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Aggressive growth momentum continues

* DEVYANI delivered a strong performance in 3QFY22, with an improvement on all operating metrics. Both KFC and Pizza Hut (PH) saw a sequential improvement in ADS to INR124k and INR47k, respectively, despite the addition of a large number of stores in the past five quarters.

* While strong demand tailwinds in 3QFY22 boosted KFC’s ADS, the same may normalize going forward. However, the gradual uptick in ADS for PH is likely to continue on account of the brand’s focus on the delivery channel.

* The company delivered a pre-Ind AS EBITDA of 16.4% in 3QFY22 (up 430bp YoY and 110bp QoQ) – another metric which has not been diluted despite a sharp network expansion.

* We remain bullish about DEVYANI’s prospects as it continues to aggressively expand its store network, aided by an improvement in ADS. As highlighted in our initiating coverage note, KFC enjoys a strong brand equity, while PH is headed for a turnaround. We maintain our Buy rating.

Strong beat as operating metrics continue to improve

* DEVYANI’s consolidated sales grew 64.7% YoY to INR6.2b (est. INR5.5b).

* SSSG: KFC up 23.8% (est. 30%), PH up 24.7% (est. 30%), CC up 101.2%.

* Net new units (NNU) added for KFC/PH/CC stood at 30/40/five. It added four stores in Others (India) and one each in Nigeria and Nepal. In total, it added 81 NNUs in 3QFY22.

* Number of stores as of 3QFY22-end stood at 339/351/50 for KFC/PH/CC. It has 58/28/18 stores in Other (India)/Nigeria/Nepal. In total, its store count stood at 884 stores at the end of 3QFY22.

* Gross margin rose 270bp YoY to 71.4%.

* EBITDA (pre-Ind AS) grew 124% YoY to INR1b, with an EBITDA margin of 16.4%, up 430bp YoY. EBITDA (post-Ind AS) grew 67.5% YoY to INR1.5b (est. INR1.3b). EBITDA margin expanded by 40bp YoY to 23.7% (in line).

* Adjusted PAT stood at INR654m (est. INR432m) as against a loss of INR73m in 3QFY21.

Highlights from the management commentary

* Restrictions in several states affected its performance in Jan’22 due to the impact on the on-premise channel (dine-in, eat-in, and takeaways).

* Total store additions across all brands is likely to be ~250 in FY22 (192 stores added in 9MFY22).

* Input costs have risen, but the company has not taken any price hikes yet. The management is evaluating hiking prices and will take a decision soon.

Valuation and view

* While there was a beat in 3Q, the COVID-led restrictions will impact its 4QFY22 performance. We raise our FY22E EBITDA estimate by 3.2%. There is no material change to our FY23E/FY24E estimate.

* We remain bullish on DEVYANI’s prospects due to: a) KFC’s strong brand equity, b) turnaround in PH, led by the focus on delivery, c) sharp network expansion across the portfolio, d) healthy mid-teen operating profitability.

* We maintain our Buy rating with a TP of INR210/share (SoTP valuation with an FY24E EV/EBITDA of 29x/22x for KFC/PH).

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