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Challenging demand conditions weigh on performance

DIL’s 2Q operational performance was impacted as brand contribution margins shrank across all segments (280 bps/460 bps contraction in KFC/Pizza Hut) led by lower ADS (10-13% decline YoY) because both KFC and Pizza hut continued to face demand headwinds, leading to SSSG declining 7%/6% YoY respectively despite a low base. The management highlighted that the weak demand scenario, the volatile geopolitical situation and more vegetarian days impacted demand during the quarter. Along with these, higher marketing spends in PH and experimental pricing and promotional activities in KFC coupled with lower ADS impacted margins. International revenue was up 1% YoY while brand contribution margin expanded by 120bps YoY. Store openings remained robust; DIL added 28/23/15 stores in KFC/PH/Costa Coffee. The management believes that the long-term structural story in food services remains intact and growth rates along with profitability will pick up once the overall demand momentum picks up. In line with this, the company has added three new brands to its portfolio – Tealive, New York Fries, and Sanook Kitchen – and targets to launch them from Apr’25 onwards. Notwithstanding the near-term demand pressures, we remain believers in the DIL story led by its strong execution capabilities, and (1) presence in higher-growing chicken category, (2) pan-India store opening rights in PH and (3) array of other brands will help it address the large opportunity in the Indian food services segment. We maintain BUY with a target price of INR 190 (27x blended EV/EBITDA Dec’26- Pre Ind AS).

* Subdued demand along with weak margins impacted performance:

Consolidated revenue grew 49% YoY to INR 12.2bn (growth number looks higher due to absence of Thailand revenue in the base quarter). EBITDA grew 29% YoY to INR 2bn. EBITDA margin contracted 260bps YoY to 16.3% as gross margin contracted ~150bps YoY to 69.3% and employee expenses expanded ~150bps YoY, offset by ~40bps lower other expenses. Adjusted PAT was NIL largely led by lower other income (26% decline) and higher interest/depreciation expense (57/61% increase). Corporate overheads grew by 66% YoY to INR 519mn (higher by 40bps YoY). Pre-IND AS EBITDA grew 21% YoY to ~INR 1.1bn (9.4% EBITDA margin; down ~220 bps YoY).

* India businesses’ (ex-Costa Coffee) struggle continues; IBD witnesses smart QoQ recovery:

KFC revenue grew 7% YoY to INR 5.4bn with brand margins at 16.6% (down ~280bps YoY); it added 28 stores QoQ. Pizza Hut (PH) revenue was flat at INR 1.8bn and brand margin was 3.1% (down ~460 bps YoY) due to negative leverage; it added 23 stores QoQ. Costa Coffee revenue grew 42% YoY to INR 490mn with brand contribution margin down ~10bps YoY at 14.5%; it added 15 stores QoQ. KFC/ PH/ CC’s SSSG was - 7/ -6/ +9%. International revenue was ~INR 3.9bn (including Thailand acquisition) with brand contribution margin at ~16% (down ~150bps YoY).

* With this note, coverage of Devyani International has been transferred to Gaurav Jogani.

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