Q4FY23 Review: Devyani International: Pizza margin under pressure

18 May 2023 , 10:55 AM

Devyani grew sales 28% (6% beat due to non-core businesses) but pre Ind AS Ebitda declined 7%, in line with estimates. PH SSSG fell 3% largely in line with Dominos, while KFC SSSG was muted at 1.9%. Ebitda margins were muted due to expenses phasing (~100 bps), input cost inflation and operating deleverage. The company guided towards 300 store opening across formats in FY24, as its formats are relatively underpenetrated.

Largely in-line result: 

ADS for both PH and KFC reduced by 5%/6% YoY, driven by high store additions and weak SSSG. Margins were impacted by phasing of employee benefits, input costs and operating leverage, driving adj. Ebitda margin down 450bps YoY. Margins for respective main segments are very similar to Sapphire now (used to be higher earlier). PH margins have been impacted badly, with both companies reporting single-digit restaurant Ebitda margin. 305 store openings drove growth in FY23 and similar opening are slated for FY24.

Price increase in KFC: 

KFC has taken price hike of 3-4% in April, which comes on the base of 9-10% last April. This is risky, since beyond a point volume hit exceeds the price increase – whether IIFL Capital Services analysts’ have reached that point or not, is the million-dollar question. If the company is able to manage the volume hit, margins for KFC could be boosted and give buffer against negative mix impact from low-priced SKUs. Post weak demand trends in 2H, April saw an uptick. But, analysts of IIFL Capital Services think this was driven more by seasonal factors among summer holidays, onset of IPL, etc. From here, the demand must have bottomed but a secular recovery will take at least 2-3 quarters.

Cut estimates: 

Analysts of IIFL Capital Services cut their estimates by 1-4% to account for lower margins in Pizza Hut business. Ebitda Cagr will be respectable at 25% FY23- 25 driven by store openings, since the formats are relatively underpenetrated. However, the stock is trading at 31x FY25 EV/adj. Ebitda and this prices in recovery. Valuation for Sapphire at 18x FY25 is more attractive for growth and margins, which are not very different.

Analysts of IIFL Capital Services cut their FY24/25 adj. Ebitda by 4%/1% on lower Pizza Hut margins; the stock trades at 31x FY25 EV/Ebitda (70% premium to Sapphire). They maintain REDUCE, TP of Rs165.