Devyani International riding on the strong business momentum in core brand business. Buy for target of Rs 220: HDFC Securities

Our Take:

Devyani International Ltd (DIL) is the largest franchisee of Yum Brands in India. It is among the largest operators of quick service restaurants chain in India operating 1096 stores as of Sep 30, 2022. As the franchise partner of Yum Brands, the company operates their iconic brands KFC and Pizza Hut in India as well as in Nigeria and Nepal. DIL has also franchisee rights for the Costa Coffee brand stores in India. In addition, the company has established in-house brands such as Vaango and Food Street. The company has been consistently expanding its store network. Stores in Core Brands grew at CAGR of 21% over FY19-22 to 832 stores as at March’22. DIL plans to add 250 outlets per annum with a cluster-based approach. Its strong association with Yum Brands coupled with large addressable population in KFC states (>80% non-vegetarian) and exclusivity for Pizza Hut delivery only stores provides significant growth opportunities in India’s growing QSR market.

DIL has been riding on the strong business momentum in core brand business. KFC is on strong footing in terms of operating metrics and store economics, whereas Pizza Hut performance is seeing some green shoots from various turnaround measures. Leveraging on their Core Brands, increasing brand recognition of Other Business, innovative product offerings, improving digital and delivery capabilities and robust supply chain management system; DIL is poised to improve its positioning. Yum Brand franchisees have reduced the store size of all new stores for both KFC and Pizza by 30-40% thereby reducing capex and related operational cost. The shift to smaller stores has not hurt average daily sales per store for either brands. Lower capex with improving store-level economics aided in quicker payback for new stores. Continuous food innovation and value proposition (Pizza Hut) would enhance its unit-level performance by driving order frequency and order ticket size, thereby improving SSSG and profitability of existing stores.

DIL has shifted its focus from opening large dining-focused stores to smaller-sized, delivery-focused stores. The company will work diligently to improve its delivery performance and plans to establish synergies between Core Brands stores and delivery services by leveraging its broad store network. Rollout of delivery format stores for both Pizza Hut and KFC would reduce the delivery time. Furthermore, the company plans to expand its collaboration with delivery aggregators to capitalize on the rising online delivery segment. DIL has plan to aggressively expand its store network by opening 1000 stores in next 4 years (250 stores per annum). The company looks to open new stores for KFC and Pizza Hut in close proximity to one another that allows them to reduce capital costs incurred on construction and logistics costs towards supply of raw materials to both stores. We expect store addition to gain momentum supported by under-indexed Pizza Hut stores compared to Dominos in key states, its exclusive rights for delivery format stores and larger addressable chicken market (compared to Sapphire). Although this aggressive store expansion could limit SSSG marginally due to store splits; but overall additions with greater emphasis on the delivery model would improve unit-level profitability.

Valuation & Recommendation: A strong recovery in the out-of-home consumption, rising traction for branded products, aggressive store expansion plans, value proposition through an innovated menu and widening delivery reach will help DIL’s revenues clock a CAGR of 36% over FY22-24E (~23% increase due to store count). Accelerated store expansion with improving unit metrics for KFC & Pizza hut led by store size reduction; and steady increase in SSSG would drive EBITDA/PAT growth of 37.6%/46.7% CAGR over FY22-24E. Improving profitability and lower capex/store should also lead to a significant improvement in returns ratios. We think the base case fair value of the stock is Rs 205 (28x FY24E EV/EBITDA) and the bull case fair value is Rs 220 (30x FY24E EV/EBITDA) over the next two-three quarters. Investors can buy the stock in the band of Rs 184-188 (26x FY24E EV/EBITDA) and add more on dips to Rs 164-168 band (23x FY24E EV/EBITDA).