Buy Devyani International Ltd For Target Rs.215 by Motilal Oswal Financial Services Ltd
Weak underlying metrics; store expansion continues
* Devyani International’s (DEVYANI) consol. revenue grew 54% YoY (in line) in 3QFY25, led by a recent acquisition in Thailand. India revenue was up 10% YoY, despite 20% YoY store expansion, which was offset by weak samestore sales growth (SSSG) across brands.
* KFC revenue grew 9% YoY, supported by 17% store expansion, though offset by a 4% decline in same-store sales (-3% for Sapphire). Pizza Hut (PH) revenue rose 6% YoY, with 14% new store additions, while SSSG declined 0.8% YoY (+5% for Sapphire). Costa Coffee’s revenue rose 30% YoY, with 36% YoY store addition and 5% SSSG.
* India ROM was flat YoY at INR1.2b and margin contracted 140bp YoY to 13.9%, owing to operating deleverage. KFC’s ROM contracted 170bp YoY to 17.2% (18.2% for Sapphire) and PH’s ROM contracted 400bp YoY QoQ to 2.1% (4.7% for Sapphire).
* Consolidated GM contracted 190bp YoY and 60bp QoQ to 68.7 (est. 69.2%), as the Thailand business operated at a lower GM than India. EBITDA pre-Ind AS margin grew 80bp YoY/70bp QoQ to 10.1%. Consol. RoM declined 110bp YoY but rose 70bp QoQ to 14.3%.
* Devyani is focusing on innovation, customer engagement, and value offerings to drive recovery. Also, government measures for the middle class in the budget could support demand revival. ADS and SSSG recovery remain key monitorables, as they are vital for improving unit economics. The stock price has been flat for the last three years due to growth challenges. We reiterate our BUY rating with a TP of INR215 (based on 35x Dec’26E pre-IndAS EV/EBITDA).
In-line operating performance; strong store addition
* Sluggish growth metrics: Consol. sales grew 54% YoY to INR12.9b (est. INR12.7b) due to Thailand acquisition. India revenue was up 10% YoY at INR8.7b (est. INR8.8b). KFC revenue grew 9% YoY and same-store sales declined 4.4%. PH revenue grew 6% YoY and same-store sales declined 0.8%. ADS of KFC was down 8% YoY at INR96k, and PH ADS dipped 5% YoY to INR35k. Costa Coffee’s revenue rose 30% YoY with SSSG of 5.1%, while ADS was down 26% YoY at INR26k.
* Strong store expansion: Total 111 stores were added in 3Q, taking the total to 2,032. The store addition in KFC/PH/CC/Vaango/International stood at 44/51/2/4/10. The total store count for KFC/PH/CC/Vaango and others/International stood at 689/644/203/64/22/374.
* Weak margins: Gross profit grew 49% YoY to INR8.9b (est. 8.8b) and margins contracted by 190bp YoY and 60bp QoQ to 68.7 (est. 69.2%). Consol. EBITDA margins contracted 40bp YoY but expand 70bp QoQ to 16.9% (est. 16.8%). Consol. ROM increased 43% YoY to INR1.9b and margin declined 110bp YoY but rose 70bp QoQ to 14.3%. Pre-Ind-AS EBITDA increased 66% YoY to INR1.3b and margin rose 80bp YoY/70bp QoQ to 10.1%.
* Reported EBITDA grew 50% YoY to INR2.2b (est. INR2.1b). PBT declined 42% YoY to INR56m (est. INR165m) on higher depreciation (+67%) and interest cost (+39%). Deferred tax of INR150mn further impacted profitability. Loss after tax stood at INR9m (est. APAT of INR132m).
* In 9MFY25, net sales/EBITDA grew 49%/34%, while APAT fell 73% YoY.
Highlights from the management commentary
* Management is optimistic about the proposals announced in the Union Budget, particularly the income tax relief as it may boost consumption trends for QSR.
* PH margin continued to contract, but management expects margin improvement in the coming quarters due to marketing cost optimization.
* KFC ROM can reach 19-20% at ADS of INR100k over the next few quarters. Devyani is adopting some strategic measures to achieve this target. These measures focus on ADS and cost optimization.
* Devyani has introduced KFC cafes, currently in select stores only. Their strategy is different from peers (McCafe, BK Café) as Devyani is focusing more on reducing the store size to optimize costs and to make stores more efficient in terms of paybacks and margins.
Valuation and view
* There are no changes in our EBITDA estimates for FY25 and FY26.
* KFC added 93 stores in 9MFY25, and this expansion is expected to continue in FY26. Meanwhile, PH opened 77 stores during the same period due to certain DA commitments. However, management plans to focus on improving ADS and profitability across the existing network and will adopt a more cautious approach to future store openings for PH.
* Devyani is focusing on innovation, customer engagement, and value offerings to drive recovery. Also, government measures for the middle class in the budget could support demand revival. However, ADS and SSSG recovery remain key monitorables, as they are vital for improving unit economics. 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 (based on 35x Dec’26E pre-Ind-AS EV/EBITDA).
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