Q2FY24 Review: Devyani International: Overall weak results; Pizza Hut more impacted

8 Nov 2023 , 12:19 PM

Devyani reported Q2 results below estimates with sales growth of 9.6% and pre ind as Ebitda decline of 15.9% YoY. Weakness was witnessed across segments, and even assuming a recovery in H2FY24 (adj Ebitda growth 9% YoY vs decline 9% in H1FY24), we calculate a cut of 17.8% adj Ebitda for FY24 (FY25/26 cut lower at 14%/11%). In analysts of IIFL Capital Services QSR downgrade note 9 months ago they had cautioned that QSR slowdowns are long and painful; they are experiencing that. Despite taking a 25% adj Ebitda cagr FY24- 26, 30x Sep 25 Ebitda yields 9% downside. Maintain Reduce with PT of Rs170. 

Disappointing quarter: 

Sales grew by 9.6% YoY on the back of 14.9%/1.5% YoY growth in KFC/Pizza Hut (PH) sales, both below analysts of IIFL Capital Services estimates. ADS for both KFC and PH declined YoY and QoQ which impacted margins. Restaurant margins declined 210bps YoY for KFC (130 bps increase for Sapphire) and a sharp ~930 bps YoY decline for PH (~240 bps decline for Sapphire). Even sequentially margins were weak. SSSG for PH was -10% but was better than -20% for Sapphire, while – 4% SSSG for KFC was lower than flat SSSG for Sapphire.

PH continues to be weak; Nigeria impacted: 

Restaurant margins declined in PH was on account of higher marketing spend and ADS deleveraging. The management has also lowered their guidance of opening new PH stores in H2FY24. Internationally, Nigeria business saw impact of currency devaluation which would lower spending in consumption space. Mgmt. mentioned they would have to support Nigeria business for next couple of years. Going forward in H2FY24 analysts of IIFL Capital Services expect recovery in both KFC and PH which would be supported by strong festive season in Q3. 

11-18% downgrade in adj Ebitda: 

Analysts of IIFL Capital Services factor in Q2 miss and soften SSSG growth assumption which has resulted in 7%/6%/5% cut in sales and 18%/14%/11% cut in adj Ebitda in FY24-26. Demand slowdown in the near term is a concern however they have factored in recovery going forward driving 25% adj Ebitda cagr over FY24-26. Valuations at 34x Sept’25EV/adj. Ebitda are expensive and they maintain REDUCE with target price of Rs170.