IGI Logo

Devyani is the largest franchisee of Yum brands in India (accounts for c.64/59% of store network and c.57/55% of sales of Pizza Hut (PH)/KFC as of 9MFY23). It has a presence across many large segments (Pizza, chicken, Café) through a portfolio of strong brands (PH, KFC, Costa Coffee). KFC, which is a key earnings driver for Devyani, remains on a strong footing, leveraging its first mover advantage while PH is seeing gradual improvement across metrics. This, along with recovery in other business (Costa Coffee, international business, own brands) has led to an impressive turnaround in profitability and uptick in RoIC for Devyani within the overall QSR space. A combination of strong brands, large addressable opportunity, execution capabilities, strong promoter backing of RJ Corp and optionality in other brands (Costa Coffee) provides assurance on the growth runway. The recent correction (25%+ decline from August ) owing to near term demand challenges makes its valuation palatable (25x FY25E Pre-IND AS EBITDA) and provides a good entry point as we believe intrinsic strengths of the business and market opportunity remain intact. With estimated Sales/EBITDA (pre-IND AS) CAGR of 26/29% over FY23-25E, we expect Devyani to emerge as the fastest-growing player in our QSR coverage universe. Valuation premium to peers is justified; we initiate with a DCFbased target price of INR 195/share (30x FY25E pre-IND AS EBITDA). BUY.

* Core brands provide ample headroom for growth: Core brands (PH/KFC/Costa Coffee) account for 86%/88% of consolidated sales/brand contribution for Devyani. The growth outlook appears strong with - a) KFC (59% of sales) – remains on a strong footing with a dominant share in the fast-growing chicken QSR segment. With the restructured store format (store size/capex down by 35-40%), the profitability (store level margin of 20%+ & RoIC of 45%+) is one of the best in class in QSR. This, along with a large addressable market (under-indexed to Dominos) provides a strong runway for growth. b) PH – turnaround efforts (restructuring store size, menu, pricing) are bearing fruit (improvement in contribution margin and rise in delivery sales salience). Further, Devyani has national rights for the delivery format, which provides it a larger, almost pan-India opportunity. c) Costa Coffee – attractive franchise with superior profitability (brand contribution margin of c.25%+) is seeing renewed focus post renewal of the franchise agreement, benefits of which are visible in improving ADS, profitability as well as store expansion. We expect core brand store count/sales to grow at a CAGR of 21%/27% over FY23-25E.

* Accelerated store expansion with focus on profitability and higher growth in KFC to help sustain momentum in operating performance: With large addressable opportunity, apt store format and strong unit economics in place, Devyani has embarked upon accelerated store expansion (store addition of 246/228 stores in FY22/9MFY23) and targets 250-300 store additions p.a. going ahead too. Apart from capitalising on legacy under-penetration in India, it has also focussed on profitability through initiatives on store size restructuring, balanced store additions between metro and non-metro markets (accounting for 52% of store network), variabalisation of staff cost, and reviving other business (Costa Coffee, Own brands, International business) resulting in turnaround in overall profitability (preIND AS EBITDA margins up from 7.4% in FY19 to 15.3% in 9MFY23) and capital efficiency. With higher growth in high margin businesses (KFC/Costa Coffee) & gradual recovery in PH, we expect EBITDA (pre-IND AS) CAGR of 29% over FY23-25E.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361

Above views are of the author and not of the website kindly read disclaimer