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Devyani International’s Q1FY24 print was below our estimates; consol. revenue/EBIDA grew 20.1%/5.3%, and PAT declined 38.1%. India KFC/PH revenue grew 21.5%/11.1% led by decline in SSSG at 0.9%/5.3%. Costa coffee revenue/SSSG grew 83.4%/9.4%. DIL stated, despite IPL event, given challenging environment ADS declined for KFC/PH at 7.9%/10% indicating shift in demand towards value segment. In Q1 DIL added 20/15/11 stores under KFC/PH/Costa format. Though DIL effected 3.5%/1.0% price increase in KFC/PH portfolio, inflation in chicken and dairy cut DIL’s gross margin to 70.3% (-30bp) led by KFC at 69.7% (+70bp), PH at 74.9% (-130bp) and Costa 77.3% (-430bp). However higher employee cost (+45.9%) and other exp. (+21.1%) ensued post-INDAS EBITDA margins at 20.5% (-288bp). Despite softer demand management held store expansion target with single digit SSSG led by strong menu innovation expecting recovery in margins in Q2. We tweak our earnings and retain REDUCE, with a revised DCF-based TP Rs180 (implying 17.7x EV/EBITDA FY25E). Persistent weakness in demand coupled with lower no of days cut SSSG in Q1

DIL reported consol. revenue at Rs8.5bn (+20.1%) YoY driven by persistent weakness in demand. KFC/PH India revenue grew 21.5%/11.1% led by decline in SSSG at 0.9%/5.3% YoY. Costa coffee revenue/SSSG grew 83.4%/9.4%. Management alluded, despite IPL event/ vacations, given challenging environment ADS declined for KFC/PH at 7.9%/10% indicating shift in demand towards value segment. In Q1 DIL added 20/15/11 stores each under KFC/PH/Costa format in India (total count KFC/PH/Costa at 510/521/123) with focus on non-metro (52% stores). Management attributed weak revenues and SSSG to, (1) negative operating leverage due to higher scale of store addition, (2) decline in ADS for KFC/PH, and (3) rising competition. That said, in Q1 DIL dialed up menu innovation adding 10 new pizzas and Chicken roll/ snackers priced at Rs99/- supporting with higher media spends. With one new store addition revenues in International business (Nigeria/Nepal) stood at Rs580mn (+8.4%) YoY, yet ADS declined 15.9%.

Weaker margin on account of higher chicken/ dairy inflation and adverse impact in Nigeria DIL’s gross margin declined to 70.8% (-30bp) YoY, reflecting Pre-INDAS restaurant EBITDA margin to 13.2% (-290bp) led by, (1) higher inflation in chicken/dairy, and (2) lower brand contribution margin for KFC at 21.1% (-130bp), PH at 10.1%(-740bp) and Costa coffee at 20.9% (-960bp). Despite higher employee cost (+45.9%) and other expense (+21.1%) company EBITDA grew by 5.3%, settling post EBITDA margin at 20.5% (-288bp). Company effected 3.5%/1.0% price increases in KFC/PH portfolio in Q1 yet expect lower diary inflation to improve margins in Q2FY24. PAT dropped to Rs457mn (-38.8%). DIL said it has booked exceptional item (Rs473.3mn) on account of currency devaluation in Nigeria resulting in Rs15mn loss. Management opined the higher employee expenses in Q1 on account of, (1) overall wage inflation, (2) factoring minimum wages bill in Karnataka, and (3) reversing incentive to staff.

Valuation and risks As argued in our recent QSR Thematic report, with strong management and execution capabilities we saw solid performance delivered by DIL. However weak demand, incremental competition in chicken QSR, and rising inflation in chicken/dairy pose short term challenges in our view. We reckon with 3.5%/1.0% price increases in KFC/PH portfolio and higher corporate overheads DIL may hold margins. We increase earnings for FY24E/FY25E by 6.4%/7.5% and retain REDUCE rating with a revised DCF-based TP of Rs180 (implying EV/EBITDA of 17.7x FY25E). Key risks to our call prolonged weakness in demand, rising inflation in key RM/PM and severe competition in chicken portfolio from organized/ unorganized players.

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