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* A major menu-revamp: Pizza Hut has introduced 11 new pizza options across pricepoints (Rs199-409; pre-GST) and moved away from 16 existing options (Emkay estimates). The revamped menu offers appetizing choices and largely bridges the portfolio gap across Fusion/Indian flavor-topping combinations vs. Domino’s (Exhibits 2, 3).

* A step in the right direction: In the wake of weak consumption trends, PH’s huge menu revamp and its earlier plugging of key price-gaps with the launch of Flavor-fun pizzas have been the need of the hour, and should enthuse consumers for trials. In addition to improved brand accessibility with accelerated expansion, this menu revamp and relatively attractive value offers have potential to fast-track market-share gains for PH, from ~15% (vs. ~65% for Domino’s; our estimates).

* We see upsides, but stay conservative due to a subdued demand environment: The revamp comes as a positive surprise and we see scope of earnings upsides/re-rating for both, DIL and Sapphire. However, we await actual reflection of such initiatives in growth, as consumer demand remains subdued, dairy prices are elevated and base for H1FY24 is strong. Such revamps are generally supported by strong marketing campaigns, which can also impact margins in the near term. We currently have a HOLD on DIL/Sapphire.

Menu revamp should accelerate market-share gains: PH currently has ~15% market share in the overall pizza QSR category and ~20% with-in the combined sales of Domino’s and Pizza Hut. We believe a huge menu refresh, plugging of key price-gaps with launch of Flavor-fun pizzas, relatively attractive value offers and improved accessibility with accelerated store expansion should help PH continue gaining market share. Pizza Hut has added ~600bps market share since the pandemic lows in 9MFY23 vs. Domino’s (Exhibit 5). We expect the accelerated store additions to continue, with ~150 annual store adds for the PH format on a base of ~800 PH stores (FY24E end; DIL/Sapphire combined).

Our estimates currently factor-in the weak H1 before a growth turnaround in H2: Against a weak demand backdrop and high base, our current estimates factor-in a mid-single-digit SSG decline for the PH format across both, DIL and Sapphire in H1FY24, before a SSG turnaround is seen in H2. The menu revamp is undoubtedly a stimulating move and we see scope of earnings upsides/re-rating for both, DIL and Sapphire. However, we remain conservative as of now, due to the subdued demand environment, RM inflation and likely marketing investments to support these new launches. Going beyond near-term challenges, we remain confident of mid-teen growth for QSRs over the medium term, given the low QSR penetration at ~8% in India vs. >20% for China/Brazil.

KFC – Price hikes and introduction of chicken rolls can drive upsides: Our checks suggest that KFC has also introduced chicken rolls in Apr-23 which, we believe, is also a local favorite snack; its price-point is also attractive, at Rs99 for a single filling and Rs149 for a double filling. Our analysis of the menu pricing suggests that KFC has taken a price hike of 3- 4% in Apr-23, post a ~10% price hike last year in the wake of the sudden increase in raw material prices. For Q1FY24E, both PH/KFC should realize benefits of 8%/4% price hikes over the last 12 months.

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