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Recovery signals emerging

In Q3, Devyani International (DEVYANI IN) delivered on the margin front, with revenue growth slightly ahead. For KFC India, the drop in same-store-sales was arrested to 2.9% YoY, and gross margin saw improvement and continued store expansion. For Pizza Hut, the drop in SSS was arrested to c.9.0%, with store additions expected to remain flat in CY26. Sustained positive SSSG in Jan-26, along with margin improvement and a ~24% correction in the stock price, has improved the risk-reward profile. So, we upgrade to BUY from Accumulate. However, we reduce our TP to INR 165, as we factor in a downgrade in revenue estimates by 1-2% and EBITDA by 4-8% in FY25-28E. Amidst strategic interventions at PH, expansion of KFC and SSSG improvement are near-term growth drivers.

KFC – Drop in SSS hits margin gains: Revenue of KFC India rose 5.9% YoY, largely driven by store additions (+54 net, taking the total store count to 788, up 14.4% YoY). ADS was flat QoQ at INR 90k, while the drop in SSS was arrested to 2.9% YoY. Weak SSSG was partly driven by cannibalization from rapid expansion in the past few years. Despite muted sales, gross margin improved by ~120bps YoY to 69.8%, supported by cost controls and operational efficiencies, though gains were partly offset by deleverage from lower ADS and a higher delivery mix. SSS growth for KFC in January 2026 was driven by promotions and channel strategies, although monitor consistency. KFC plans to add ~110-120 stores annually. We expect SSS to drop by 1.5% in FY26E and store count to reach 1,026 by FY28E.

Pizza Hut – SSS deteriorated: PH India continued to face demand pressure as revenue dropped by 6.4% YoY in Q3, driven by SSS declining by 9.1% even as it added 18 stores (639, flat YoY). Operational focus shifted decisively to profitability, resulting in a QoQ gross margin improvement of ~130bps to ~76%. As part of its turnaround, PH has begun shutting down loss-making stores and confirmed no new net store additions in CY26, with expansion limited to replacement closures. DEVYANI identified key turnaround levers: a) technology, b) rationalization of loss-making stores, c) A&P and d) menu innovations. A detailed turnaround strategy is expected to be shared post the approval of merger with Sapphire. With many monitorables, we expected SSS of PH to decline 5.5% in FY26 and growth up to 2.0% in FY28E

Upgrade to BUY; TP pared to INR 165: In Q3, DEVYANI posted slightly higher growth, with margin ahead of estimates, led by pricing action. January witnessed SSSG, though monitor consistency till March, implying that the worst for QSR has likely peaked. Post margin correction in H1, gross margin gains were strong. PH necessitates multi-level interventions for operational turnaround, which may require some time (depending on discussion with Yum Brands and Sapphire). Amidst this, KFC’s expansion (14% CAGR till FY28E) is a growth lever, with any improvement in SSSG as a trigger for operating leverage. Sky Gate has turned around at brand EBITDA level, ahead of the guided timeline. Factoring in Q3, we pare our revenue estimates up to 2.5% and EBITDA by 4-8% in FY25-28E. So, we lower KFC’s multiple to 32x Sep-27E EV/EBITDA (pre-IndAS), and value Pizza Hut on 2x P/S, Costa Coffee on 25x, Vaango on 20x and the international business on 30x. We lower our TP to INR 165 from 185. Upgrade to BUY as the stock price has corrected 24% in past three months.

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