Devyani International Q3 Results Review - Weak Same-Store Sales Growth Drags Profitability: Motilal Oswal

Motilal Oswal Report

Devyani International Ltd. reported 6.6% YoY revenue growth, despite a 23% store growth, which was offset by weak same-store sales growth for both KFC (-5%) and Pizza Hut (-13%) along with the devaluation of Nigerian Naira.

KFC revenue grew 14% YoY, while Pizza Hut revenue contracted 2% despite a 17% store growth. Growth metrics have slowed down; a similar trend was witnessed across most quick service restaurant peers.

Gross margin trend was positive across brands due to benign raw material basket. However, unit economics was adversely impacted by weak growth metrics. KFC with superior unit economics displayed resilience; its restaurant operations manager declined 70 basis points YoY to 19% (19.4% in Q2 FY24). However, PH ROM declined 800 basis points to 6.1% (7.7% in Q2 FY24).

Devyani International's consolidated restaurant Ebitda contracted 11% YoY to Rs 1.3 billion, with a margin dip of 290 bp YoY to 15.4% (flat sequentially). Pre India-AS Ebitda declined 33% YoY to Rs 787 million and margin declined 550 bp YoY to 9.3% (11.5% in Q2). profit before tax declined 87% YoY to Rs 97 million with PBT margin at 1% versus. 9% in Q3 FY23 and 4% Q2 FY24.

The QSR industry continues to see weak unit economics, across dine-in and delivery formats. Despite these industry-wide difficulties, KFC has shown resilience in managing the crisis effectively. On the other hand, PH has been struggling, partly attributed to intense competition in the market. Store expansion plans remain buoyant for Devyani despite near-term industry challenges. The overall guidance of reaching 2,000 stores by FY24 remains on track.

We maintain a cautious stance due to the ongoing demand challenges in the near term. The recent correction in the stock partially covers up the near-term pressure.

We reiterate our 'Buy' rating on the stock with a target price of Rs 195.

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