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MOSL: DEVYANI INTERNATIONAL: Recovery in dine-in drives strong sales momentum

. DEVYANI INTERNATIONAL: Recovery in dine-in drives strong sales momentum

(DEVYANI IN, Mkt Cap USD2.8b, CMP INR187, TP INR225, 20% Upside, Buy)

• DEVYANI's 1QFY23 result was in line at the operating level. Despite material cost inflation, overall gross margin fell only 10bp YoY and 20bp QoQ as a result of timely price increases. These hikes have been well absorbed, as highlighted in our Apr'22 .
• For KFC, average daily sales (ADS), at 127k, surpassed 3QFY22 levels, with healthy profitability metrics, given the sharp inflation in chicken costs. While Pizza Hut continues to report a sequential improvement in brand contribution margin, ADS is still lower than our estimate.
• With an increasing focus on hygiene, convenience, and innovation, QSRs, with their strong brands, present a great investment case, given their low penetration levels in India. Strong pricing power helps combat input cost inflation. DEVYANI remains among our top picks in this space. We maintain our Buy rating.

 

Strong operating performance was in line with our estimates

• DEVYANI reported a sales growth of 99.8% YoY at INR7b (in line).
• SSSG for KFC/Pizza Hut/Costa Coffee (CC) grew 63.3%/31.5%/206.8% (est. 30%/4%).
• It added net new units (NNU) of 27 for KFC, 23 for Pizza Hut, 14 for CC, and five for others (India). Geography-wise, it added one NNU in Nigeria, but none in Nepal. A total of 70 NNUs were added in 1QFY23. Store additions were in line with the management's stated guidance and our estimate.
• The number of stores stood at 391/436/69/65 for KFC/Pizza Hut/CC/ others (India) as of 1QFY23. Its total store count in Nigeria/Nepal stood at 29/18. As of 1QFY23, it had a total of 1,008 stores.
• Consolidated gross margin fell 10bp YoY to 71.1%. Gross margin fell 30bp QoQ for KFC, but rose 70bp for Pizza Hut.
• EBITDA (post-Ind AS) grew 167.5% YoY to INR1.6b (in line). EBITDA margin expanded by 590bp YoY to 23.4% (est. 23%).
• EBITDA (pre-Ind AS) grew 474% YoY to INR1,137m, with an EBITDA margin of 16.1%.
• Adjusted PAT stood at INR748m (est. INR610m) v/s a loss of INR143m in 1QFY22.

 

Highlights from the management commentary

• SSG targets: The management targets 3-4% SSSG in KFC on a steady state basis and a high single-digit SSSG for Pizza Hut.
• Delivery time shrinks in Pizza Hut: Around 70-80% of orders are being delivered within 30 minutes v/s 35 minutes at the time of its IPO a year ago.
• Steady-state delivery contribution: The steady-state delivery channel contribution for Pizza Hut/KFC is expected to be ~60%/35-40%.
• Price hikes: The management deliberately did not raise prices to cover the entire extent of RM inflation in KFC (9% price increase taken in 1QFY23). For Pizza Hut, it was able to raise prices ahead of the cost increases.
• Material costs stabilizing: Edible oil prices have fallen, while chicken prices have stabilized. While some other costs are inflating, there are no major worries currently.

 

Valuation and view

• While the 1QFY23 result was in-line, the improving operating outlook lead us to increase our FY23/FY24 EPS estimates by 2.4%/3.9%. Whle we have increased our FY23 EBITDA estimate by 5%, improving profitability meant that the management guided for full tax rates from 3QFY23 onwards.
• We remain bullish on DEVYANI's prospects on account of: a) KFC's strong brand equity and the growth opportunity; b) gradual turnaround in Pizza Hut, driven by the management's focus on delivery and improved store metrics; c) sharp network expansion across the portfolio; and d) healthy operating profitability in the mid-teens (on a pre-Ind AS basis).
• We maintain our Buy rating with a SoTP-based TP of INR225 per share (Jun'24E EV/EBITDA of 45x/35x for KFC/Pizza Hut on a pre-Ind AS basis).