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Weak SSSG hurts profitability

* Devyani International (Devyani) reported 38.7% YoY revenue growth in 4QFY24, including the Thailand acquisition. The organic growth (exacquisition) is expected to be ~5% YoY (est. 7.5%) despite a 20% store growth. This was, however, offset by the same-store sales (SSS) decline for both KFC (-7%) and PH (-14%) along with the devaluation of the Nigerian naira. KFC’s revenue grew 11% YoY, while PH’s revenue dropped 5% YoY. The growth metrics of the company have been sustaining weakness, a similar trend that is visible across QSR peers.

* Gross margin (GM) was positive across brands due to a benign RM basket. However, consolidated GM contracted 40bp YoY to 69.2% (est. 70.4%) due to the Thailand business (having lower margins than the India business). KFC’s ROM expanded 150bp YoY to 19% (same in 3Q). However, PH’s ROM declined 490bp YoY to 4.4% (vs. 6.1% in 3Q).

* Consolidated restaurant EBITDA (including Thailand) increased 15% YoY to INR1.4b, with a margin dip of 280bp YoY to 13.6%. The Pre-Ind-AS EBITDA increased 5% YoY to INR959m, while the margin contracted 290bp YoY to 9.2%. PBT declined 86% YoY to INR59m (est. INR85m), while the PBT margin was at 0.4%. APAT declined 95% YoY to INR33m (vs. est. PAT of INR35m).

* Devyani has successfully completed integration of its Thailand business during the quarter and also entered into a partnership with PVR–INOX for operating food courts in shopping malls.

* We maintain our cautious stance on QSR in the near term due to the ongoing demand challenges. The stock trades at 25x and 21x Post-Ind-AS EV/EBITDA on FY25E and FY26E. We reiterate our BUY rating on the stock with a TP of INR185 (premised on 22x FY26E Post-Ind-AS EV/EBITDA

Weak sales growth; miss on margin

*  Sluggish growth metrics: Devyani’s sales growth was healthy at 38.7% YoY to INR10.5b (est. INR8.1b), mainly due to its Thailand acquisition. The organic growth (ex-acquisition) is expected to be ~5% YoY (est. 7.5%). KFC’s revenue grew 11% YoY and Costa Coffee’s revenue rose 36% YoY, while PH’s revenue declined 5% YoY during the quarter.

* Store Expansion: Total store addition during the quarter was 330, mainly due to 288 stores added from the recent acquisition in Thailand. The store additions in KFC/PH/CC/Vaango were 6/2/25/9. The total store count stood at 1,782, distributed among KFC/PH/CC/Vaango/others. International stores were at 596/567/179/63/24/353. Management maintains its store addition guidance of 275-300 in FY25. However, it will expand PH stores cautiously.

* Weak margin print: Consolidated GM contracted 40bp YoY to 69.2% (est. 70.4%). GP rose 38% YoY to INR7.2b (est. INR5.7b); EBITDA was up 15% YoY to INR1.7b (est. INR1.4b), while margin contracted 340bp YoY to 16.6% (est. 17.4%). Consolidated ROM increased 15% YoY to INR1.4b and margin contracted 280bp YoY to 13.6%. The Pre-Ind-AS EBITDA increased 5% YoY to INR959m, while margin contracted 290bp YoY to 9.2%. PBT declined 91% YoY to INR44m (est. INR85m). PBT margin was 0.4%. APAT declined 95% YoY to INR33m (est. INR35m).

* In FY24, net sales grew 18.6% YoY; EBITDA remained flattish YoY, while APAT declined 67% YoY.

Highlights from the management commentary

* The company has taken strategic initiatives such as optimizing menu pricing in a subdued environment, which has aided revenue growth.

* To capitalize on India's emerging status as a major destination for travel, tourism, and value shopping, the company is focusing on food courts as an essential component of its growth strategy across various consumption channels and touchpoints of travel and shopping.

* Devyani has partnered with PVR-INOX to operate in various food courts in shopping malls nationwide, enhancing its presence and enriching its brand portfolio. It will help the company co-promote the movies and food. The initiative aims to capitalize on the growing trend of 'Food on the Go' in major consumer spaces.

* There is an improvement in gross margins across its core brands (KFC India and Pizza Hut), led by the cost-saving initiatives taken by the company.

* Management maintains its store addition guidance of 275-300 in FY25. However, it will expand PH stores cautiously.

Valuation and view

* On account of the consolidation in the Thailand business, we have adjusted our overall numbers accordingly. Revenue for FY25/FY26 has increased 25%/21% YoY. The Thailand business operates at an EBITDA margin of ~11-12% (preacquisition). Post-acquisition, there is also an added acquisition cost (interest) for Devyani. Therefore, the deal is likely to be EPS dilutive in the near term. Hence, we cut our EPS by ~8%/5% for FY25E/FY26E.

* KFC’s store addition will sustain in FY25, but PH’s store addition will be muted as management is aiming to fix the ADS and profitability for the current network.

* The QSR industry continues to see weak unit economics across dine-in and delivery formats. Despite these industry-wide difficulties, however, KFC has shown resilience in managing the crisis effectively. Conversely, PH has been struggling, partly attributed to intense competition in the market. We maintain our cautious stance on QSR in the near term due to the ongoing demand challenges. The stock trades at 25x and 21x Post-Ind-AS EV/EBITDA on FY25E and FY26E. We reiterate our BUY rating on the stock with a TP of INR185 (premised on 22x FY26E Post-Ind-AS EV/EBITDA).

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