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SSSG remains weak; RM trend improving

* DEVYANI reported 20% YoY revenue growth (in line), aided by 28% store adds. SSSG remained weak for both KFC and PH. However, the decline in RM prices led to a 120bp gain in gross margin QoQ. Due to higher corporate G&A and employee expenses, EBITDAM contracted by ~290bp YoY to 20.5%, translating into 5% growth in EBITDA and a 39% decline in PAT.

 * Due to the challenging environment, SSSG remained weak, and a recovery is expected to take a couple of quarters. The PH format is expected to recover gradually. Moreover, strong store addition guidance (275-300), expected       SSSG recovery in 2HFY24, and moderation in inflation should boost profitability. We model revenue/EBITDA CAGRs of 24%/26% over FY23-25E. Reiterate BUY with an SoTP-based TP of INR220 (based on 43x/35x for KFC/Pizza   Hut on a pre-Ind AS basis on Mar’25 estimates).

Revenue/EBITDA in-line; SSSG remain weak

* Sales grew 20% YoY to INR 8.5b (in line), led by 28% YoY store adds.

* SSSG: KFC at -0.9% (est. +1%), PH at -5.3% (est. -4%), CC at 9.4% (est. +15%) and Vaango at 8.2%.

* Total 47 stores added: 20 - KFC, 15 - PH, 11 - CC.

* Total store count stands at 1,290: 510 – KFC, 521 – PH, 123 – CC, 52 – Vaango, 60 – International, 24 – Others (India).

* Gross profit grew 20% YoY to INR6.0b (in line), led by lower RM inflation. Margin was down 25bp YoY/up 120bp QoQ at 70.8%

* Reported EBITDA increased by 5% YoY to INR1.7b (in line). Margins contracted 290bp YoY to 20.5% (est. 20.6%).

* PAT declined 39% YoY to INR457m (13% beat) due to higher depreciation.

Highlights from the management commentary

* DEVYANI targets to add 275-300 stores in FY24 and to increase the total store count to 2,000 by FY26, implying a 17% CAGR in store adds over FY23- 26E. It plans to add 70-75 stores p.a. for PH, 60-70 stores for Costa Coffee and 120-125 stores for KFC.

* The company has increased prices in PH by less than 1% just to neutralize the slightly margin-dilutive value category. Similarly, it hiked prices in KFC by 3% last quarter.

* KFC’s SSSG in 2QFY24 could be lower owing to Hindu festivals. However, RM prices in KFC have largely stabilized and cheese and milk prices for PH/CC have started to stabilize.

* The company intends to strengthen the PH model by continuing marketing expenditure (6% of sales), developing customer franchisees and innovating products.

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