Devyani International Ltd.

Initiating Coverage

Devyani International Ltd.

Nov 30, 2022

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 Devyani International Ltd.

Industry LTP Recommendation Base Case Fair Value Bull Case Fair Value Time Horizon

QSR Rs 186 Buy in the band of Rs 184-188 & add more on dips to Rs 164-168 band Rs 205 Rs 220 2-3 quarters

HDFC Scrip Code DEVYANILTD Our Take:

BSE Code 543330 Devyani International Ltd (DIL) is the largest franchisee of Yum Brands in India. It is among the largest operators of quick service
NSE Code DEVYANI restaurants chain in India operating 1096 stores as of Sep 30, 2022. As the franchise partner of Yum Brands, the company operates their
Bloomberg DEVYANI IN iconic brands KFC and Pizza Hut in India as well as in Nigeria and Nepal. DIL has also franchisee rights for the Costa Coffee brand stores in
CMP Nov 29, 2022 186 India. In addition, the company has established in-house brands such as Vaango and Food Street. The company has been consistently
Equity Capital (Rs cr) 120.5 expanding its store network. Stores in Core Brands grew at CAGR of 21% over FY19-22 to 832 stores as at March’22. DIL plans to add 250
Face Value (Rs) 1 outlets per annum with a cluster-based approach. Its strong association with Yum Brands coupled with large addressable population in
Equity Share O/S (cr) 120.5 KFC states (>80% non-vegetarian) and exclusivity for Pizza Hut delivery only stores provides significant growth opportunities in India’s
Market Cap (Rs cr) 22,408 growing QSR market.
Book Value (Rs) 6.8
Avg. 52 Wk Volumes 3624171 DIL has been riding on the strong business momentum in core brand business. KFC is on strong footing in terms of operating metrics and
52 Week High 215.0 store economics, whereas Pizza Hut performance is seeing some green shoots from various turnaround measures. Leveraging on their
52 Week Low 135.5
Core Brands, increasing brand recognition of Other Business, innovative product offerings, improving digital and delivery capabilities and
robust supply chain management system; DIL is poised to improve its positioning. Yum Brand franchisees have reduced the store size of all
Share holding Pattern % (Sep 2022)
new stores for both KFC and Pizza by 30-40% thereby reducing capex and related operational cost. The shift to smaller stores has not hurt
Promoters 62.8
average daily sales per store for either brands. Lower capex with improving store-level economics aided in quicker payback for new stores.
Institutions 15.8
Continuous food innovation and value proposition (Pizza Hut) would enhance its unit-level performance by driving order frequency and
Non Institutions 21.4
Total 100.0
order ticket size, thereby improving SSSG and profitability of existing stores.

DIL has shifted its focus from opening large dining-focused stores to smaller-sized, delivery-focused stores. The company will work
diligently to improve its delivery performance and plans to establish synergies between Core Brands stores and delivery services by
leveraging its broad store network. Rollout of delivery format stores for both Pizza Hut and KFC would reduce the delivery time.
Furthermore, the company plans to expand its collaboration with delivery aggregators to capitalize on the rising online delivery segment.
DIL has plan to aggressively expand its store network by opening 1000 stores in next 4 years (250 stores per annum). The company looks
* Refer at the end for explanation on Risk Ratings
to open new stores for KFC and Pizza Hut in close proximity to one another that allows them to reduce capital costs incurred on
Fundamental Research Analyst construction and logistics costs towards supply of raw materials to both stores. We expect store addition to gain momentum supported by
Hemanshu Parmar under-indexed Pizza Hut stores compared to Dominos in key states, its exclusive rights for delivery format stores and larger addressable
[email protected]

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chicken market (compared to Sapphire). Although this aggressive store expansion could limit SSSG marginally due to store splits; but
overall additions with greater emphasis on the delivery model would improve unit-level profitability.

