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DIL’s Q3 print was weak, albeit in line with peers’ and our expectations, after adjusting for the Nigerian FX devaluation (2.5% margin hit). Demand trends remain frail, with 5%/13% SSG decline in KFC/PH. Negative leverage drove a 300bps drop in store EBITDA to 15.4% in Q3. DIL sees this as a blip, as network expansion is expected to endure, basis the long-term potential for QSRs. As per DIL, the recent Thailand acquisition provides healthy prospects, with potential to double the number of KFC stores over 8-10 years, healthy SSG profile with market premiumization, potential margin gains, and introduction of own brands. We maintain REDUCE, as current valuations exceed growth prospects, in our view. Our FY24 EBITDA gets a 6% cut on Q3 FX loss, but there are no major changes to FY25/26 estimates, post our recent earnings-prune for the entire QSR space. Better traction in Thailand vs. our estimate of a low-teens EBITDA CAGR is an upside, while further devaluation in Nigeria is a downside.

Weak trend persists across formats; PH/Nigeria pain to sustain for longer: KFC’s revenue grew 15%, led by 28% growth in store-count and 5% decline in SSG, while PH saw a 3% revenue decline, owing to 17% growth in store-count and 13% drop in SSG. Overall, revenue growth was sluggish at 7%, due to weak macros, negative sentiment for US brands in select pockets, and high competition in the pizza space. Pizza category is witnessing weaker trends due to high competition, down trading, and revival of local players post the pandemic. For Costa, revenue grew 36% on account of 6% growth in SSG and the rest via network growth; margins declined by 1,160bps due to aggressive store additions. Store additions picked up and stood at 94/209 for Q3/9M across formats. DIL expects to reach a store-count of 2,000 by CY24 end, suggesting 265 store openings, with the mix inclining more towards KFC vs. PH. While gross margin grew by 130bps, the negative leverage and growth investments drove a 300bps decline in brand contribution. Translation losses through Nigeria FX devaluation led to higher HO costs (6% vs. 3.5% YoY), resulting in a 550bps decline in EBITDA margin to 9.3%.

Earnings call KTAs: 1) DIL remains confident about a pick-up in PH, given initiatives around visibility improvement, focus on improving in-store experience, and menu correction; PH may see curtailed expansion if weak trends persist. 2) Thailand provides good growth prospects as it is a developing country with high eating-out frequency, at 8-9 times a week vs. once in 35-40 days in India. A large part of Thailand’s IEO market is still unorganized, and DIL expects to benefit from the organized shift with rise in income levels. 3) Capital for the Thailand acquisition has been raised through ~Rs3.5bn debt in India; DIL has also been able to reduce interest rate for existing debt, with the Thailand entity. The acquisition has been completed and Q4 will see 2&1/2 months of consolidation. 4) FX losses pertaining to Nigeria have been recognized as part of G&A. Further devaluation of currency can cause more losses, and vice-versa. 5) Nigeria is a highly food dependent economy and high inflation is leading to all-round impact on both, topline and margin. DIL will support the Nigeria business financially, till the situation improves. 6) Closure of stores remains at comfortable levels of 6-7% of new stores opened. 7) DIL has entered into a JV with RKAHPL to open/run food courts at railway stations. RKAHPL has expertise in handling railway tenders/processes, while DIL will contribute towards the efficient management of food courts. 8) Costa saw relatively better ADS trends compared with PH/KFC, due to its higher store salience in high-footfall areas like airports.

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