Devyani International Limited (DIL), incorporated in 1991, operates a chain of franchised quick service restaurants in India, Nepal, and Nigeria. The company’s core brands business include KFC, Pizza Hut, and Costa Coffee stores operated in India; International Business comprise KFC and Pizza Hut stores operated in Nepal and Nigeria. Other Business consists of its own brands, such as Vaango, and Food Street. As of Sept 30, 2021, its core brands business operated 705 stores, including 309 KFC stores, 351 Pizza Hut stores, and 45 Costa Coffee stores. Its international business operated 44 stores and Other Business operated 54 stores.
Rapid expansion to spur revenue growth
DIL has opened 111 new stores including 45 KFC stores, 54 Pizza Hut stores and 1 Costa store in H1 FY22 and is likely to open 100 more stores in H2 FY22. The company has targeted to open 200 new stores every year. We expect DIL to operate 470 KFC stores, 585 Pizza Stores, 75 Costa stores by FY24E. Average daily sales for new stores are likely to remain 10-20% lower than the old stores, while in 15-18 months period performance of the new stores improves to in-line with the new stores. With increased opening of new stores, the average revenue per store revenue is expected to decrease slightly over FY22-23 and improve gradually from FY24 onwards.
Margins expect to improve with successful transition to smaller store formats
DIL’s average store size for KFC is 1500-1800 Sq Ft and Pizza Hut is 600-1000 Sq Ft. It has managed transition from large stores to smaller store formats without losing the average daily sales. It is expected to continue to expand with smaller stores at strategic locations and improve the rent to revenue ratio, thereby improving the margins.
DIL demonstrates strong performance in Q2FY22
The company has changed its employment model from fixed to variable model which has given a boost to the brand contribution margin. Along with this, post IPO the company’s debt situation is improving which has let to a decline in interest cost. Thus, in Q2 FY22 DIL turned profitable with a PAT margin of 9%. Going forward, we expect EBITDA margin to be in the range of 20-22% and PAT margin to be in the range of 1-5% over FY22-24.
Favorable economic & industry scenario
Post pandemic, the food industry has seen a shift of consumer preference moving towards organized players following higher hygiene standards. India has a large consumption market with underpenetrated quick service restaurants (QSR). The total value sales of quick-service restaurants in India stood at Rs.2,854.8 bn and is expected to grow by 12.4% CAGR over FY20-25. DIL being a key player in the QSR business is well placed to benefit from the favorable macro economic factors.
Outlook & Valuation
With increased focus towards core brands, opening of new stores in high street areas and incubation in new geographies, we expect the revenue from core brands to grow by 38.4% CAGR, international brands by 28.4% CAGR and other brands by 19.7% CAGR over FY22-24E. With improved contribution margin and lower interest cost, we expect the company to continue making profits in the coming fiscals. We assign ‘Buy’ rating on stock with target price of Rs.195 valuing the business at EV/EBIDTA 37x FY24E.
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