Valuation & Recommendation:

A strong recovery in the out-of-home consumption, rising traction for branded products, aggressive store expansion plans, value
proposition through an innovated menu and widening delivery reach will help DIL’s revenues clock a CAGR of 36% over FY22-24E (~23%
increase due to store count). Accelerated store expansion with improving unit metrics for KFC & Pizza hut led by store size reduction; and
steady increase in SSSG would drive EBITDA/PAT growth of 37.6%/46.7% CAGR over FY22-24E. Improving profitability and lower
capex/store should also lead to a significant improvement in returns ratios. We think the base case fair value of the stock is Rs 205 (28x
FY24E EV/EBITDA) and the bull case fair value is Rs 220 (30x FY24E EV/EBITDA) over the next two-three quarters. Investors can buy the
stock in the band of Rs 184-188 (26x FY24E EV/EBITDA) and add more on dips to Rs 164-168 band (23x FY24E EV/EBITDA).

Financial Summary
Particulars (Rs cr) Q2FY23 Q2FY22 YoY-% Q1FY23 QoQ-% FY20 FY21 FY22 FY23E FY24E
Total Operating Income 747.4 516.1 44.8 704.7 6.1 1,516.4 1,134.8 2,084.0 3,098.8 3,852.6
EBITDA 166.4 128.1 29.9 164.7 1.0 174.4 234.6 476.0 709.6 901.5
PAT 56.8 46.6 22.0 74.8 -24.0 -121.4 -63.0 155.1 276.5 333.9
Adjusted PAT 58.8 45.7 28.6 73.8 -20.4 -121.4 -55.2 156.3 278.0 334.9
Diluted EPS (Rs) 0.5 0.4 28.6 0.6 -20.4 -1.1 -0.5 1.3 2.3 2.8
RoE-% 93.6 146.6 39.1 33.7 29.6
P/E (x) NA NA 143.3 80.6 66.9
EV/EBITDA (x) 21.1 97.0 49.6 33.2 25.9
(Source: Company, HDFC sec)

Q2FY23 Result Review:

Devyani International Ltd (DIL) reported healthy topline of Rs 747.4cr (+44.8%/6.1% YoY/QoQ) mainly on the back of accelerated store
additions in the recent quarter. DIL delivered a healthy performance across its core brands in a seasonally soft quarter. The company
opened a record 88 net new stores during the quarter, taking the total operational stores to 1,096 as of Sep’22. Store count grew
38.5%/9% YoY/QoQ. Gross margins declined ~90bps QoQ owing to raw material inflation (upward revision in RM sourcing contracts which
happens with a lag). The company reported EBITDA of Rs 166.4cr (+30%/flat YoY/QoQ). EBITDA margin came in at 22.3% (down
~255bps/110bps YoY/QoQ) marginally below expectation due to higher employee costs. Adjusted EBITDA (Pre-Ind AS 116) stood at 15.1%
compared to 16.1% in the previous quarter. It posted PAT of Rs 58.8cr (+28.6%/-20.4% YoY/QoQ). The company’s profitability was
impacted on account of exceptional loss from currency fluctuations (for subsidiary operating in Nigeria) of Rs 11.3cr.

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KFC revenue grew +47%/4.2% YoY/QoQ to Rs 443cr; with SSSG growth of 13% YoY (mainly price driven). KFC added 32 new stores and
reached a mark of 423 stores at the end of the quarter. Average daily sales (ADS) was at Rs 121,000, down 4.7% QoQ (usual seasonality
due to lower non-veg food consumption during 'Shravan'). Gross margin stood at 67.9% vs 69% in Q1FY23. Brand contribution margin
stood at 21.5% (down 94bps/90bps YoY/QoQ). Off-premise sales continue to remain strong at 36% of its revenue.

