Devyani International Ltd by Deven Choksey Research

Result highlights:

1.. For Q2FY25, DEVYANI’s revenue was INR 12,222 Mn, a growth of 49.1% YoY and a flat growth in QoQ, which is largely in line with our estimate. 
2.. EBITDA for the quarter increased to INR 1,987 Mn by 25.2% YoY (-11.0% QoQ). EBITDA underperformed our estimates.
3.. EBITDA margin was under pressure due to higher-than-expected operational expenses (-202 bps YoY/-311 bps QoQ).
4.. Adj PAT for the quarter was at INR 30 Mn, lower by 99.9% YoY (-99.9% QoQ), which missed our estimate.
5.. We lower our FY25E/FY26E EBITDA estimates by 3.3%/2.5%, respectively, reflecting weaker-than expected Q2FY25 performance. However, we expect a gradual pick-up in the overall demand environment in Q3FY25E on the back of the festive season and marketing initiatives driving higher footfalls. We maintained our EV/EBITDA multiple of ~23x to arrive at a target price of INR 180/share (previously: INR 185). Given the upside of 9.8% from the CMP, we reiterate our “ACCUMULATE” rating on the shares of Devyani International Ltd.

KEY FINANCIALS 

Due to weak environment SSSG growth remain low

1) In Q2FY25, KFC India reported revenues of INR 5,434 Mn (+6.8% YoY, -2.0% QoQ), driven by positive YoY growth despite a 7.0% decline in Same-Store Sales Growth (SSSG), affected by the vegetarian eating festival and geopolitical tensions. Average Daily Sales (ADS) dropped by 11.9% YoY (-7.7% QoQ). Gross margin stood at 69.0%, down by -2 bps YoY (-57 bps QoQ). Operating deleverage led to a 279 bps YoY decline in brand contribution margins, which fell to 16.6%.
2) KFC added 49 stores in 1HFY25 and is on track to meet its FY25 target of adding 100-110 stores.
3) In Q2FY25, Pizza Hut (PH) reported total revenue of INR 1,848 Mn (+0.4% YoY, +1.6% QoQ), SSSG decline by 5.7%. Increased competition from local players and weak consumer sentiment led to the SSSG decline. GM improved by 97 bps YoY, though it was down by 12 bps QoQ to 76.7%. Brand contribution margin was 3.1%, down -458 bps YoY, but improved by +181 bps QoQ.
4) PH added 23 stores in 1HFY25 and plans to open 60-70 stores in FY25E.
5) In Q2FY25, Costa Coffee reported revenue of INR 490 Mn, reflecting a strong 41.6% YoY (+7.7% QoQ) growth, driven by rapid store expansion. SSSG Growth stood at +8.7%. The GM declined by 120 bps YoY (+16 bps QoQ) to 75.1%. Brand contribution margin dropped to 14.5%, (-25 bps YoY,-46 bps QoQ), primarily due to ADS deleverage.
6) International business revenue grew 1.2% QoQ to INR 3,943 Mn in Q2FY25, flat growth manly due to a decline in ADS in Nigeria, Nepal & Thailand.
7) In Q2FY25, the company added total 85 stores, reaching a total of 1,921 (Incl. Thailand).
8) The company is on track to reach 2,000 stores by FY25E.

Devyani International Ltd by Deven Choksey Research

Key Concall Highlights:

(1) Revenue Performance:

In Q2FY25, DEVYANI International (DIL) reported organic revenue growth of 7.3% YoY, while consolidated revenue surged by 49.1% YoY. This growth was primarily driven by DIL’s expanding portfolio, though subdued consumer demand and high inflationary pressures impacted organic growth. The company continued to implement strategic initiatives, including menu pricing optimization, cost control measures, and improving operational efficiency to drive revenue.

(2) Margins and Cost Dynamics:

Gross margin contracted by 146 bps YoY to 69.3%, primarily due to lower GM in the Thailand KFC business compared to the Indian operations. The EBITDA margin also contracted by 311 bps YoY to 16.3%, reflecting the consolidation of the Thailand business and its impact on the overall cost structure.

