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Weak same store sales continue to impact profitability

Devyani’s 4QFY24 organic business performance was below estimate – revenues for KFC/PH were c.3% below estimate. Same stores sales/ADS saw further moderation for KFC & PH owing to sluggish demand, some impact of negative sentiment against US brands & high competitive intensity. While PH SSS trend was similar to Sapphire, KFC SSS decline of 7% was higher vs -4% for Sapphire. Costa Coffee performance was relatively resilient (SSSG +7.3%). India business GM delivery was better with better than envisaged margins in KFC/PH/Vaango due to benign RM scenario. Scale-deleverage/currency devaluation (Nigeria) led to compression in operating margins. Recently acquired Thailand business is broadly on track as per the management. In terms of outlook, 1Q is seasonally better quarter; management expects weak consumer sentiment to be short lived and is hopeful of demand recovery post elections. While store additions for FY24 (251 stores) were below expectations, management continues to maintain guidance of 275-300 stores for FY25E. Inline with sector, we expect the stock to remain under pressure due to lack of near term triggers. Pace of recovery in SSSG for India business & execution on Thailand business will be key monitorables. From long term perspective, we remain positive on QSR opportunity and RJ Corp’s execution capabilities to tap the same. BUY.

* Organic performance below estimate: DIL’s India business sales were c.2% below estimate while brand contribution was broadly inline; weaker International business led to overall organic performance being below forecasts. Consolidated sales (incl. Thailand acq) grew 38.7% to INR 10.5bn, driven by store additions (store count +43.4% yoy & 20.2% excl. Thailand). India sales grew 7.4% yoy (store count +20.7%) while International business sales were up >4x to INR3bn largely on account of Thailand acquisition. SSS remained tepid – PH:-14%, KFC: -7.1% (vs Sapphire’s PH:-15%, KFC: -3%). Costa performed relatively better (SSSG +7.3%) due to higher salience of airport stores which continued to do well. GM was down 40bps yoy to 69.2% (India GMs were up 220bps yoy while International margins were lower due to Nigeria & Thailand KFC business). Further, scale deleverages & Nigeria devaluation resulted in c.280bps decline in brand contribution margins to 13.6%. Corporate OH were controlled well at 4.4% of sales. Netnet, Pre-IND AS EBITDA margin was down c.290 bps to 9.2% (JMFe: 8.7%).

* SSSG trend remain weak for PH/KFC while Costa Coffee surprises positively: 1) KFC India revenues were up 11.3% yoy led by store additions (+21.6% yoy). ADS was down 12.3% yoy. GM expanded 184bps yoy as input costs remained favourable, thereby aiding brand contribution margins (+148bps yoy to 19%). 2) PH India sales declined by 4.5% yoy (ADS down 18% yoy). Management has taken initiatives in terms of product innovations (especially on the premium side of pizzas) and brand investments to win back the customers. GM expansion was strong at 405bps to 77.3% due to benign input costs. Scale-deleverage & higher marketing spends, however, resulted in EBITDA margin compression of c.490bps yoy to 4.4%. 3) Costa Coffee sales were up 36.3% yoy led by store additions even as ADS was down 8.3%. GM was down 140bps yoy to 76.7%, while contribution margins at 17.9% (-234bps yoy/up 304bps qoq) surprised positively

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