Pizza Hut posted revenue of Rs 181.2cr (+36%/9.8% YoY/QoQ) and it added 30 stores taking the count to 466. Its ADS improved marginally
to Rs 45,000 on sequential basis, with a SSSG at 2.9% YoY. Higher input prices and change in product mix impacted the gross margins
which came in at 74.5% compared to 76.2% in the previous quarter. Brand contribution margins were 17%, down ~50bps QoQ mainly due
to contraction in gross margin while operating leverage benefits arrested further fall. On-premise consumption remained steady for Pizza
Hut at 45%.

Costa coffee reported robust revenue of Rs 22cr, +134%/25% YoY/QoQ. SSSG continued to remain healthy (50.7% YoY), on the back of
recovery of footfalls at its stores. Store count stood at 88 (+95.6%/27.5% YoY/QoQ). ADS was down 14% QoQ at Rs 31,000, reflecting
dilution due to new store additions. Gross margin came in at 79.5% vs 81.8% in Q1FY23. Brand contribution margin shrunk to 19.5%
compared to 30.7% in the previous quarter; this was mainly due to significant addition of new stores during the quarter.

Quarterly Performance
KFC Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23 Q2FY23
Revenue (Rs cr) 125.1 221.1 254 202.9 301.4 362.1 352.6 425 443
No of Stores 214 240 264 284 309 339 364 391 423
Average Daily Sales (Rs) 68,517 1,12,237 1,18,498 92,136 1,16,380 1,24,000 1,13,000 1,27,000 1,21,000
SSSG (%) -51.60% -13.0% 19.6% 158.0% 72.0% 23.8% 3.0% 63.6% 13.0%
Gross Margin (%) 65.9% 67.1% 69.6% 69.4% 69.1% 69.3% 69.3% 69.0% 67.9%
Brand Constribution Margin (%) 12.9% 19.1% 22.6% 16.0% 22.4% 23.0% 21.8% 22.4% 21.5%

On-Premise 56% 67% 68% 35% 56% 64% 59% 65% 64%
Off-Premise 44% 33% 32% 65% 44% 36% 41% 35% 36%

Pizza Hut Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23 Q2FY23
Revenue (Rs cr) 63 95.1 103.6 96.5 133.3 155.6 146.4 165.1 181.2
No of Stores 258 273 297 317 351 391 413 436 466
Average Daily Sales (Rs) 26,456 40,464 41,788 38,411 45,000 47,000 41,000 44,000 45,000

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SSSG (%) -37.3% -11.0% 13.4% 216.1% 73.5% 24.7% 2.3% 31.5% 2.9%
Gross Margin (%) 71.6% 74.0% 76.2% 75.9% 75.5% 75.6% 75.5% 76.2% 74.5%
Brand Constribution Margin (%) 10.3% 16.2% 15.2% 14.1% 15.8% 16.8% 17.6% 17.5% 17.0%

On-Premise 39% 46% 48% 20% 38% 42% 41% 46% 45%
Off-Premise 61% 54% 52% 80% 62% 58% 59% 54% 55%

Costa Coffee Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23 Q2FY23
Revenue (Rs cr) 4 7.6 8.5 3.7 9.4 14.3 13.7 17.6 22
No of Stores 55 45 44 44 45 50 55 69 88
Average Daily Sales (Rs) 12,255 20,706 24,592 16,060 27,000 37,000 30,000 36,000 31,000
SSSG (%) -78.7% -55.9% -24.9% 344.9% 225.9% 101.2% 24.0% 206.8% 50.7%
Gross Margin (%) 75.0% 76.3% 80.0% 78.4% 79.8% 79.7% 81.8% 81.8% 79.5%
Brand Constribution Margin (%) -30.0% 35.5% 30.6% 16.2% 33.0% 32.2% 29.9% 30.7% 19.5%
(Source: Company, HDFC sec)

