon from others. So we’ve talked about opening 250 to 300 stores even in the current environment. If you see our guidance in the past has been 250 stores, of lately, we’ve been talking about 250 to 300 as a result of the current environment that you rightly pointed out. We are not changing the store opening guidance. We will remain with 250 to 300. However, depending on the immediate market situation, there could be some mix change, so for example, we are definitely looking at opening higher number of KFC stores and a little lower Pizza Hut stores. But overall, the store count will remain the same. And we’re not changing that.

We remain bullish as far as the overall market is concerned. We do understand that currently because of the inflation the consumer sentiment and consumer demand is impacted, but we remain bullish in the medium-to-long term and we don’t see any concern.

Jaykumar Doshi — Kotak Securities — Analyst

And what percentage of stores — how many new cities would you be entering for KFC?

Manish Dawar — Whole-time Director, Chief Financial Officer

So we continue to open at least four to five new cities, every quarter and that is what we’ll be doing. So therefore the entire strategies all around densification in the existing cities, plus the new cities plus as you know, there are some cities where we have single stores and we continue to evaluate that. By opening the next store and the next store there.

Jaykumar Doshi — Kotak Securities — Analyst

Understood. Thank you so much. Wish you all the best.

Manish Dawar — Whole-time Director, Chief Financial Officer

Thanks, Jay.

Operator

Thank you. The next question is from the line of Percy Panthaki from IIFL Securities. Please go ahead.

Percy Panthaki — IIFL Securities — Analyst

Hi. So I’m just looking at your corporate overheads in Q3 last year it was INR34 crores, which was 5.4% of sales, this time it is INR28 crore, which is 3.5% of sales. So there is a 190 basis points savings on this as a percentage of sales, which has really sort of helped your overall company-level margins. So can you just help us understand why this is the case even in rupee million terms, this — the number is down by about 18%.

Manish Dawar — Whole-time Director, Chief Financial Officer

Sure, Percy. So, Percy, given the current environment, obviously we have tightened our belts and there has been some initiatives on the cost control and cost reduction, but at the same time there is a small element of some old provisions which were no longer required and that is also was written back, but that’s a small one, but overall we are tightening the belt, because of the current environment and therefore, that is not a big concern area for us.

Percy Panthaki — IIFL Securities — Analyst

So, going ahead, shall we take this INR33 crore to INR34 crore as sort of number — quarterly number in future?

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah. You can take around that number.

Percy Panthaki — IIFL Securities — Analyst

Okay. Okay. Understood. Secondly, just wanted to understand in terms of your margins at restaurant level for — I mean, I’m not looking at individual formats, I’m just looking at the overall restaurant level as a company, assuming that there will not be much mix change in restaurants, going ahead. The kind of margins that we have done this quarter are they here to stay temporarily given where the input costs are given where the demand environment is, etc., etc., or do we see some revival because at an individual restaurant level margins have fallen by about 250 basis points and 300 basis points in your two major formats.

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah. So, Percy. If you see the restaurant-level margins are typically driven by the ADS numbers and the ADS is little lower in the season, even though it’s a good season. So which I said is a combination of basically some of the new store openings or — and at the pace we are kind of opening the new stores because if you look at the pace, I mean we are probably the leaders in the industry as far as the new-store openings are concerned, but as things start to stabilize as the new stores start to mature and they start coming into into the base, we will see the margins coming back.

Percy Panthaki — IIFL Securities — Analyst

Understood. And lastly on Costa Coffee, while your margin profile, it’s very healthy, the sales per store is sort of pretty low at about INR2.5 million to INR3 million per quarter. So do you think that given the kind of format you are operating, this is the kind of sales per store that you will generate and let’s say someone like a Starbucks is a completely different format and they make like INR7.5 million sales per store per quarter, which is like maybe 2.5 times, 3 times yours? So that’s not a number we would aspire for given that it’s a completely different model or do you think that there is significant headroom for improvement in this number?

Manish Dawar — Whole-time Director, Chief Financial Officer

So, we are not looking at that number and to be honest, we are not aspiring for that number also because as you said, it’s a completely different format and it’s a completely different positioning. So as far as we’re concerned, we want to have a good healthy mix of both top line and bottom line and that is how we are approaching all of our brands. Having said that, as I’ve said earlier, we are focused on the food category and this whole focus and stabilization of the entire supply chain will give us some additional ADS first, but for sure we are not aspiring at INR7.5 million kind of number.

Percy Panthaki — IIFL Securities — Analyst

Okay. Okay. Yeah, that’s all from me. Thanks and all the best.

