What does the future hold for Devyani International Ltd. (NSE: DEVYANI)? Stock up 20% in 6 months

Devyani International Ltd (NSE: DEVYANI)(DIL) is the largest franchisee of Yum Brands in India and is among the largest fast food chain operators in India and as of 30. As of September 2022, it operated 1,096 stores in 224 cities. As a franchise partner of Yum Brands, the company operates its iconic KFC and Pizza Hut brands in India as well as Nigeria and Nepal.

DIL also holds the franchise rights for the Costa Coffee brand and stores in India. KFC, Pizza Hut and Costa Coffee together make up its “core brands” which account for ~95% of the top line. In addition, the company has established its own brands such as Vaango and Food Street. KFC contributes ~58% to the top line, followed by Pizza Hut and Costa Coffee, which contribute ~26% and 2% of revenue respectively.

The company operates 423 KFC, 466 Pizza Hut and 88 Costa Coffee outlets in India; 29 Pizza Hut outlets in Nepal; 20 KFC and Pizza Hut outlets in Nigeria. Stores in Core Brands grew at a CAGR of 21% over FY19-22 to 832 stores as of March 22.

Its strong association with Yum Brands along with KFC’s large addressable population in the States (> 80% non-vegetarian) and Pizza Hut’s delivery-only exclusivity indicate significant growth opportunities in the growing Indian QSR market. DIL plans to add 250 branches annually in India with a cluster approach.

DIL outlets are concentrated in the North (39%) and South (35%). The company has equal presence in metros (48%) and non-metro cities (52%). DIL sees significant turnaround and improved unit metrics for KFC and Pizza Hut, led by shrinking store size, increasing value proposition through innovative offering and focus on delivery with enhanced digital capabilities.

DIL is on a strong business momentum in the core brand business. KFC is on solid footing in terms of operating metrics and store economics, while Pizza Hut’s performance is seeing green shoots from various turnover measures. Leveraging their core brands, increasing Other Business brand awareness, innovative product offerings, enhancing digital and delivery capabilities and a robust supply chain management system; DIL is all set to improve its positioning.

Yum Brand franchisees have reduced the size of all new outlets for both KFC and Pizza by 30-40%, reducing capital and associated operating costs. The move to smaller stores did not hurt average daily sales per store for either brand. Lower capital expenditures with improving store-level economics contributed to a faster return on investment in new stores.

Continuous food innovation and value proposition (Pizza Hut) would enhance its unit-level performance by increasing order frequency and order size, thereby improving SSSG and profitability of existing stores. DIL has shifted its focus from opening large catering stores to smaller delivery stores. The company will work diligently to improve its delivery performance and plans to create synergies between Core Brands stores and delivery services by leveraging its extensive store network. The introduction of delivery format stores for both Pizza Hut and KFC would reduce delivery time.

In addition, the company plans to expand collaboration with delivery aggregators to tap into the growing online delivery segment. DIL plans to aggressively expand its store network by opening 1000 stores in the next 4 years (250 stores per year). The company is trying to open new stores for KFC and Pizza Hut in close proximity to each other, which will allow them to reduce the investment costs spent on construction and the logistics costs of supplying ingredients to both stores.

Devyani International Ltd (DIL) posted a healthy topline of ₹747.4cr (+44.8%/6.1% qoq), mainly due to accelerated business additions in the last quarter. DIL delivered a healthy performance across its core brands in a seasonally weak quarter.

The company opened a record 88 net new stores during the quarter, bringing the total number of stores in operation to 1,096 as of September 22. Store count grew 38.5%/9% quarter-over-quarter. Gross margins fell ~90 bps quarter-on-quarter due to feedstock inflation (upward revisions to feedstock sourcing contracts that occur with a delay).

The company reported EBITDA of 166.4 cr (+30%/n/o QoQ). EBITDA margin came in at 22.3% (down ~255 bps YoY/110 bps QoQ), slightly below expectations due to higher employee costs. Adjusted EBITDA (Pre-Ind AS 116) was 15.1% compared to 16.1% in the previous quarter.

It reported PAT of ₹58.8 cr (+28.6%/-20.4% quarter-on-quarter). The company’s profitability was affected by an extraordinary loss from currency fluctuations (for subsidiaries operating in Nigeria) of 11.3 cr.

KFC’s revenue rose 47%/4.2% YoY to Rs 443 crore; with year-on-year SSSG growth of 13% (mainly price). KFC added 32 new stores to reach 423 stores at the end of the quarter. Average daily sales (ADS) were at Rs 121,000, down 4.7% quarter-on-quarter (usual seasonality due to lower non-veg consumption during ‘Shravan’). Gross margin was 67.9% versus 69% in Q1FY23. Brand contribution margin was 21.5% (down 94 bps/90 bps YoY/QoQ). Off-premise sales continue to be strong at 36% of sales.

Pizza Hut posted revenue of Rs 181.2 cr (+36%/9.8% qoq) and added 30 stores, taking the count to 466. Its ADSs improved marginally to Rs 45,000 on a sequential basis, with SSSG at 2.9 % year-on-year. Higher input prices and a change in product mix impacted gross margins, which reached 74.5% compared to 76.2% in the prior quarter. Brand contribution margins were 17%, down ~50bps quarter-on-quarter, mainly due to gross margin declines, while operating leverage benefits contained further declines. On-site consumption remained steady at 45% at Pizza Hut.

Costa coffee posted robust revenue of 22cr, +134%/25% YoY/QoQ. SSSG continued to maintain its health (up 50.7% year-on-year), thanks to a recovery from declines in its stores. The number of stores was 88 (+95.6%/27.5% quarter-on-quarter). ADS declined 14% quarter-on-quarter to Rs 31,000, reflecting dilution due to new business additions. Gross margin reached 79.5% versus 81.8% in Q1 FY23. Brand contribution margin decreased to 19.5% compared to 30.7% in the prior quarter; this was primarily due to a significant addition of new stores during the quarter.

DIL continues to focus on improving the quality of operations, enriching the customer experience, and strategically expanding its store network in India while effectively managing unit-level economies and achieving economies of scale. Store expansion and high store density in specific areas will reduce costs associated with transporting raw materials to stores and other fixed overhead costs (spread across a number of stores), thereby increasing EBITDA margins and profitability at the store level. Effective cost management will help drive profitability at the brand level.

Devyani continues to invest in technology to enhance its digital and delivery capabilities. Most of the stores at KFC and Pizza Hut have been integrated with the online channel, allowing for a larger number of customers. It also upgraded its online order-taking platform to serve more customers across a larger store base.

DIL plans to increase investments in end-to-end digitization, automation, artificial intelligence, and machine learning to effectively connect online operations with offline assets. The company is working with Yum to enhance its technology platform and further integrate its systems with the Yum platform to ensure greater operational efficiency. In the future, the company will continue to optimize its delivery services by adopting innovative technologies and developing new delivery service concepts.

The organized food service market provides a multi-year growth opportunity. KFC and Pizza Hut are well-positioned for growth, thanks to rapid store expansion. Both brands have taken various initiatives—store downsizing, cost rationalization, offering innovation, and network expansion—to expand market share and improve store efficiency.