1. Our View
Devyani International Ltd. (DIL) has a robust store addition engine, which currently adds approximately 250 to 300 stores annually, and its diversified brand portfolio comprising KFC, Pizza Hut, and Costa Coffee. This portfolio positioning establishes the company as a structural proxy for India’s consumption upgrade story, offering exposure to multiple segments of the quick-service restaurant (QSR) market. The company is currently navigating a distinct “margin trough” in FY26, driven by a confluence of persistent food inflation, the integration costs associated with the recent Skygate (Biryani By Kilo) acquisition, and soft discretionary demand across key urban centers. While the revenue for the second quarter of FY26 grew by 12.6% year-over-year, the swing to a consolidated net loss of INR 22 crore highlights the significant operating leverage trap the company faces when Same Store Sales Growth (SSSG) remains muted.
The single most important swing factor for our valuation and recommendation remains the recovery of SSSG in the KFC India portfolio. KFC remains the indisputable cash cow for Devyani International, contributing over 60% of the brand contribution. For the stock to re-rate towards our bull case valuation of INR 185, KFC India’s SSSG must return to mid-single digits, specifically in the 5–6% range, by FY27. This recovery is contingent upon the stabilization of the “GST 2.0” policy impacts and a broader recovery in urban discretionary spending, which we anticipate will materialize over the next 12 to 18 months.
2. Company Overview and Business Model
Devyani International serves as the largest franchisee for Yum! Brands in India, operating a sophisticated multi-brand, multi-country platform that leverages shared infrastructure to drive efficiency. The company’s core domestic portfolio is anchored by KFC, which operates 734 stores and functions as the flagship powerhouse of the business. The KFC format operates on a high-margin, high-throughput model and is the primary driver of consolidated EBITDA. Complementing this is Pizza Hut, with 621 stores, which focuses heavily on the delivery-carryout segment. However, this brand has struggled with profitability and intense competitive pressure from both aggregators and nimble cloud kitchens. The portfolio is rounded out by Costa Coffee, operating over 220 stores. This segment is a rapidly growing play on India’s burgeoning café culture and is currently in an aggressive investment mode to capture market share.
Beyond its core portfolio, DIL has activated new growth engines through strategic acquisitions and international expansion. The company recently acquired a controlling interest in Skygate Hospitality, the parent company of “Biryani By Kilo” and other brands. This strategic move diversifies DIL into the high-growth biryani category, yet it is currently margin-dilutive, dragging gross margins by approximately 50 basis points in Q2 FY26. Internationally, DIL operates in Nigeria and Nepal. While these operations provide a hedge against domestic demand volatility, their contribution remains small at less than 15% of total revenue. The overarching business model relies on a cluster-based expansion strategy, leveraging shared supply chain infrastructure to improve unit economics. It is a capital-intensive model requiring significant capex for new stores, thus necessitating high asset turnover to generate attractive Return on Capital Employed (ROCE).
3. Industry Overview and Competitive Landscape
The Indian QSR sector in the 2025–2026 period is witnessing a distinct “K-shaped” divergence in performance. Value-focused segments remain resilient, while premium discretionary dining has seen notable volume compression due to sticky inflation; while retail inflation was recorded at 1.33% in December 2025, food inflation remains structurally higher. A key trend defining the current landscape is the “GST 2.0” transition. The recent shift to a simplified 2-tier GST structure in late 2025 has created temporary friction in the market. Although management characterizes the direct impact on QSR as minimal, the broader consumption basket is adjusting to these changes, leading to cautious consumer spending in the short term. Furthermore, delivery aggregators like Zomato and Swiggy continue to exert pressure on margins through high commissions, forcing QSR players to invest heavily in their own proprietary applications. While DIL’s app contribution is rising, it still lags behind peers such as Jubilant FoodWorks.
In terms of competitive intensity, the landscape remains fierce. Jubilant FoodWorks continues to hold a fortress-like position in the pizza segment with Domino’s, aggressively defending its market share with its 20-minute delivery promise. Sapphire Foods, the other major Yum! franchisee, presents a direct benchmarking risk; historically, Sapphire has demonstrated slightly better margin discipline in its Pizza Hut operations, highlighting potential efficiency gaps for DIL. Meanwhile, Westlife Foodworld remains strong in the burger category with superior gross margins, offering a stable alternative for investors seeking lower volatility in the QSR space.
