Devyani International Limited, the largest franchise partner for Yum! Brands in India, Saw Adverse impact of rampant inflation on its profitability in the September quarter (Q2FY23). Gross margin fell to a multi-quarter low of 70.2% in the previous quarter on sustained rise in input prices. The company made fair value corrections earlier this financial year to protect margins.
The encouraging thing, according to analysts at Jefferies India, is that Q2 margins may mark a trough. Still, margin recovery is likely to be slow here. This is because with input cost inflation stabilizing, aggregate pricing levels remain high year-on-year.
However, there is excitement on the store edition front. In Q2, Devyani added 88 net new stores, the highest ever, taking the total store count to 1,096. What’s more, management has also retained the annual guidance of 250 store additions.
The major brands of Devyani are KFC, Pizza Hut and Costa Coffee. KFC’s revenue grew 47% year-on-year (YoY). Clearly, the sequential growth was soft at 4% despite 8% store additions as consumers shifted away from non-vegetarian food consumption due to ‘Shravan’ month and ‘Navratra’. Overall, same store sales growth (SSSG) was healthy at 13%, coming in at a high of 72% in Q2FY22.
Pizza Hut SSSG was muted at 3%. Analysts at Jefferies believe this could be due to several factors such as demand impact from rising product prices, aggressive store additions and a possible drop in the newly launched price range ‘Flavor Fun’. Pizza Hut saw 36% year-on-year revenue growth led by 33% store additions. Inflation gross margin in Cheese Hut. Management maintained the Pizza Hut SSSG outlook at 7-8% on a steady-state basis. Separately, Costa’s revenue doubled year-over-year, rising 134%, but the store saw a sharp decline in brand margins.
Devyani’s shares have gained about 28 per cent in the past one year. Investors would do well to track how consumer demand plays out in the face of high inflation.
Of course, analysts remain optimistic about Devyani’s prospects. Kotak Institutional Equities has increased its FY2023-25 revenue estimates by 2% and maintained the broadly adjusted EBITDA forecast. Ebitda is earnings before interest, taxes, depreciation and amortization. The broking firm has retained its ‘Reduce’ rating with a revised fair value of Rs 195 (meaning 31X December 2024E EV/Ebitda).
Devyani shares are currently hovering around 189 each. “There is a lot to like, but rich valuations offer limited upside in the near term,” said Kotak analysts.
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