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Weakness sustains; all eyes on recovery in 2HFY25

* Devyani International (Devyani)’s consol. revenue grew 44% YoY (in line) including the recent acquisition in Thailand. India revenue up 6% YoY, despite a 20% YoY store growth, which was offset by weak SSSG across brands. KFC’s SSS declined 7%, PH at -8.6%, and Costa Coffee at +0.6%. Devaluation of the Nigerian Naira also hit revenue growth. KFC’s revenue grew 7% YoY, while PH’s revenue contracted 1% YoY. Growth metrics sustained a weakness; a similar trend was witnessed across its QSR peers.

* India business ROM contracted 2% YoY to INR1.4b with a margin contraction of 140bp YoY to 16.2% (14.9% in 4Q). KFC’s ROM dipped 160bp YoY to 19.5% (19.0% in 4Q), and PH’s ROM contracted 510bp YoY to 4.9% (4.4% in 4Q).

* Consolidated GM dipped 170bp YoY to 69.2% (in line), as the Thailand business operated at lower GM vs. India. The operating margin improved sequentially on cost optimization and a rise in ADS. Consol. EBITDA was up 29% YoY to INR2.2b, with a margin contraction of 220bp YoY to 18.3% (16.6% in 4Q). Consol. ROM improved 21% YoY to INR1.9b, with a margin dip of 290bp YoY to 15.3% (13.5% in 4Q). The Pre-Ind-AS EBITDA increased 27% YoY to INR1.4b, as margin contracted 160bp YoY to 11.6% (9.2% in 4Q).

* We maintain our cautious stance on QSR due to sustained competition and ongoing demand challenges. We reiterate our BUY rating on the stock with a TP of INR210 (premised on 35x Jun’26E Pre-Ind-AS EV/EBITDA).

Weak SSSG across brands; margin better than expected

* Sluggish growth metrics: Consol. sales growth was at 44% YoY to INR12.2b (est. INR11.9b) due to Thailand acquisition. India revenue was up by 6% YoY to INR8.4b. (est. INR8.6b). KFC’s revenue grew 7% YoY, Costa Coffee’s revenue rose 40% YoY, while PH’s revenue declined 1% YoY.

* Store expansion: Total 54 stores were added in 1QFY25 and reached 1,836. The store additions in KFC/PH/CC/Vaango and International stood at 21/3/ 13/7/10. The total store count stood at 1,836 distributed among KFC/PH/ CC/Vaango/others/International stores at 617/570/192/72/22/363.

* Better-than-expected margin print: Gross profit grew 41% YoY to INR8.5b (est. INR8.2b) and margin contracted 170bp YoY, while it was stable QoQ at 69.2 (est. 69.0%). Consol. reported EBITDA margin contracted 220bp YoY, while it expanded 170bp QoQ to 18.3% (est. 16.8%). Consol. ROM improved 21% YoY to INR1.9b and margin contracted 290bp YoY to 15.3%. Pre-Ind-AS EBITDA increased 27% YoY to INR1.4b and margin contracted 160bp YoY to 11.6%.

* Consol. reported EBITDA rose 29% YoY to INR2.2b (est. INR2.0b). PBT fell 37% YoY to INR381m (est. INR224m). Consol. PBT declined 37% YoY to INR381m due to an increase in depreciation (up 66% YoY) and interest (up 56% YoY). PBT margin was 3%. APAT declined 17% YoY to INR281m (est. PAT of INR179m).

Highlights from the management commentary

* The consumer demand remained subdued in 1QFY25, as observed in the QSR industry. It expects the demand scenario to improve during the festive season.

* The focus area remains on product innovation, optimizing marketing spends, a value layer, menu instruction, and promotions to deliver margins.

* Gross margin contracted due to the acquisition of the Thailand business. The Thailand business’s gross margin (~64%) was less than the India business margin (~72%).

* Thailand SSSG was healthy, despite the southern Thailand stores being hit by geopolitical issues.

*  The company is on track to reach 2,000 stores by FY25.

Valuation and view

* There are no material changes to our EBITDA estimates for FY25 and FY26.

* KFC’s store additions will sustain in FY25, but PH’s store additions will be muted as the 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, KFC has shown resilience in managing the crisis effectively. On the other hand, PH has been struggling, partly attributed to intense competition in the market. We maintain a cautious stance due to the ongoing demand challenges in the near term. The stock trades at 42x and 35x Pre-Ind-AS EV/EBITDA on FY25E and FY26E. We reiterate our BUY rating on the stock with a TP of INR210 (premised on 35x Jun’26E Pre-Ind-AS EV/EBITDA).

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