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah. Thanks so much, Percy.

Operator

Thank you. The next question is from the line of Akshen Thakkar from Fidelity. Please go ahead.

Akshen Thakkar — Fidelity International — Analyst

Hi, team. Congratulations on a good set of numbers in a relatively difficult environment. Most of my questions have been answered. I just wanted to push a little bit and understand on the flagship store strategy, you said 10% of stores will be flagship stores in KFC, that’s 10% of incremental or total? And if I were to think about sort of boxed economics there, what’s the kind of delta capex or delta ADS are we thinking about in the stores? I know it’s more to do it just sort of keeping the product more relevant, more fresh, etc., but just in terms of how it plays out into numbers one, two, three years out, just wanted to also understand how much more capex is spending on that and what’s the kind of incremental ADS we can take out of that? Thanks.

Manish Dawar — Whole-time Director, Chief Financial Officer

Hi. How are you? So as far as KFC flagship is concerned, our immediate target is that whatever new store openings we are having — 10% of new store openings will be flagship stores. But as we go along and we get confidence on the format, our eventual objective is to have 10% of this total store count. So because we don’t want to kind of push it and rush it in one go. So that’s the reason I have internal management team, we’ve taken a target of 10% of the store openings to begin with, stabilize the format, see what the results are coming, is the increment ADS coming or not coming, and then we will, but our eventual objective is to go to 10% store count for the entire portfolio.

So very marginal capex increase about 8% to 9%, not much, and we are yet to see the firm numbers on top line coming up but whatever stores we’ve seen in the few weeks the response is encouraging. So we’ll keep you posted as to how the strategy is going.

Akshen Thakkar — Fidelity International — Analyst

Okay, great. The second question was to go back to what Percy was saying that…

Operator

I’m sorry to interrupt you Mr. Thakkar, may we request you to speak a bit louder? We can’t hear you clearly.

Akshen Thakkar — Fidelity International — Analyst

Sorry. This is audible?

Operator

Please go ahead.

Akshen Thakkar — Fidelity International — Analyst

Yeah, so just going back to Percy’s point and corporate overheads on a run rate basis, given where you are what’s the kind of growth we should expect generally going ahead?

Manish Dawar — Whole-time Director, Chief Financial Officer

We should expect the growth on corporate overheads to be in line with the normal inflation. And therefore, as we continue to expand our store portfolio, and we continue to grow on top line, you will see leverage coming in on corporate overhead and the percentage to the total sales will continue to drop.

Akshen Thakkar — Fidelity International — Analyst

All right. And the last question from my side is, if you think about terms of trade that we had — have with some of the food tech platform, given that some of those start focusing more on profitability. Are you seeing any changes in terms of take rates for them etc., going up terms remain broadly same? Thanks.

Manish Dawar — Whole-time Director, Chief Financial Officer

We’ve not seen the take rates going up as of now. Obviously, the pressure is always there. It’s a two-way negotiation. So far the take rates have remained stable for us because we also are continuing to grow our store count. We are continuing to grow in volume. So, therefore, they are also getting additional business from us. So therefore to that extent, the relationship is very mutual and very healthy and it’s going well.

Akshen Thakkar — Fidelity International — Analyst

Okay. Great. And sorry, I said it was the last question, but let me just slip in one more.

Manish Dawar — Whole-time Director, Chief Financial Officer

Okay.

Akshen Thakkar — Fidelity International — Analyst

You mentioned that you’re thinking about adding more KFC next year versus Pizza Hut. So whatever your store opening this year was maybe will be the same? That mix will also have a bearing on your eventual store-level EBITDA, right?

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah.

Akshen Thakkar — Fidelity International — Analyst

Because — and KFC has much better margins.

Manish Dawar — Whole-time Director, Chief Financial Officer

Correct. You’re right.

Akshen Thakkar — Fidelity International — Analyst

Thanks. Thank you.

Operator

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

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

Yes, sir, and thanks for the follow up opportunity. Sir, PSM reported quite a bit of growth divergence within Q3. So specifically, November was quite bad. So if you could sort of throw some light on the trends during the quarter, it would be helpful. And yeah, so it would be helpful in that sense.

Manish Dawar — Whole-time Director, Chief Financial Officer

So, Devanshu, we also saw a little bit of weakness in November because, obviously, the two months that is October and December did well, but there were some weakness in November. So let’s see. I mean, we believe it is temporary, but yet to be tested yet to be seen. So, therefore, — because our belief is that it’s predominantly because of the all-around inflation which is happening whereas the consumer wallets have remained the same. And at the same time, if you see the entire scenario on tech layoffs, that also is kind of gaining prominence. Although, let’s say, the tech layoff in the U.S., but most of these companies have their backroom operations in India and they are also getting impacted.

