Buy Devyani International Ltd For Target Rs. 190 By Emkay Global Financial Services Ltd
Media reports suggest that Devyani and Sapphire are considering a merger, via a share swap deal. The combined entity has a scale of Rs80bn in FY25, with potential revenue CAGR of 15% over FY25-28 (similar to JUBI’s). The current margin profile is depressed and should get a boost from a potential demand revival; we build in EBITDA CAGR of ~25% over FY25-28E. The merger also has definite potential synergies in the form of HO cost optimization, faster go-tomarket, and store cost/capex efficiencies. The swap ratio is a crucial element toward concluding potential value creation opportunities in the two listed entities. In our view, a 2:1 ratio (Devyani:Sapphire) will help realize the synergy benefits equally. As there are potential synergies, we believe a swap ratio of less than 1.8x is negative for Sapphire shareholders, while a swap ratio of above 2.7x is negative for Devyani shareholders, assuming a 10% EBITDA benefit (synergy) for the combined entity (Exhibit 2).
Combined entity has similar scale and growth prospects as JUBI
Per FY25 reported numbers, the combined entity has a scale of Rs80bn, with potential revenue CAGR of 15% over FY25-28 (similar to JUBI’s). The overall combined network stands at 1,200 stores for KFC and ~1,000 stores for Pizza Hut in India. There are definite cost synergies, with optimization of HO costs being the lowest hanging fruit (4.5-5.0% of sales currently). Also, Sapphire operates at a lower gross-margin (50-70bps across the PH/KFC formats) than DIL. Further, the merger should resolve the tussle for PH expansion in common territories, where Devyani has PHD (Pizza Hut delivery) rights for India (ex Tamil Nadu) and Sapphire has PH rights for most of South and West India. Even the capex per store for Devyani is ~20% lower than that for Sapphire, and a merger should bring in efficiencies. On the revenue front, the merger should enable faster decision making in terms of go-to-market and new product innovations; such decision making was being delayed due to involvement of tripartite decision makers – Devyani, Sapphire, and Yum!.
GoI’s initiatives around consumption boost should drive growth revival
The overall QSR space should see marginal growth slowdown in Q1, due to unseasonal rains/geo-political events. Despite a prolonged slowdown, we remain constructive on Indian QSRs, as we expect the cut in tax/interest rate and the healthy monsoons to boost discretionary consumption in H2. Against a weak demand backdrop, we expect 7-9% growth for Devyani and Sapphire in Q1, largely led by store additions as SSGs are expected to be modest. Despite the under-performance, we maintain BUY on Devyani and Sapphire, due to price correction and potential SSG revival in H2.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