Key Triggers:
Portfolio of well recognized global brands offering variety of options:
Devyani International operates iconic global QSR brands – KFC (a global chicken restaurant brand, with over 26,500+ outlets in over 149
countries), Pizza Hut (restaurant chain specialising in the sale of ready-to-eat pizza products with over 18,250+ restaurants across 111
countries), Costa Coffee (a global coffee shop chain with over 4,000 coffee shops in over 41 countries). Their multi-brand portfolio offers
variety of cuisine options catering to varied customer preferences. Their in-house band (Vaango and The Food Street) further expands its
product offerings. The company’s offerings include burgers, pizzas, South-Indian food and street food and serves in different formats –
dine-in, delivery formats, drive through, cafes. The company works closely with Yum Brands and Costa Coffee International in menu
innovation, operations and marketing which would further consolidate their leadership position in India’s QSR industry. DIL has been
riding on the strong business momentum in core brand business which saw 21% CAGR store growth during FY19-22. KFC is on strong
footing in terms of operating metrics and store economics, whereas Pizza Hut performance is seeing some green shoots from various
turnaround measures. Leveraging on their Core Brands, increasing brand recognition of Other Business, innovative product offerings,
improving digital and delivery capabilities and robust supply chain management system; DIL is poised to improve in positioning.

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(Source: Company, HDFC sec)

Store format rationalization and focus on improving unit level profitability:

DIL continues to focus on improving the quality of operations, enriching customer experience and strategically expanding store network in
India while efficiently managing unit-level economics and attaining economies of scale. Store expansion and high density of stores in
particular area will reduce the costs associated with transporting raw material to stores and other fixed overheads (spread across number
of outlets), thereby improving EBITDA margins and store level profitability. Effective cost management will help manage profitability at
the brand level.

(Source: Company, HDFC sec)

DIL has been able to rationalize store operations. Yum Brand franchisees have reduced the store size of all new stores for both KFC and
Pizza by 30-40% thereby reducing capex and related operational cost. The shift to smaller stores has not hurt average daily sales per store
for either brand. Lower capex with improving store-level economics aided in quicker payback for new stores. This store economics has
given credence for network expansion in Tier 2-3 cities. Pizza Hut brand which was earlier seen as dine-in brand for casual dining has been
rebranded to QSR brand with more rollout of delivery format stores. Reduced store size, improving ADS, high delivery sales mix and higher

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store-level profitability (RoCE) has improved Pizza Hut’s brand contribution. KFC brand has further strengthened its positioning with
remodeled store formats and generating better profitability. We expect KFC and Pizza Hut brand contribution margin to increase to 22%
in FY24E (21.3% in FY22) and 17.6% in FY24E (16.3% in FY22); on the back of store size rationalization, change in employee hiring (flexi pay
model) and operating leverage benefits kicking in from cross brand synergies.

Menu innovation with larger play in the value segment:

Devyani Internationals leverages its core menu items and works with Yum Brands to introduce innovative menu items to meet evolving
consumer preferences and local tastes, drive customer engagement and continue to broaden the brand appeal. Menu innovation with
larger focus on value proposition, especially for Pizza Hut, which was known as more premium brand is a step to go head-to-head with
Dominos and other regional pizza chains. It launched Fun Flavour Pizzas at affordable prices of Rs 79 in Q1FY23. Some of the recent
launches include Momo Mia Pizza and San Francisco Style. In KFC, DIL launched Biryani bucket in place of Rice bowl; peri-peri chicken
which saw encouraging customer response. The company has added various innovative food items in the menu and introduced combo
meals (affordable pricing), which have helped in improving average transaction size for the company. Continuous food innovation and
value proposition would enhance its unit-level performance by driving order frequency and order ticket size, thereby improving SSSG and
profitability of existing stores.

