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Weak SSSG drags profitability

* Devyani reported 6.6% YoY revenue growth, despite a 23% store growth, which was offset by weak SSSG for both KFC (-5%) and PH (-13%) along with the devaluation of Nigerian Naira. KFC revenue grew 14% YoY, while PH revenue contracted 2% despite a 17% store growth. Growth metrics have slowed down; a similar trend was witnessed across most QSR peers.

* GM trend was positive across brands due to benign RM basket. However, unit economics was adversely impacted by weak growth metrics. KFC with superior unit economics displayed resilience; its ROM declined 70bp YoY to 19% (19.4% in 2QFY24). However, PH ROM declined 800bp to 6.1% (7.7% in 2QFY24).

* Consolidated restaurant EBITDA contracted 11% YoY to INR1.3b, with a margin dip of 290bp YoY to 15.4% (flat sequentially). Pre Ind-AS EBITDA declined 33% YoY to INR787m and margin declined 550bp YoY to 9.3% (11.5% in 2Q). PBT declined 87% YoY to INR 97m with PBT margin at 1% vs. 9% in 3QFY23 and 4% 2QFY24.

* 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. Store expansion plans remain buoyant for Devyani despite near-term industry challenges. The overall guidance of reaching 2,000 stores by FY24 remains on track. We maintain a cautious stance due to the ongoing demand challenges in the near term. The recent correction in the stock partially covers up the near-term pressure. We reiterate our BUY rating on the stock with a TP of INR195.

Slow sales growth; miss on margin

* Sales growth was slow at 6.6% YoY (10% in 2Q) to INR8.4b, with weakness in demand across formats and brands.

* SSSG: KFC at -4.7% (-4% in 2Q), PH at -12.6% (-10%), Coast coffee at +5.9%.

* A total of 94 stores have been added, led by KFC/PH/CC/Vaango and others/ international brands at 50/30/8/1/5 stores.

* The total number of stores stands at 1,452, contributed by KFC/PH/CC/Vaango and others/international stores at 590/565/154/78/65.

* Gross profit grew 9% YoY to INR6.0b and margins improved 130bp YoY, while it contracted 20bp QoQ to 70.6%.

* Reported EBITDA declined 16% YoY to INR1.5b due to higher operating expenses and weak SSSG.

* EBITDA margins contracted 470bp YoY to 17.4%. ? Consolidated ROM decreased 11% YoY to INR1.3b and margins declined 290bp YoY to 15.4% (flat sequentially).

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