Buy Devyani International Ltd For Target Rs.210 - Emkay Global
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Q3 performance strengthens confidence in execution
Q3 performance was strong but largely in line. EBITDA grew 67% on a low base, led by 33% store count growth, 24% growth in rev/store and a 40bps margin improvement. Core brands, KFC/PH, saw ~64% rev growth on ~40% store count growth and a low ADS base.
Healthy store additions continued, with 75/81 additions in Core brands/overall. DIL is now targeting the upper band of FY22 guided additions of 200-250, with 192 additions in 9M. DIL expects 200-250 annual additions beyond FY22, aided by correction in store metrics
Despite inflation, brand margins improved ~60/100bps QoQ for KFC/PH, helped by price hikes taken by KFC, better mix with more on-premise sales, and operating leverage. Going ahead, DIL expects PH format and operating leverage to drive gradual margin gains.
With the turnaround in profitability, DIL has earned the right to emerge as a QSR growth leader. It should see an industry-leading EBITDA CAGR of ~37% in FY22-25E, led by 21% store count CAGR, 7% SSG and gradual margin gains. Maintain Buy with a TP of Rs210
Healthy store additions to continue: PH/KFC revenues grew ~64% on a low base, led by ~40% growth in store count and ~24% SSG. While the base was low, ADS also improved sequentially by 7%/4% for KFC/PH, driven by better operating conditions, price hikes in KFC and strong traction in menu innovations in PH (Momomia/Cheesy-Momos; HSD contribution to ADS). DIL is targeting millennials through its ‘Dil khol ke delivery’ campaign and expects strong traction to continue with improving customer experience (low delivery time), as it goes deeper with healthy store additions. DIL added 30/40 net stores for KFC/PH in Q3 and 75/94 in 9M, taking the total store count to 339/391. DIL is now targeting the upper band of its guided 200-250 additions for FY22, and expects 200-250 annual additions to continue beyond FY22, aided by an improvement in store metrics and a large India opportunity/gap vs. Domino’s.
PH format to drive gradual margin gains: Despite inflation and healthy store additions, brand margins improved ~60/100bps QoQ to ~23%/17% for KFC/PH. The margin improvement was led by price hikes in KFC, better mix in favor of high-margin on-premise sales and operating leverage (Rs124K/47K ADS vs. 116K/45K for KFC/PH in Q2). Going ahead, DIL sees gradual margin gains of ~50bps, driven by PH format and operating leverage.
Emerging QSR growth leader (IC Report): With the turnaround in profitability, DIL has earned the right to grow faster than in the past. DIL should deliver an industry-leading EBITDA CAGR of ~37% over FY22-25E, led by a 21% store count CAGR, 7% SSG and gradual margin gains. A gradual improvement in ADS and brand margins should also help improve RoICs sharply from ~20% in FY22E to ~40% in FY25E. We maintain our Buy rating on DIL with a TP of Rs210 (42x FY24E EV/EBITDA).
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