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Near-term pressure persists; focus on store expansion

We met with Mr. Manish Dawar, CFO of Devyani International (DIL), to discuss the current demand trends, the company’s growth outlook across business verticals, and its long-term strategy. Near-term consumer sentiment remains subdued due to high food inflation, intense competition, and geopolitical challenges. The underlying performance in 2HFY25 will largely be similar to that in 1HFY25. KFC and Pizza Hut (PH) are expected to post relatively better SSSG vs. 1HFY25, but it will largely be driven by the base benefit. Operating profitability will remain weak until underlying growth (average daily sale or ADS) improves. The company is focusing on cost optimization (mainly staff efficiency for dine-in) to improve restaurant operating margin (ROM) even if ADS recovery takes time. KFC offers a long-term play in India with enough potential for an increase in customer eat-out frequency. Rapid urbanization, a fast-changing income pyramid, a higher youth population, and women work force will continue to boost the food service market. Burger and Chicken are big QSR categories globally, and the company can keep capitalizing on the trends in India. DIL is also seeing stability in PH and aims to boost its transaction growth. Amid rising overall acceptance of delivery, the company focuses on improving its delivery mix. DIL has been investing in its digital platform and better delivery experience. Despite demand weakness, the company wants to sustain its store addition trajectory, as it plans to strengthen its store network in order to capitalize on a demand uptrend. We have been cautious on the QSR universe owing to weakness in growth metrics and contractions in operating profitability. After showing weakness in the last two years, it appears that ADS levels for both KFC and PH are near the bottom. Any recovery in ADS will quickly improve the operating print. The stock price has been flat for the last three years owing to growth challenges. We reiterate our BUY rating with a TP of INR215 (premised on 35x Dec’26E pre-Ind-AS EV/EBITDA).

Unchanged near-term demand

Near-term demand remains subdued amid high food inflation, intense competition, and geopolitical challenges, with SSSG in 3QFY25 likely to benefit more from a favorable base than strong growth. Delivery continues to outperform dine-in, supported by technology, partnerships, and small-format stores in Tier 2/3 cities. Dine-in initiatives focus on localized menu innovations and promotions. Management emphasized its focus on store expansion in metro and non-metro markets, continuous menu innovation with value-driven offerings, and diversifying its brand portfolio (KFC, Pizza Hut, Costa Coffee, Vaango, Tealive, NYF, and Sanook Kitchen) across domestic and international markets

KFC – focus on improving profitability

KFC’s ADS declined to INR96k in 2QFY25 from INR121k in 2QFY23. As a result, ROM contracted to <17% (down 500bp vs. 2QFY23). DIL continues to prioritize menu innovation and product launches across its core brands to cater to evolving consumer preferences. KFC has introduced value meal rolls (INR99), featuring flavors inspired by Korean, Thai, and Indian cuisines. DIL can see scope for improvement in store efficiency, driven by employee efficiency. The men-hours required for dine-in business are higher, and there is scope for cost optimization at the store level. Hence, management is hopeful for ROM improvements in the coming quarters even if ADS does not see much improvement. DIL aims to achieve ROM of ~21% even at ADS of ~INR100k (peak ADS was INR120k-125k).

PH – looking to improve market share

PH has been focusing on value offering to improve transaction growth. ADS fell to INR35k in 2QFY25 (20% down vs. 2QFY23), resulting in ROM falling from 17% in 2QFY23 to 3% in 2QFY25. The brand’s operating profitability has declined notably, with ADS/ROM trending near the bottom (FY19 ADS/ROM was INR45k/15%). PH has implemented various initiatives such as product launches, which can drive a recovery going ahead. PH has reintroduced its popular offerings, including Momo Mia Pizza (INR299) and Melts Pizza (INR169).

Delivery continues to outperform dine-in business

DIL has observed a differentiated performance in the dine-in and delivery channels across its portfolio. Dine-in business showed no significant improvement; however, the company has implemented initiatives to increase footfall and repeat visits, including localized menu innovations and value-driven promotions, such as KFC’s value meal rolls featuring international flavors and PH’s Momo Mia Pizza. Delivery continues to perform well, reflecting a consumer preference for convenience. The company has focused on leveraging technology and partnerships to optimize delivery operations. Furthermore, the expansion of small-format stores in smaller towns and Tier 2/3 cities addresses the growing delivery demand while maintaining cost efficiency.

Rapid store addition to continue

Despite a slowdown in demand, DIL focuses on store expansion. It is prioritizing small-format, capital-efficient stores for its newly introduced brands, including Tealive, New York Fries (NYF), and Sanook Kitchen. This strategy is to balance growth with operational efficiency while adapting to evolving market dynamics. DIL has been rapidly expanding its KFC network, with a shift toward smaller store sizes— reducing from 3,000-3,500 sq. ft. to 1,600 sq. ft. On average, ~25 KFC stores have been added per quarter over the past eight quarters. For PH, the company adopted a more cautious approach during 4QFY24 and 1QFY25, opening only five stores in total. However, it resumed its expansion strategy in 2QFY25, adding 23 stores. For FY25, we model store additions of 100 for KFC, 55 for PH, and 60 for Costa Coffee, reflecting the company’s commitment to strategic growth across its portfolio.

Valuation and view

* The QSR sector continues to face subdued demand, due to high food inflation and rising competition from food delivery platforms. Despite these headwinds, companies remain focused on store expansion and diversifying their offerings to enhance both dine-in and delivery segments.

* After showing weakness in the last two years, it appears that ADS levels for both KFC and PH are near the bottom. Any recovery in ADS will quickly improve the operating print. The stock price has been flat for the last three years owing to growth challenges.

* We reiterate our BUY rating with a TP of INR215 (premised on 35x Dec’26E preInd-AS EV/EBITDA).

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