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Devyani International (DIL) is the largest operator of KFC (~60% of revenues) and Pizza Hut (PH) (~30%) in India. Post consolidating territories/rights for KFC and PH, DIL is revamping these brands to realize full potential via i) improving store economics; ii) increasing delivery share and iii) scaling-up in store addition, something the formats had missed over FY15-20.

Signs of these initiatives have been visible over the last one year, with DIL outpacing its peers on margin (ex JFL) and growth. Factoring this, we value DIL at 36x Q1FY24E EV/EBITDA (25% discount to JFL, ~10% premium to WDL) giving us a TP of INR187. We initiate with HOLD. DIL’s execution on growth/margin, will drive further re-rating.

KFC: Large market along with a focus approach to maximize potential

For its core brand KFC, DIL’s territories have a higher share of non-vegetarian population (~90% plus), driving higher addressable opportunity. Also, based on our estimate, KFC’s store potential (for DIL’s territories) is ~850 stores versus 264 as of March 2021, providing long-term growth visibility. DIL has also embarked on a three-pronged approach to realize the brand’s full potential, namely i) improve store economics:smaller size stores achieving at-parstore productivity; ii) improve delivery share from 10% pre-Covid to 35% plus; and iii) ramp-up store addition: while KFC was the fastest growing Quick Service Restaurant (QSR) format from FY11-15, growth slowed over FY15-20. However, with ownership consolidated, DIL is now aiming at stepping-up expansion again, we build-in 100 stores/annum.

PH: On the cusp of a long awaited turnaround

PH has been a follower over the last two decades. DIL is turning this around by i) shifting focus to delivery: more than 75% of its network is delivery focused stores versus 50% earlier; ii) improving store economics: targeting smaller store formats with enhanced store economics; iii) improving affordability through a wider combination of offers; and iv) increasing store density: to address its delivery time issues. DIL is upping store additions for PH, we build-in 100 stores/annum.

Outlook & valuations: Accelerated turnaround; initiate with ‘HOLD’

We expect DIL to clock 45% revenue CAGR over FY21-24, driven primarily by scaling-up KFC and PH (100 store addition/annum for both). We expect, DIL to clock a 681bps/266bps pre/post IND AS EBITDA margin improvement over FY21-24, driven by improvement in brand margins and operating leverage. This is expected to drive DIL’s PAT turnaround and improve its return profile (RoCE - FY20: 3%, FY24: 17%). What sets DIL apart is i) two scalable brands and ii) significant turnaround in margin profile, now ranking second across all listed QSR’s. We thus assign DIL a target multiple of 36x Q1FY24 EBITDA (25% discount to JFL, ~10% premium to WDL). This gives us a TP of INR187. We initiate with a HOLD, primarily on valuations (stock up ~100% since IPO in August 2021, exceeding peers and market). Potential competition in the chicken QSR category and execution remain as key risks.

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