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KFC underscores; eyes on recovery in near-term

* Devyani International's (DEVYANI) consolidated revenue grew 10% YoY in 2QFY27. India revenue increased 9% YoY, with KFC and acquired brands supporting growth. Devyani’s 2Q performance lagged peers as KFC’s SSSG came below expectations despite a weak base. Pizza Hut continued to report negative SSSG. Management is cautious on near-term discretionary demand but expects slight improvement in 3Q.

* KFC sales grew 12% YoY, with SSSG at 4.4% (base -4.2%; 3.3% in 1QFY27), below expectations of 6.5%. KFC ADS declined 1% YoY to INR88k. Management reiterated that mid-single-digit SSSG remains sustainable over the long term, supported by value-led offerings and calibrated promotions. PH revenue declined 1% YoY, with SSSG at -1.4% (-2.2% in 1QFY27).

* India’s RoM increased 23% YoY to INR1.4b, with margin expanding 130bp YoY to 13%. GM was impacted QoQ by higher wage and LPG costs and an adverse mix from value-led offerings. PH's RoM loss widened to INR33m from INR4m in 2QFY26, highlighting continued execution challenges. Consolidated pre-Ind AS EBITDA grew 34% YoY to INR1.25b (in line), with margin expanding 150bp YoY to 8.2%.

* International revenue grew 13% YoY to INR5.1b, despite flooding in Thailand and high fuel costs. RoM stood at INR912m (vs. INR749m in 2QFY26), while margin expanded 130bp YoY to 17.9%.

* The company has been focused on value-led offerings to drive transaction growth. The proposed Devyani-Sapphire merger, targeted for FY27-end, could unlock scale efficiencies; however, bridging the performance gap and improving brand-level profitability remain key monitorables. We reiterate our BUY rating with a TP of INR155 per share.

Unexciting KFC print; in-line EBITDA

* Soft KFC performance weighs on revenue growth: Consolidated sales grew 10% YoY to INR15.2b (est. INR15.5b). India revenue increased 9% YoY to INR10.2b (est. INR10.4b), supported by KFC and acquired brands. KFC sales grew 12% YoY to INR6.4b (est. INR6.6b), while SSSG stood at 4.4% (est. 6.5%) on a base of -4.2%. PH sales declined 1% YoY to INR1.8b (est. INR1.9b), with SSSG at -1.4% (est. +1.5%). KFC ADS declined 1% YoY to INR88k, while PH ADS fell 3% YoY to INR32k. International revenue grew 13% YoY to INR5.1b (est. INR5.1b). Own brands delivered healthy traction, with BBK and Vaango reporting SSSG of 8.1% and 6.9%, respectively, while franchise brands revenue grew 7% YoY.

* Store network grew 3% QoQ: It opened 70 store in 2QFY27 to reach 2,325 stores. The store additions/closure in KFC/PH/Franchisee brands/own brands/airports are 50/6/5/7/0. It also added 2 net new store in international market. The total store count for KFC/PH/ Franchisee brands/own brands/International stood at 844/632/202/225/402.

* In-line EBITDA: Gross profit increased 12% YoY to INR10.4b (est. INR10.6b), with gross margin expanding 70bp YoY but declining 60bp QoQ to 68.5% (est. 68.5%). Reported EBITDA grew 18% YoY to INR2.3b (est. INR2.2b), with consolidated EBITDA margin expanding 90bp YoY but contracting 100bp QoQ to 15% (est. 14.4%). Consolidated RoM increased 23% YoY to INR2b, with margin expanding 130bp YoY but declining 120bp QoQ to 13%. Pre-Ind AS EBITDA grew 34% YoY to INR1.25b (est. INR1.24b), with margin expanding 150bp YoY to 8.2% (est. 8%).

* PBT stood at INR16m (est. loss of INR10m) versus a loss of INR297m in 2QFY26, aided by higher other income. APAT came in at INR6m (est. INR47m) versus a loss of INR186m in 2QFY26.

* In 1HFY27, revenue/EBITDA grew 13%/21% YoY

Highlights from the management commentary

* SSSG ranged 4-9% across brands in India, except Pizza Hut, which improved sequentially. Growth was transaction-led, with the on-premise channel gaining traction.

* The festive shift hurt 2Q. Durga Puja, key for KFC’s South- and East-heavy mix, moved to 3Q, while North KFC’s SSSG was +20%. On a combined 2-3 quarter basis, management indicated that the performance should be in line with peers.

* Devyani stated that October’s SSSG should hold at 2Q levels, and it is aspiring for 3Q to be slightly above 2Q.

* Total price hikes stood at 1-2% YTD, taken in stages, and do not fully offset inflation. Gross margin should not deteriorate further, as more pricing and promo/deal optimization headroom remain available.

* FY27 guidance of 200-220 net store additions is on track.

* The Devyani Sapphire merger is expected to be completed by end of FY27

Valuation and view

* We trim our EBITDA estimates by 2% for FY27 and FY28.

* Management remains committed to improving ADS and profitability across the existing network across brands and will adopt a more cautious approach to future store openings across brands.

* The merger of Devyani and Sapphire is expected to unlock meaningful scale benefits, improve unit economics through operating leverage and revised commercial terms, and enhance execution across brands and geographies.

* The merger is expected to deliver recurring annual synergies of ~INR2.2b, driven by lower Pizza Hut operating costs, reduction in overall corporate overheads, and other operational efficiencies. We estimate an EBITDA gain of ~INR500m in FY28, considering weak QSR industry performance and any delay in occurring synergy benefits (refer to our detailed merger note).

* We value Devyani at 25x EV/EBITDA (pre-IND AS) on Sep’28E for the Indian business and 15x EV/EBITDA for international. We reiterate our BUY rating with a TP of INR155.

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