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Strategic consolidation of Yum! Brands’ India operations

• Devyani International (DIL) and Sapphire Foods India (SAPPHIRE) have approved a scheme of arrangement for the merger of SAPPHIRE into DIL. The transaction consolidates Yum! Brands’ India operations under a single listed entity. The merger will be executed through a share swap, with 177 equity shares of DIL to be issued for every 100 equity shares of SAPPHIRE. Before the scheme becomes effective, SAPPHIRE’s promoter, Sapphire Foods Mauritius, will divest its ~18.5% equity stake in SAPPHIRE to DIL’s group company, Arctic International.
• The merger is aimed at unlocking scale benefits, improving unit economics through operating leverage and revised commercial terms, and strengthening execution across brands and geographies. After integration, the combined entity is expected to benefit from faster store expansion, procurement efficiencies, corporate overhead rationalization, and improved cash-flow generation. The merged company will have annualized revenue of ~INR78b (similar to JUBI) and a network of ~3,000 stores.
• As part of the transaction, DIL will acquire 19 KFC restaurants in Hyderabad for ~INR900m and make a one-time payment of ~INR3.2b to Yum! India for merger approval and additional territory rights. The merger integration is expected to be complete by the end of FY27.
• The merger is expected to deliver recurring annual synergies of ~INR2.2b, driven by lower Pizza Hut operating costs, reduction in overall corporate overheads, and other operational efficiencies. As per the company, ~60% of synergies (~INR1.1b) will be realized in the first year after the merger and the full benefits (INR2-2.25b) from the second year onward. We estimate an EBITDA gain of ~INR500m in FY28, considering weak QSR industry performance and any delay in occurring synergy benefits.
• The merged entity, at 25x EV/EBITDA (pre-IND AS) on FY28E, gives a per share value of INR180 (similar to our current TP).

Deal structure and key terms

• Under the proposed scheme of arrangement, SAPPHIRE will be merged into DIL through a share-swap arrangement, wherein SAPPHIRE shareholders will receive 177 equity shares of DIL for every 100 equity shares of SAPPHIRE. Before the scheme becomes effective, SAPPHIRE’s promoter, Sapphire Foods Mauritius, will divest its ~18.5% equity stake in SAPPHIRE to DIL’s group company, Arctic International.
• Yum! Brand has agreed to revised commercial arrangements to support longterm growth of the combined platform. These include enhancements of certain waivers for the KFC and Pizza Hut brands to improve alignment on store expansion and sustainable growth.
• In addition, DIL will acquire 19 KFC restaurants in Hyderabad from Yum! India for a lumpsum consideration of ~INR900m. DIL will make a one-time payment of ~INR3.2b to Yum! India for merger approval and additional territory rights. While these payments entail near-term cash outflows, they are expected to enhance long-term strategic outlook.

Synergy benefits from the proposed merger

• The proposed merger is expected to generate meaningful strategic and financial synergies by consolidating KFC and Pizza Hut operations under a single, scaled operating platform, creating one of the largest QSR players in India with an expanded national footprint (excluding captive markets).
• The combined entity is expected to benefit from a unified brand and consumer strategy, improved execution consistency, and accelerated store rollout. Operational synergies are anticipated from integration of procurement, supply chain, technology, finance, and management functions, resulting in improved bargaining power with vendors, landlords, and service partners.
• The merger integration is expected to be complete by the end of FY27. Management expects ~60% (~INR1.1b) of the targeted synergies to be realized in the first year after the merger, and full run-rate synergies of INR2.1-2.2b achievable from the second full year of integrated operations. We model ~INR500m of synergy benefits in FY28.

Changes in post-merger operational functions

• For PH, DIL will be taking over functions like marketing, innovation, technology and supply chain. For KFC, technology and supply chain management will transition to the merged entity, while marketing and innovation will continue to be driven by Yum! Brands.
• DIL has already started hiring talent across functions. It has also shortlisted a global technology vendor as their tech partner to revamp the web and app ecosystem and to improve the digital journey and consumer experience. DIL expects all key functions to be fully operational by Jun’26.
• All the incentives from Yum! Brand are availed for 10 years.

