Aug 15, 2023
Rating: buy; Devyani International – Tough macro impact seen
Devyani International Ltd’s Q3 revenues and Ebitda were broadly inline with our modest estimates. KFC same store growth (SSG) was muted at 3%, with Pizza Hut (PH) worse at (-6%). ADS was impacted by weak demand, dilution due to new store adds & downtrading. Gross margins declined to a multi-quarter low. Store adds guidance unchanged at 250-300, with higher focus on KFC (10% of stores will be flagship with larger area, expanded menu etc). Near-term outlook is clouded by tough macro, but structural story is intact, as per management.
Also read: Adani shares continue fall amid MSCI review
Gross margins declined 200bps y-o-y to 69.3%, a multi-quarter low. Continued cost inflation and product mix change (launch of Fun Flavour (FF) value menu in PH) impacted. While the input basket for KFC (Chicken, oil) seems to have stabilised, PH & Costa (cheese, milk) continue to face headwinds.
Brand contribution margins were 350bps lower y-o-y to 18.3% on account of GM decline, negative operations leverage due to the ADS dilution by new stores and marketing investments. Cost controls helped to keep corporate overheads in check. Ebitda margin was also 170bps lower y-o-y to 22%. Ebitda grew 18% y-o-y and 5% q-o-q to `1.7bn – in line with Jefferies.
The demand was good in October and December, while November saw weakness. Inflation seems to be an issue across the industry and management is closely monitoring the situation. Startup layoffs and slowdown in IT hiring is impacting demand and sentiment. In Q3, 81 stores were added with overall store count at 1,177 across formats, across 225 cities in India. The management maintained 250-300 store addition guidance, but will incrementally focus on KFC over Pizza Hut given high competition in pizza category.
Also read: Speed up capex to get loan, states told
In KFC, 27% y-o-y revenue growth was driven by 36% store additions, while SSG remained soft at 3%. Per-store revenues declined 4-7% q-o-q/y-o-y despite strong seasonality due to weak demand & ADS dilution due to store adds. GM declined ~160bps y-o-y but has now stabilised. 10% of incremental store adds will be flagship stores with larger area, expanded menu and improved digital infra. While margin dilutive in the near-term, management expects better operating metrics in the long-run.
SSG disappointed at (-6%) y-o-y due to inflation impacting demand, downtrading to FF and elevated competition in Pizza category. Overall revenue growth at 18% y-o-y was driven by 24% store adds. GMs declined 200 bps y-o-y due to inflation in cheese. Costa crossed the milestone of 100 stores with the opening of 15 stores in Q3. Revenues more than doubled y-o-y, but brand margins saw a sharp decline due to store adds.
More Details