(Source: Company, HDFC sec)

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Aggressive Store Expansion with focus on delivery channel format for Core Brands:
DIL has plan to aggressively expand its store network by opening 1000 stores in next 4 years (250 stores per annum). 100 stores each of
KFC and Pizza Hut every year and the balance will come from the rest of the brands. Currently, DIL operates a total of 1096 stores in India
and International market. It expanded footprint to nearly 50 new cities in FY22. Store network is being consistently expanded to
consolidate its presence in existing cities and growing its presence in new market. It follows a cluster based expansion approach which
optimizes supply chain and drives cost efficiencies. The company looks to open new stores for KFC and Pizza Hut in close proximity to one
another that allows them to reduce capital costs incurred on construction and logistics costs towards supply of raw materials to both
stores. More stores in a particular area allows the company to capitalize on economies of scale. DIL has strategically opened 48% of the
core brand stores in eight metro cities. The company has been able to address demand in high-potential domestic markets (non-metro
contribution within core brands has gone up to 52%). DIL remains positive on expanding in non-metro markets which have higher
profitability compared to metro markets due to lower rentals, staffing costs and utilities. Geographically, DIL has a stronger presence in
north and south India, which represented 74% of core brand stores as of Sep’22. The company’s expansion is driven by its ability to keep
costs low and implement economies of scale through operational leverage.

DIL has shifted its focus from opening large dining-focused stores to smaller-sized, delivery-focused stores. The company will work
diligently to improve its delivery performance and plans to establish synergies between Core Brands stores and delivery services by
leveraging its broad store network. Accelerated rollout of delivery format stores for both Pizza Hut and KFC would reduce the delivery
time. Furthermore, the company plans to expand its collaboration with delivery aggregators to capitalize on the rising online delivery
segment. Also, smaller store sizes with attractive metrics offer opportunity to penetrate deeper. We expect store addition to gain
momentum supported by under-indexed Pizza Hut stores compared to Dominos in key states, its exclusive rights for delivery format
stores and larger addressable chicken market (compared to Sapphire). Although this aggressive store expansion could limit SSSG
marginally due to store splits; but overall additions with greater emphasis on the delivery model would further improve unit-level
profitability.

Cross brand synergies leading to operating leverage:

DIL has been able to leverage operating synergies across the brands that they operate. The company has streamlined business processes
from conceptualization of the stores to execution of daily operations. The company’s sourcing, warehousing and distribution of raw
materials is centralized for particular regions and across the Core Brands Business; this reduces the storage space required at stores,
thereby helping DIL minimize store operating costs, without incurring significant additional expenses at the commissary level. The vehicles
deployed for the delivery of raw materials to the stores are common across the core brands business and also for stores of brands that
form part of other business. Company’s policy of centralized sourcing from an optimal number of vendors further facilitates cost
efficiencies and reducing costs. DIL is able to obtain competitive rates for raw materials given that it taps a common pool of suppliers and

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ensure consistency in service and delivery standards. The presence of multiple brand stores in specific location helps to increase
efficiencies of its supply chain and also allows negotiate competitive lease rentals. Apart from this, DIL is able to launch and operate
smaller brands such as Vaango as they benefit from operating leverages derived from operating a wider brand portfolio. Cross-brand
synergies & cluster focused expansion with a focus on bringing cost efficiencies at each level; the company is able to achieve consistent
growth in margins and earn higher brand contribution.

Focus on technology and digital capabilities:

Devyani continues to invest in technology to improve its digital and delivery capabilities. Most of the stores across KFC and Pizza Hut have
been integrated with the online channel, enabling a greater number of customers. It has also upgraded its online order-taking platform to
serve a greater number of customers across a larger store base. DIL plans to increase investment in end-to-end digitalization, automation,
artificial intelligence and machine learning, to effectively connect online traffic with offline assets. The company is working with Yum to
improve its technology platform and further integrate its systems with Yum’s platform to ensure greater operational efficiency. Going
forward, the company will continue to optimize its delivery service by adopting innovative technologies and developing new delivery
service concepts.

