Q1FY24 Review: Devyani International: No revival in Pizza Hut

7 Aug 2023 , 11:57 AM

Devyani’s sales growth of 20% YoY (in-line) continues to be driven by store addition, with SSSG for Pizza Hut (PH) falling by 5% YoY. Pre-IndAS Ebitda margin contracted by 296bps YoY (-142bps for Sapphire), due to sharp decline in PH margins. KFC SSSG was also weak at -1%, but margins expanded sharply QoQ after declining for 3 quarters sequentially. Analysts of IIFL Capital Services keep their estimates unchanged. Demand conditions remain volatile and valuations at 33x FY25 EV/adj. Ebitda, are high. Maintain REDUCE. TP of Rs180. 

In line with estimates: 

Devyani reported sales growth of 20% YoY, similar to Sapphire. Pre-IndAS margin of 13.2% contracted by 296bps YoY — higher than the 142bps contraction by Sapphire (11.8% margin). Even sequentially, Devyani’s margin expansion of 108bps was lower than 175bps for Sapphire. This was due to a sharp jump in corporate costs for Devyani, even as restaurant margins of both KFC and PH posted higher QoQ recovery than Sapphire. SSSG for PH declined by 5%, but was better than -9% for Sapphire. -1% SSSG for KFC was slightly lower than flat SSSG for Sapphire. 

Pizza category remains the most impacted among QSRs: 

Pizza Hut SSSG of -5% and -9% for Devyani and Sapphire resp., were lower than the estimated -4% SSSG for Dominos. Burger QSRs continued to outperform Pizza, with McDonalds (Westlife) posting 7% SSSG. Thus, PH margins continued to be weak, contracting by 742bps YoY for Devyani due to inflation in cheese/vegetable prices and negative operating leverage. Q1FY24 ADS of PH was 9% below the Q1FY23 level. 

Maintain REDUCE: 

Analysts of IIFL Capital Services keep their estimates unchanged. Growth continues to be driven by store addition with SSSG remaining challenging. Expansion in KFC margins is positive, but PH margins still remain under pressure due to weak demand recovery and inflation. Actions to revive the format, in terms of filling key portfolio gap are in the right direction, but any meaningful recovery is yet to be seen. At 33x FY25EV/adj. Ebitda, valuations are high and they maintain REDUCE.