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Among the largest QSR chains operating in India, Devyani International Ltd (DIL) manages the franchises of Yum! Brands (KFC, Pizza Hut, Taco Bell) and Costa Coffee. Apart from these franchises it also has its own brands – Vaango, The Food Street, Ile Bar, AMRELI and Ckrussh Juice Bar among others. In India they currently have 696 stores across 166 cities and they have an international presence (39 stores) in Nigeria and Nepal.

The company’s business can broadly be classified into three verticals that include:

Core brands – This comprises KFC, Pizza Hut (PH) and Costa Coffee brands operated in India. As on 31st Mar 2021, there were 264 KFC stores, 297 PH stores and 44 CC stores which contributed 84% to FY21 revenue. Deeply affected by the pandemic, this vertical de-grew by 14.0% in FY21 to INR 954 cr after growing 13.4% in FY20. However, post the second wave we are seeing encouraging trends of sales revival. We expect the Core Business to grow its store count by 545 stores to 1150 stores (KFC +236 stores to 500, PH +253 stores to 550, CC +56 stores to 100) leading to a 41.1% CAGR in revenue to INR 2,680 cr by FY24. The gross margins for the core brands (KFC 67.7%, PH 74.1%, CC 78.5%) are expected to sustain going forward given their strong brand appeal.

International Business – This primarily comprises KFC and PH stores in Nigeria and Nepal. As on 31st March, 2021 this segment had 37 operational stores. This vertical accounted for ~10% of the total turnover in FY21. It de grew 22.6% in FY21 to INR 115 cr after growing at 35.1% in FY20. Post Covid we expect revenues to grow at a CAGR of 13.3% to INR 168 cr driven by new store additions (+7 stores to 44) and the closing down of non-profitable ones.

Other Business – This consists of in-house brand stores such as Vaango, The Food Street, Ile Bar, AMRELI, Ckrussh Juice Bar among others and currently there are 50 such stores in this vertical contributing 5% to the overall turnover. This vertical de-grew by 47.6% in FY21 to Rs 60 cr after

growing 16.4% in FY20. Post Covid we expect revenue to grow at an 84.8% CAGR to INR 378 cr on the back of new store additions (+60 stores to 110).

Over the period FY19-21 revenue growth was impacted by the onset of Covid to INR 1,135 cr (-6.9% CAGR) leading to a consequential reduction in EBITDA to INR 226.9 cr (-9.8% CAGR) and deepening of losses to INR 81.3 cr from INR 59.3 cr (FY19). However, the operating cash flow was encouragingly positive at INR 239.6 cr. The Debt to Equity of the company stood at 11x (with a net debt of INR 1,212.4 cr) and net worth of INR 113.8 cr.

The DIL management is looking to raise INR 440 cr through a maiden IPO along with an INR 1,398 cr OFS (6,53,33,330 shares by Dunearn and 9,00,00,000 shares by RJ Corp). The net proceeds from the fresh issue will be utilized for repayment of debt to the extent of INR 324 cr post which the leverage is expected to come down to 2X.

Going forward we expect DIL to grow its revenue at a CAGR of 41.7% to INR 842 cr over the period of FY21-24E driven by

* Core brands revenue CAGR of 41.1% to INR 2680 cr,

* International Business revenues CAGR of 13.3% to INR 168 cr, and

* traction in Other Business revenues to INR 378 cr (CAGR of 84.8%)

The key drivers of this growth are

* increased internet and mobile penetration and mainstreaming of food delivery apps,

* better commercial terms being the largest food service provider on the food delivery apps,

* rapid increase in store count and increasing Pan India presence from 155 cities as on 31st Mar 2021,

* a wide variety of franchise offerings that help diversify and sustain momentum, and

* revival of business to pre-Covid levels, post pandemic.

We expect EBITDA to grow to INR 932.9 cr (60.2% CAGR, +890bps to 28.9% margin) by FY24. Reduction in interest expense (due to part repayment of debt from issue proceeds) and the improved operating profitability is expected to help DIL become profitable in FY23. By FY24, we expect net earnings to grow to INR 301.7 cr (net profit margin of 9.4%). Operating cash flow is expected to increase to INR 463.6 cr by FY24 from INR 239.6 cr reported in FY21. Consequently, return ratios RoCE and RoE are set to expand to 15.8% and 29.1% respectively by FY24 from the current negative levels.

Valuation

We initiate coverage with a SUBSCRIBE for long term investing. Our target price of INR 149.8 (59.9X FY24 EPS) represents a potential upside of 66.4% from the offer price of INR 90 (upper limit of the band) over a period of 18-24 months.

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