Valuation and view

• The transaction consolidates KFC and Pizza Hut operations in India under a single operator. The merged entity will operate over 3,000 stores globally with an annualized turnover of ~INR78b (similar to JUBI), positioning it among the largest multi-brand QSR companies in India. The merger enhances long-term growth visibility and is expected to unlock significant synergies through improved operating leverage, more efficient capital allocation, greater scale benefits, and stronger execution across brands and geographies.
• Although the one-time fee payable to Yum! Brands amounts to INR4.1b (INR3.2b + INR0.9b), the merger is expected to generate recurring annual synergies of ~INR2.2b. As per the company, around 60% of these synergies are likely to be realized in the first year after the merger and the full run-rate is expected from the second year. Although the upfront payment may appear near-term negative, we view the transaction as structurally positive given the quantum of recurring synergies and the creation of a single pan-India QSR platform.
• For FY28, the first year after the merger, we estimate an EBITDA gain of ~INR500m, driven primarily by improvement in the Pizza Hut business and savings in corporate overheads. Management expects Pizza Hut to turn profitable at the brand contribution level in the first year of integration, with margins improving to low double-digit levels over time. Accordingly, we model Pizza Hut ROM at ~5% in FY28 (post-merger) vs. -1% FY26E, and corporate overhead savings of 50bp. ? The merged entity, at 25x EV/EBITDA (pre-IND AS) on FY28E, gives a per share value of INR180 (similar to our current TP).

Key highlights from the call Overview

• The merged entity will have more than 3,000 stores globally and a turnover of ~INR78b on an annualized basis.
• India's food and beverage market is large and is getting formalized and expanding rapidly. The broader food services market is expected to be at more than USD100b, with QSR at more than USD25b.
• After the merger, there would be national rollouts and standardized execution, which will translate directly into durable competitive advantage.
• This merger creates a platform that is better placed competitively with deeper national penetration for market brands, stronger bargaining power with vendor partners and landlords, and better capital allocation.

Changes in post-merger operational functions

• For PH, DIL will take over marketing, innovation, technology and supply chain functions. For KFC, technology and supply chain management will move to the merged entity and Yum! Brands will continue to drive marketing and innovation.
• DIL has already started hiring talent across functions. It has also shortlisted a global technology vendor as a tech partner to revamp the web and app ecosystem to improve the digital journey and consumer experience. DIL expects all key functions to be fully operational by Jun’26.
• The merger is expected to close in ~12-15 months, and in the interim, both companies will focus on operational improvements. The call on the leadership roles in the merger entity will be taken after the merger.
• All the incentives from Yum! Brand are availed for 10 years.
• The merger will create annual synergies of ~INR2.2b net of all incremental costs. About 60% of total synergies are expected to be realized in 1st year of merger, with the balance expected to accrue in the following years.

Deal structure

• The deal is structured as a share swap, with 177 DIL shares to be issued for every 100 SAPPHIRE shares, mainly because of the face value difference.
• As per Yum! Brands requirement, SAPPHIRE’s promoter is supposed to maintain at least 25% stake, which cannot be without Yum! Brands approval. Of this 25% stake, 18.5% will be sold bilaterally (in next 13-15 months) as part of the deal, resulting in RJ Corp emerging as the dominant shareholder in the merged entity.

Pizza Hut

• Management expects positive brand contribution margin in the first year of merger and aims to scale it to low double digits.
• Aggressive store additions by both companies weighed on SSSG and operating leverage. Going forward, they will focus more on improving operational metrics rather than store network. That said, net store addition will continue.
• PH brand contribution is expected to come closer to KFC over time.

KFC

• The store count requirement for the merged entity will be close to existing separate DAs. However, their focus will be on improving overall consumption.

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