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Sector Outlook: Positive
Devyani International Limited (DIL) witnessed strong growth in Q1FY25. However, mixed performance is witnessed in the core brands and international operations. Total number of stores for DIL increased to 1,836 as they added 54 new stores. The Company is on track to reach their target of 2,000 stores by the end FY25. This expansion was accompanied by a substantial revenue increase of 44.3% YoY and 16.7% QoQ, totalling Rs. 12,219.0 million. The improved financial performance was driven by seasonal factors, effective cost management, enhanced advertising spend efficiency, and a relatively modest impact from the devaluation of the Nigerian currency, with EBITDA margins standing at 18.3%. However, despite these positive metrics, the performance of key brands and international ventures highlighted several challenges. Same Store Sales Growth (SSSG) of KFC declined by 7% and Average Daily Sales (ADS) dropped by 11%. Pizza Hut also struggled, with an 8.6% decline in SSSG and reduced ADS.
The brand’s gross margin fell to 4.9% due to increased marketing expenses and competitive pressures. Despite these challenges, Pizza Hut cautiously added three new stores and is implementing strategic measures to stabilise and grow its market presence. Costa Coffee’s performance was subdued, achieving only a 0.6% increase in SSSG, affected by lower summer consumption of hot beverages. The brand’s contribution margin dropped 600 basis points year-over-year to 14.9%, driven by higher coffee prices and negative operating leverage. DIL plans to add 50-60 new Costa Coffee stores in FY25, though it faces challenges related to lower productivity and margin pressures. Internationally, DIL’s operations showed mixed results. In Thailand, the company reported positive SSSG despite geopolitical issues and brand boycotts, reflecting resilience in a challenging environment. However, currency devaluation continued to impact profitability, leading to a significant contraction in EBITDA margins across international markets.
Key Concall Highlights
- Total number of stores for DIL stood at 1,836 stores as they added 54 new stores in Q1FY25. The company remains on track to achieve its target of 2,000 stores by year-end, with planned additions of 100+ stores for KFC and 50-60 stores for Costa Coffee.
- DIL’s performance was bolstered by seasonal factors, effective cost management, improved advertising spend efficiency, and a relatively minor impact from the devaluation of the Nigerian currency.
- Brand Performance: In Q1FY25, KFC expanded its footprint by adding 21 new stores, bringing its total to 617. It reported a 12.3% QoQ revenue increase and improved Average Daily Sales (ADS) to Rs. 104,000, achieving a brand contribution margin of 19.5%. Pizza Hut also grew, opening 3 new stores to reach a total of 570, with an increased ADS of Rs. 36,000 and a brand contribution margin of 5%. Costa Coffee added 13 stores, reaching a total of 192. While its revenue remained flat QoQ, it saw a 40.5% YoY increase and a brand contribution margin of 15%. The Thailand business, contributing significantly to revenue, achieved a brand contribution margin of 14.8% and maintained positive Same Store Sales Growth (SSSG) despite geopolitical tensions and higher transaction volumes compared to India.
- For KFC, off-premise sales stayed steady at 41% this quarter, just like in the last few quarters. Owing to higher Average Daily Sales (ADS), the overall performance improved even though the off-premise sales percentage didn’t change.
- To tackle regional competition and appeal to younger customers, Pizza Hut India focused on boosting its presence on digital platforms. The brand introduced innovations like “Melts,” “Thin N Crispy Crust Pizza,” and the “Beat the Heat” combo to enhance visibility and attract more customers.
- Management is optimistic about a recovery in the industry during the upcoming festive season. To support this, they are expanding the store network to improve brand accessibility and strengthen the institutional business by focusing on food courts and high-traffic locations like airports.
- DIL has teamed up with PVR INOX to create food courts in shopping malls throughout India, with revenue anticipated to start in Q4FY25. The partnership involves an economic interest split of 51:49 between DIL and PVR INOX Limited.
Valuation and Outlook
With its strong execution capabilities, Devyani International Limited (DIL) delivered notable performance despite a challenging environment. The company faced a loss of Rs. 22.5 crore due to currency depreciation in Nigeria. However, its recent entry into the Thailand market, buoyed by high tourist footfall, has shown significant potential despite ongoing geopolitical tensions. In India, while weak demand and increased competition in the Pizza QSR segment present short-term challenges, KFC is expected to maintain its Average Daily Sales (ADS). The management has outlined a recovery strategy for the upcoming quarters, focusing on store expansion and new ventures such as the partnership with PVR INOX to develop food courts in high-traffic areas like malls and airports. Overall, while addressing challenges in core brands and international markets remains crucial, DIL’s strategic expansion and partnerships, including the PVR INOX venture, support a positive outlook for the company’s growth trajectory and long-term success.