(3) KFC:

KFC India’s revenue declined -2.0% QoQ but grew +6.8% YoY. The QoQ declined was driven by a 7.0% decline in Same-Store Sales Growth (SSSG), which was impacted by the vegetarian-only festivals in Q2FY25. Additionally, Average Daily Sales (ADS) and brand contribution margin decreased by 7.7%/16.8%, respectively, due to brand deleverage, higher delivery costs, and ongoing experiments with marketing and pricing strategies.

(4) Pizza Hut (PH):

Pizza Hut’s revenue grew by a modest +0.4% YoY, impacted by a 5.7% decline in SSSG. The SSSG slowdown was attributed to increased competition from local players and weak consumer sentiment. PH’s brand contribution margin also decreased significantly, falling to 3.1% from 7.7% in Q2FY24, driven by ADS deleverage.

(5) Costa Coffee:

Costa Coffee demonstrated a strong performance, with a 41.6% YoY revenue growth and an SSSG of +8.7% driven by rapid store expansion. However, despite strong sales, Costa’s brand contribution margin declined slightly to 14.5%, down from 14.7% YoY, primarily due to ADS deleverage. Given the brand’s under-penetration, the company remain optimistic about its growth potential.

(6) International Business:

The international business posted a 1.2% QoQ revenue increase, reaching INR 3,943 Mn in Q2FY25. This growth was limited by declining ADS in Nigeria, Nepal, and Thailand. However, brand contribution margin for the international business improved from 14.8% in Q1FY25 to 16% in Q2FY25, indicating operational improvements.

(7) Store Expansion:

DEVYANI added 85 net new stores in India during the quarter, bringing its total store count to 1,557, distributed across KFC (645 stores), Pizza Hut (593 stores), Costa Coffee (207 stores), and Vaango (90 stores). The company also expanded its international footprint with 40 stores in Nigeria, 28 in Nepal, and 296 in Thailand. DIL is targeting the opening of 100-110 new KFC stores and 60-70 new PH stores in FY25E, aiming to reach a total of ~2,000 stores by FY25E.

(8) Product Innovations and Strategic Initiatives:

In Q2FY25, DEVYANI introduced a variety of menu innovations:
• KFC launched new value meal rolls featuring national and international flavors like Korean, Thai, and Indian. • Pizza Hut relaunched its Momo Mia pizza with an updated recipe to cater to evolving customer preferences. • Costa Coffee unveiled seasonal and regional menu adaptations reflecting current consumer trends. •• Vaango launched a range of traditional snacks, including banana chips, Murukku, and Madras Mixture, along with Filter Coffee decoction.

(9) New Brand Acquisitions:

DEVYANI entered into a Master Franchise Agreement for three new brands:
TeaLife: A Malaysian tea and beverage brand., New York Fries: A Canadian quick-service chain specializing in fresh-cut fries, loaded fries, and hot dogs. Sanook Kitchen: A Singapore-based brand offering Thai and Asian cuisine.

(10) This expansion aligns with DIL’s “food on the go” strategy, broadening its market presence and enhancing its offering with more diverse food and beverage options. The initial focus will be on small, capital-efficient formats with attractive paybacks, with the first year dedicated to experimentation and minimal capital expenditure.

Outlook: 

While the demand environment remains subdued in the near term, especially in key segments like Pizza Hut, DEVYANI remains focused on cost optimization, store expansion, and leveraging its strong portfolio of brands. The company is optimistic about growth in Costa Coffee, which continues to benefit from rapid expansion, and plans to expand KFC and Pizza Hut footprints in India and internationally.

Valuation and view:

DEVYANI International’s Q2FY25 performance reflects a mixed but resilient outlook, with strong revenue growth driven by store expansion and strategic initiatives. While same-store sales faced challenges due to external factors, the company remains focused on cost optimization, brand innovation, and expanding its footprint across both domestic and international markets. DEVYANI is well-positioned for long-term growth, especially in its rapidly expanding Costa Coffee brand and continued KFC and Pizza Hut expansions.