4. Historical Financial Performance (FY22–FY25)
Since its listing, Devyani International has delivered blistering top-line growth, expanding revenue at a CAGR of approximately 30% from FY22 to FY25. Revenue scaled from INR 20.8 billion in FY22 to INR 49.5 billion in FY25, a trajectory driven almost exclusively by aggressive store additions, with net adds consistently in the range of 200 to 250 stores per year [7]. However, profitability has been far more volatile than the top line. Pre-IndAS EBITDA margins historically hovered in the 13–15% range. Following the adoption of IndAS, EBITDA margins optically increased due to lease accounting treatments, peaking at approximately 22%, but have since compressed to the 17–18% range in FY25. This compression is attributed to persistent input cost inflation in key commodities like chicken, cheese, and oil, alongside negative operating leverage. Consequently, return ratios such as ROCE and ROE have remained suppressed in the single digits, weighed down by high capital intensity and the earnings drag from the Pizza Hut format, which has yet to achieve the mature profitability profile of the KFC business.
5. Latest Results Deep Dive (Q2 FY26)
The results for the second quarter of FY26 underscore the challenges DIL faces in the current environment. The company reported revenue of INR 13.77 billion, representing a 12.6% year-over-year increase. However, this growth was entirely volume-led by new store openings, as Same Store Sales Growth (SSSG) remained weak. The most concerning metric was the EBITDA margin, which contracted by approximately 200 basis points to 13.97%, leading to a flat EBITDA of INR 1.92 billion despite the revenue growth. This underperformance resulted in a significant miss against consensus expectations. Ultimately, the company reported a consolidated net loss of INR 21.9 crore, a sharp negative swing from the INR 0.2 crore profit reported in Q2 FY25.
Several key drivers contributed to this underperformance. Demand headwinds were exacerbated by unseasonal rains in September and the “Shraavana/Navaratri” religious fasting period, which significantly impacted non-vegetarian sales, a critical revenue stream for KFC. The margin bridge reveals that gross margins fell to 67.8%, a decline of 157 basis points year-over-year. Management attributed 50 basis points of this drop to the consolidation of the lower-margin Skygate (Biryani) business, with the remainder driven by input inflation. Additionally, Pizza Hut continues to struggle; revenue for the brand was flat year-over-year at INR 1.86 billion despite store additions, implying deeply negative SSSG of -4%. The brand appears to be struggling to find its footing against both Domino’s and the rising tide of gourmet pizza players. Despite these challenges, management remains optimistic, citing the “GST 2.0” transition as a structural long-term positive and maintaining guidance for 250–300 store additions in FY26.
6. Unit Economics and Operating KPIs
A proper assessment of Devyani International requires a granular dissection of the unit economics across its brand portfolio, as the consolidated numbers mask the disparity between its engines. KFC India remains the only “investment grade” asset currently generating substantial free cash flow at the store level. It commands an Average Daily Sales (ADS) of approximately INR 89,000 with gross margins in the 68–69% range and a healthy brand contribution margin of 14–16%. The payback period for a KFC store is an attractive 3–4 years.
In stark contrast, Pizza Hut India is in a turnaround phase. Its ADS hovers around INR 33,000, which is dangerously close to the breakeven point for many of its store formats. While gross margins are higher at 74–75%, the brand contribution margin is volatile and low, ranging between 2–5%. This explains the significant drag on consolidated earnings and the valuation multiple [4]. Costa Coffee sits between these two extremes, with an ADS of INR 35,000 and robust gross margins of ~76%, but as it is in a growth phase, its contribution margins are currently 15-17% with a payback period similar to KFC. The divergence in these metrics reinforces our view that the stabilization of Pizza Hut is critical for improving the overall quality of earnings.
7. Key Risks and Bear Case
The most significant internal risk to our thesis is the “Pizza Hut Drag.” The continued inability to scale Pizza Hut ADS constitutes a structural threat; if the format proves unviable against aggregators and cloud kitchens, DIL may be forced into a large impairment and store closure cycle. Externally, commodity inflation remains a persistent threat, particularly volatility in chicken prices. A 10% increase in broiler prices impacts gross margins by approximately 80-100 basis points if not passed on to consumers. Furthermore, the integration of Skygate adds operational complexity. If the biryani category proves difficult to scale due to high waste or inconsistent quality, it will dilute the high-quality earnings stream from KFC for longer than anticipated. Finally, while currently zero, any future pledging of shares by the parent company (RJ Corp) could create a sentiment overhang, though we view this as a low-probability risk.
8. Catalysts and Monitoring Points (Next 6–12 Months)
Investors should closely monitor the Q3 FY26 earnings release in February 2026, specifically watching for SSSG numbers; a return to positive SSSG for KFC would be the first definitive sign of a bottom. Additionally, the margin profile of the newly acquired Skygate business must be tracked against management’s guidance of achieving “breakeven brand contribution” by March 2026. Finally, any strategic announcements regarding the closure of underperforming Pizza Hut units should be viewed constructively. While optically negative, such a move would be a case of “bad news is good news,” as it would improve the overall quality of the store fleet and capital allocation efficiency.