We’ve seen a lot of announcements from the Indian tech companies also where the layoffs are happening and, obviously, all of this, had some bearing on the consumer sentiment.

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

So that December pickup from November. So that growth trajectory continues in January or January is more similar to November?

Manish Dawar — Whole-time Director, Chief Financial Officer

Let’s see. I mean, it’s like, because, obviously, it’s too early to comment on the overall quarter results, because we are not giving any month-on-month results. But let’s see how it kind of shapes them, so but it not so bad as probably if you’re thinking.

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

Okay. And sir, Mr. Jaipuria also mentioned that there are quite a bit of new launches that are so if you could throw some light on that front because they definitely are growth driver in the QSR industry. So if you could throw some light on the new client launches which going ahead?

Manish Dawar — Whole-time Director, Chief Financial Officer

We are not looking at any new brands as of now, obviously, if we kind of finalize something we will come back to you guys to make that announcement.

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

I was asking for new product launches, not brand launches.

Manish Dawar — Whole-time Director, Chief Financial Officer

Got it. Got it. So that’s a continuous cycle, Devanshu as we speak. Mr. Jaipuria talked about KFC, innovation pizza that we talked about in Pizza hut, as you know, we launched a complete range of Fun Flavour of pizzas. We launched a new version of momo pizza, we’ve launched the new sides. So, therefore, that’s a continuous process, and every quarter, we keep on doing something or else in our portfolio.

Devanshu Bansal — Emkay Global Financial Services Ltd. — Analyst

Got it, sir. Thanks.

Manish Dawar — Whole-time Director, Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Prashant Kutty from Sundaram Mutual Fund. Please go ahead.

Prashant Kutty — Sundaram Mutual Fund — Analyst

Yeah. Hi. Thank you for the opportunity. Just one question on the demand front, this seem to be seeing a very different kind of a direction in terms of how pizza is behaving and whereas broadly how burger is the behaving, any thoughts on this front, specifically, because you also talk about opening flagship stores, does it have anything to do with the fact that maybe the last two years is more about delivery and this year seems to be more about dining or things kind of coming back? Can one probably pick out some trends in that?

Manish Dawar — Whole-time Director, Chief Financial Officer

Prashant, look, obviously, as we’ve spoken earlier also. I mean, last two to three years, there are no trends emerging because we got impacted by COVID first which kind of changed the entire consumer thinking that lasted for almost two years as we were coming out of COVID, obviously there has been a significant inflation pressure that all the commodities and all and most of the categories are witnessing. So obviously, these are not the normal times that you’re able to kind of see the trends and extrapolate those trends.

So, but again. I mean fundamentally how we look at the business, if you look at India as a country, the way the demographics are, the way the income levels are growing, the way the consumption habits are changing. We are absolutely and we remain bullish on the QSR segment. It is highly under-penetrated in the country and there is a strong potential.

Now within that, obviously, these are some short-term impacts, which are there, and that’s the reason we are not changing our strategy and we continue to remain bullish and we continue to kind of execute on our strategy.

Prashant Kutty — Sundaram Mutual Fund — Analyst

Yeah. Absolutely, I understand. That’s why I just want to know when you talk about a little bit there is a focus more towards KFC. Pizza Hut obviously was more about a turnaround story and it kind of achieved that. But hereafter probably incrementally, is there a case that we feel the opportunity is more on KFC rather than on Pizza Hut, because we have the challenger over here is that a thought or there’s an equal amount of focus towards both?

Manish Dawar — Whole-time Director, Chief Financial Officer

There is an equal amount. Because if you see, I mean these are all temporary adjustments. I’m not saying that we are changing our so temporary for example, it is easily possible that in a year we could focus more on KFC in the maybe next few quarters we could focus more on Pizza Hut because obviously we need and we want to optimize the return on capital and that is how we approach the business.

So but otherwise fundamentally pizza category also remains a large candidate. It is a growth category, it remains an attractive category. There is nothing wrong with the category as such.

Prashant Kutty — Sundaram Mutual Fund — Analyst

Got it. And my last question on the margins. Obviously, last year were more — given by the fact that there were lot of tailwinds as well. At this time to do have headwinds because of — on the especially on the back of gross margins and all. At a steady-state level, when you look at restaurant EBITDA margins for KFC, or for the Pizza Hut, are these the normal which is a pick up as the as restaurant EBITDA margin numbers or what should be the right benchmark?

