DIL’s Q2 EBITDA was largely in line with our estimates. Among brands, KFC SSG at 13% was better than expected, while PH SSG at 3% was weaker. Near-term commentary was cautious, as PH softness was attributed to weak consumer sentiment amid elevated retail inflation. However, DIL retained its outlook of 7-8% SSG for PH, underpinned by its entry into the value-pizza segment [Flavor-Fun Pizzas]. Store additions remained robust, with net additions of 88/158 stores in Q2/H1FY23 and annual guidance of 250 store-additions was retained. Inflationary pressures led the ~100bps decline in brand margins, but HO cost leverage restricted EBITDA-margin decline to 20bps. With peaking of RM costs [Oil, Chicken, gas], DIL expects to recoup the lost margins. Capex/store at Rs13.7mn in H1 remained in line with last year’s. We uphold EBITDA for FY24/25E, led by retained medium-term outlook. We expect DIL to deliver strong EBITDA CAGR of ~41% in FY22-25E, led by 24% store-count CAGR, 10% SSG and gradual margin-gains; maintain BUY with TP of Rs225 (36x Sep-24E EBITDA)

Result summary: KFC revenues grew by 47%, led by 37% growth in store count and 13% SSG, while PH revenues saw 36% growth, led by 35% growth in store count and 3% SSG. Among channels, on-premise for both KFC/PH saw faster growth at 60-70% vs. ~20% growth in the off-premise channel. With new menu launches, marketing initiatives and deeper penetration, DIL continued to expect higher normalized SSG, at 8% for PH vs. 4-5% for KFC formats. Store additions at 88 remained robust, with 30/32 store additions for PH/KFC and 19 stores for Costa Coffee. Inflationary pressures led the ~100bps decline in brand contribution margins, but HO cost leverage restricted the EBITDA margin decline to 20bps. Elevated RM costs led the ~100bps decline in KFC brand margins, while structural cost-savings in PH drove a ~120bps improvement in brand margins to 17%. Costa Coffee brand margins dropped ~1,300bps to 20%, due to significant pick-up in new store additions during Q2.

Earnings-call KTAs: 1) DIL remains bullish on non-metro markets, as lower rentals, staffing costs and utilities ensure higher profitability in such towns vs. metros. Store mix of non-metro cities stood at 52% at Q2-end. 2) Prices of key inputs like gas, edible oil and chicken have peaked, but remain elevated on YoY basis. Hike in employee costs & rentals also remains on expected lines. With price hikes taken so far and normalization of costs, DIL expects to recoup the lost margins. 4) DIL’s medium-term objective for Costa is to reach ADS of 40K vs. 31K in Q2. 5) While DIL currently plans to expand Vaango at a slower pace compared with its core brands, it expects it to become a sizable category in future, as there are no other Indian QSRs. 6) With extinguishing of accrued losses, DIL expects normalised tax-rate of 25.2% going ahead. 7) DIL is experimenting with smart stores, with self-ordering-kiosks for KFC. DIL expects higher transaction size and reduction in operational costs with smarter stores.

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