Devyani International Ltd - Stock Valuation and Financial Performance

Subpar result on account of revenue primarily influenced by store additions in response to weak same-store sales growth (SSSG).

About the Industry:

We believe that multiple drivers of growth for the Quick Service Restaurant (QSR) industry in India are in place over the next five years. As a nation of food lovers, the potential for the organized QSR sector, particularly those with middle-of-the-range pricing, is limitless. This channel is forecasted to continue its robust expansion, surpassing overall consumption and its peer group in areas such as apparel, retailing, and packaged food. Thus, it is important to view investments in this industry from a medium-to-long-term perspective. QSRs remain the dominant format, comprising 54% of total outlets and 34% of the overall food services sector.

India's QSR market is estimated to be reaching Rs. 83,000 Cr by FY 2025 as per marketresearch.com. This shall be on back of younger population coming to urban cities and the eating out trend increasing amongst them. 

Given the favourable conditions in the QSR industry, we believe that both Yum Brands' franchisees Devyani International and Sapphire Foods, which operate KFC and Pizza Hut formats, are well-positioned for growth through rapid store expansion. Both players have taken various initiatives such as rightsizing stores, cost rationalization, product innovation, and network expansion as their primary development strategies to enhance market share, improve store efficiency, and stay competitive in the market.

About the Company:

Established in 1991, Devyani International Limited (DIL) is a multidimensional quick-service restaurant (QSR) player. DIL has well recognized global brandsKFC, Pizza Hut, Taco Bell, and The Habit Burger Grill in its portfolio and are amongst the large operators of QSRs in India. DIL is the largest franchisee of KFC and Pizza Hut in India, Nigeria and Nepal. DIL is also a franchisee for the Costa Coffee brand and stores in India. KFC, Pizza Hut and Costa Coffee together comprise its core brands. In addition to that, DIL has established in-house brands such as Vaango(South Indian Cuisine) and Food Street. 

DIL has been consistently expanding its store network over the years. In line with changing customer expectations, its physical stores have been integrated with digital and delivery capabilities to drive a dual presence. Along with greater brand accessibility, the substantial operating synergies across brands, innovative product offerings, strong technology adoption and robust supply chain management have further strengthened its business model and leadership position in the QSR segment in India.

(Source: Company reports)

Key Performance Matrix:

Business Performance

Click hereto check 10 year Financial X-Ray

DIL reported revenue of Rs.  790 Cr in Q3FY23 supported by solid performance from its core brands. The revenue from its international business reached Rs 66 Cr in Q3FY23. During the period, KFC’s revenue grew by 27% YoY to Rs 459 Cr, while Pizza Hut’s revenue increased by 18% YoY to Rs 184 Cr.

DIL expanded its store network by adding 81 new stores in Q3FY23, bringing the total count to 1,177 stores. Of these, 17 were Pizza Hut stores and 38 were KFC stores. The company also expanded its presence from 224 cities at the end of September 2022 to 227 cities at the end of December 2022. Year to date, DIL has opened 239 net new units, which is higher than the 192 net new units (NNUs) opened in the same period last year.

Although the Average Daily Sales (ADS) of KFC decreased to Rs. 1,16,000 due to weak consumer spending, DIL is aiming to improve KFC's ADS by expanding its presence in existing small-radius areas. Pizza Hut's ADS marginally declined to Rs. 43,000, while Costa's ADS improved to Rs.  37,000.

About the Management:

Mr. Ravi Jaipuria : Chairman & Promoter

Mr. Virag Joshi: President & CEO

Future Outlook:

Positive QSR growth dynamics :

In India, the quick-service restaurant (QSR) sector has been rapidly gaining popularity due to several factors, including favourable demographics, the rise in literacy rates, higher disposable incomes, and easier access to these establishments. Affordability has also played a significant role in this growth. To attract Indian customers, Western fast-food chains have been customizing their menus to cater to local tastes and preferences. In 2020, QSRs had to adapt to significant changes in business operations due to the pandemic. Many restaurants turned to technology to offer contactless dining experiences and takeaways. Additionally, QSRs are modifying their menus to reflect evolving global trends and changing eating habits of Indian consumers.

Devyani International Limited has demonstrated strong performance in the recent quarter that is usually considered weak, and is steadily adding more stores in its core brands to accelerate growth. Although current consumer demand is experiencing a temporary slowdown, it is expected to improve as soon as inflation stabilizes, which will benefit the company's revenue and profitability. By introducing new products and innovative campaigns, DIL is poised to achieve robust growth in the short term.

Earlier KFC used to open large stores of 3000+ sq. ft. but as the management realised that this model was profitable but lacked ability to go beyond tier 1, tier 2 cities in India. With a store size of 1,600-1,700 sq. ft, it is now able to go deeper in the country. The company is on track to add 250 stores annually until FY26E, in line with its expansion plans, expanding its presence in new regions and deepening its footprint in existing cities.

Risks:

• A significant majority of DIL’s business depends on its arrangements with Yum for operating KFC and Pizza Hut stores. Therefore, the termination or non-renewal of these arrangements could have a severe negative impact on DIL’s business, financial condition, and operating results.
• DIL’s growth strategy and development commitments may be adversely affected if it is unable to locate and secure appropriate store locations, which could have a significant negative impact on its business, financial condition, and operating results.