Manish Dawar — Whole-time Director, Chief Financial Officer

So as we see the ADS improve, as we see the SSSGs improve as — let’s say we have the new stores maturing on the maturity curve. We will see some improvement in the brand contribution margins.

Prashant Kutty — Sundaram Mutual Fund — Analyst

Sure. So suffice to say that maybe something like for KFC, 21%, 22% is more like a normalized level, and maybe Pizza Hut a 16%, 17% is like a more normalized level. That’s a fair assumption to make? In a normal scenario, I’m not saying that that’s for guidance, but then the normal scenario, that should be a fair assumption to make.

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah, that’s a fair assumption. I mean, give or take some points here and there. But otherwise in the normal scenario, you’re right.

Prashant Kutty — Sundaram Mutual Fund — Analyst

But sir, you’re not really worried on the demand from the demand has been extremely weak and is it like things are only digitally. I mean, is that a worry for us?

Manish Dawar — Whole-time Director, Chief Financial Officer

I think probably the worst is behind us.

Prashant Kutty — Sundaram Mutual Fund — Analyst

I’ll add together. Thank you so much and all the very best to you.

Manish Dawar — Whole-time Director, Chief Financial Officer

Thanks so much, Prashant.

Operator

Thank you. The next question is from the line of Disha, an Individual Investor. Please go ahead.

Unidentified Participant — — Analyst

Great. Congratulations on a — hello?

Operator

Please continue.

Manish Dawar — Whole-time Director, Chief Financial Officer

Yeah, we can hear you.

Unidentified Participant — — Analyst

Yeah. Congratulations on aggressive expansion and reaching 100th store for Costa. I’d like to understand a little bit more on your store opening strategy like how you choose any location and what is the split between metros and non-metros? For Costa Coffee.

Manish Dawar — Whole-time Director, Chief Financial Officer

So, currently — Okay, so Costa predominantly is a metro phenomenon as of now. So there is — there are very few stores, which are outside the metros, maybe a handful. But otherwise, remains a metro phenomenon as of now, because that is where as you know, bulk of the consumption is. And as far as the store opening rigor is concerned or the discipline is concerned Costa is no different compared to our other brands. So we have multiple databases available. We have the consumption habits available for various state areas.

So whatever rigor the follow for opening a KFC store or Pizza Hut store is followed for Costa as well. Costa, as of now, we have focused more on metro areas, because the store count is really small compared to where we are on KFC and Pizza Hut. And once we’ve kind of done that. We will start to go into the smaller geographies as well.

Unidentified Participant — — Analyst

All right. I have another question to follow, sir. How long does the Costa store take to stabilize looking at your aggressive expansion, I’d like to understand, how long will it take to stabilize in staff, within rating trying to break even basically.

Manish Dawar — Whole-time Director, Chief Financial Officer

So we normally try and achieve the breakeven in the first six to 12 months for our entire portfolio of stores and the maturity curve will be close to 24 months.

Unidentified Participant — — Analyst

Another question to follow. Just trying to understand the AOV of Costa versus KFC and Pizza Hut, these kinds of client because coffee as such is a margin-accretive product, so I’m just trying to understand what kind of AOV does Costa enjoy versus other the other brands that you have.

Manish Dawar — Whole-time Director, Chief Financial Officer

It is not very different, so Costa also is about close to INR400 to INR500.

Unidentified Participant — — Analyst

The average order value.

Manish Dawar — Whole-time Director, Chief Financial Officer

But — Yeah. Yeah. Yeah. Within that, you have coffee, which is a strong margin contributor, food is little kind of lower compared to coffee and our focus is to kind of push food category, because that will eventually help to build the cost for ADS also. So therefore, that is how we are approaching the client. So our objective is that for Costa, the margins should be in line with the rest of the brands and rest of the portfolio. And so that it is not dilutive on the overall business.

Unidentified Participant — — Analyst

Thank you so much, sir. Thanks a lot.

Manish Dawar — Whole-time Director, Chief Financial Officer

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen, this was the last question for today. I will now hand over the conference over to the management for closing comments.

Ravi Kant Jaipuria — Non-Executive Director

Thank you, Chairman. And all the investors, analysts who have been on the call. I do hope that we have been able to respond to your questions satisfactorily. Should you need any further clarification or would like to know more about our company, please feel free to contact our Investor Relations team. Thank you once again for your time to join us on this call today and to participate in our growth journey. Thank you.

Operator

[Operator Closing Remarks]