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KFC: SSSG disappoints

KFC: Same store sales decelerate to 4.6% YoY in FY24

Devyani International’s (DEVYANI IN) SSSG for KFC declined 4.6% YoY in FY24, which is an underperformance versus the 1.0% YoY drop posted by Sapphire’s KFC. Execution for Sapphire KFC seemed better as DEVYANI KFC’s ADS declined 10% YoY in FY24 compared with Sapphire KFC’s 7% YoY drop. With regards to Pizza Hut (PH), SSSG of both Devyani & Sapphire declined significantly – DEVYANI PH’s SSSG declined 10.9% YoY in FY24 versus Sapphire PH’s 16.0% YoY. Pizza category continues to see pressure because of higher competitive intensity due to the presence of regional players (La Pinos, Mojo Pizza, Papa John’s etc). We believe DEVYANI KFC may add 190 stores in the next two years, leading to a CAGR of 15% in FY24-26E.

KFC: Gross margin stable

On the profitability front, DEVYANI KFC’s gross margin grew 120bps YoY in FY24, as expected but brand contribution margin declined 60bps YoY compared with a growth of 30bps for Sapphire KFC. However, brand contribution margin of DEVYANI KFC and Sapphire KFC in FY24 were similar. We believe DEVYANI may not aggressively resort to discounts/promotional offers, which may protect brand contribution margin for KFC. We expect brand contribution margin for DEVYANI KFC to remain in a narrow band of 19.6-20.7% in FY24-26E. This is aligned with our view that fried chicken as a category may perform better on the profitability front versus other categories where there is severe pressure, and companies are resorting to higher promotions and marketing expenses.

Valuation: Maintain Buy with a lower TP of INR 190

We up FY25E/26E revenue estimates 21.4%/17.2% due to the acquisition of Thailand business, which offset the negative impact in revenue from lower SSSG estimates in DEVYANI KFC. We maintain EBITDA estimates as the cut in KFC’s margin has been offset by the acquisition of Thailand business. Drop in the Nigerian currency may also be a headwind for overall margin. DEVYANI KFC is trading at 33x one-year forward EV/EBITDA (pre-IndAS). This could be at a premium versus other categories, which could lead to a target EV EBITDA of 39x (unchanged). The stock has corrected 14% in the past six months. Maintain Buy with June 2025E SoTP-TP pared to INR 190 (from INR 210), as we cut pre-IndAS EBITDA margin for KFC. We maintain our preference for the fried chicken category because of stable profitability in an uncertain demand environment. We foresee the category to have strong growth Q2FY25 onwards, led by better offtake and a low base, last year.

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