Devyani International IPO Review By ICICI-Direct

Devyani International (DIL) is among the earliest and largest operators of quick service restaurants (QSRs) in India. The company is the largest franchisee of Yum brands in India and operates brands KFC & Pizza Hut under its banner. In addition, DIL is also a franchisee of Costa Coffee in India. Core brands (KFC, Pizza Hut and Costa Coffee) contribute ~94% to its topline while the rest comes from international operations and other business (own brand such as Vaango & Food Street). The core brands store counts grew at a CAGR of ~14% in the last two years to 605 stores by March 2021. The store count reached 645 by June 2021 as DIL continued its focus on adding core brand stores amid pandemic. The company is looking to expand its core brands in existing and new cities as the QSR industry is likely to grow at ~12% CAGR over the next five years (higher than historical CAGR of 5.5%), supported by rising urbanisation and per capita income.

India’s QSR to grow at ~12% over next five years

The Indian QSR industry has grown at a CAGR of 3% in the last five years to US$40 billion (bn) in 2020. Further, it is likely to grow at a higher rate of ~10% to become ~US$65 bn industry by 2025. Rapid growth in QSR will be aided by increased urbanisation supported by a younger population with rising income levels and excess disposable income. Also, QSR is expected to experience a rise in number of transactions and average transaction amount due to the short service time at an affordable price offered by QSR.

Biggest franchise of KFC in India

DIL is the largest franchisee of KFC in India, contributing ~57% to its overall topline. The segment has recorded strong revenue CAGR of ~18% in FY19-21 to | 644 crore, despite pandemic led disruption. The segment’s gross profit also increased at a CAGR of 19% and recorded one of its best gross profit margin (of ~68%) in FY21. On the cost front, while all marketing expenditure of KFC is managed by Yum Inc, DIL pays 6% of its gross revenue as fixed royalty. While the company has future plans to expand more stores under the KFC and Pizza Hut brands, the company is focused on increasing innovative product offerings under the same head.

Key risks & concerns

 Localised lockdowns, low consumer confidence
 Not exclusive India franchisee & termination of franchisee
 Competition risk

Priced at 7x price/sales (post issue) FY20 on upper band

We believe DIL would be able to capture the growth owing to metro lifestyle and outside food habits. This, coupled with the company’s cost rationalisation initiatives will help drive profitability in future. We recommend SUBSCRIBE to the issue.