Understanding portfolio offerings and its triggers:

KFC – on a strong footing, serving large addressable under-penetrated market and; improving unit profitability
DIL opened the first KFC store in India in 2005 at Kolkata. As of Sep’22, it operates 423 KFC stores across India. Contributing ~58% of the
topline, it reported strong revenue growth of 38% CAGR over FY19-22 mainly on the back of robust store expansion (230 net store
additions). KFC stores in India are generally located in neighborhood markets in urban areas, such as high-street locations, shopping malls
and food courts, business hubs, drive-thrus, and transit locations such as airports. It operates in two formats – larger format with full
service dining in capacities and small-store formats to cater to delivery/ take-away orders with limited seating. Incrementally, the
company is focused on opening smaller outlets ranging from 1,500-1,700 sq. ft of retail space.

KFC stores have an extensive menu featuring fried chicken buckets and allied chicken products, grilled chicken, burgers, rice bowls, and
beverages. KFC is dominant market leader in chicken QSR space and remains relatively under-penetrated (compared to Dominos). DIL has
strategically acquired stores in South, east and northeast territories, which are larger addressable population (>80% non-vegetarian)
compared to Sapphire. Apart from aggressive store expansion, the company is focused on delivery-focused omnichannel stores aligned
with the structural customer demand shift towards delivery from dine-in. Also, roll-out of stores has increased brand density and
facilitated faster delivery to customers. Its share of off-premise sales has increased from 11% in FY19 to 44% FY22, which is received
bump-up due to covid pandemic.

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(Source: Company, HDFC sec)

Strong brand positioning and constant menu innovation with adoption of local flavours aids in driving SSSG (average 5.9% over FY19-22).
Its innovation pipeline continues to be strong; it launched Biryani Bucket, peri – peri chicken. KFC also launched the popcorn nachos an
innovative blend of tender chicken popcorns served on a bed of crunchy nachos. Adding more products in the value for money segment
(such as KFC Zinger, Double Down) would increase the customer acceptability and then gradually shift them towards premium offerings.

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The company plans to add 100 KFC stores per annum in the coming years. The store opening drive will likely be largely driven by smaller-
format stores. Rationalising store size would further boost profitability over the years. Despite reducing the store size in the recent years,
DIL’s KFC stores have been able to maintain ADS and margins. The company saw improvement in gross margin from 66% in FY19 to 69.3%
in FY22. Store level profitability also improved; with brand contribution margin increasing from 18.4% in FY19 to 21.3% in FY22. The
company is piloting KFC smart restaurants with self-ordering kiosks and a futuristic store design.

The KFC brand franchise has been on a relatively strong footing, with steady expansion and high-teens store margins. Rationalization of
stores, variable employee cost structure and benefits of operating leverage would improve their margins. We expect KFC’s revenue to
grow at CAGR of 36.3% over FY22-24E on accelerated store expansion and expect margin to reach 22% in FY24E. We are positive on the
growth despite the increasing competition in the chicken QSR industry. Entry of McDonalds in this segment with selective rollout and
Jubilant Foodworks securing franchise rights of Popeyes; would not have meaningful impact in the medium term due to large opportunity
in underpenetrated space.

Pizza Hut – potential turnaround (addressing gaps in terms store network, delivery experience, value focused menu and store
economics)
Devyani opened the first Pizza Hut store in India in 1997 at Jaipur. It operates 466 Pizza Hut stores as of Sep’22. Yum brands have two
categories of franchise rights for Pizza Hut – Dine-in format and Delivery format. The former is larger format omni-channnel restaurant
(with capacity of 50-100 seats) while dine-in area are more focused to address delivery needs but it has limited seating (20-30 capacity).
DIL has dine-in format rights for North and East India and has almost pan-India opportunity of opening delivery-led Pizza Hut stores
(except Tamil Nadu). DIL’s Pizza Hut reported revenue CAGR of 7.9% mainly driven by aggressive store expansion. It added net 145 stores
in last three fiscals taking the count to 413 stores as at Mar’22. It is consolidating its presence in existing markets and foraying into smaller
towns.

The market leader – Dominos – has attractive unit economics (lower breakeven sales level), value positioning, strong delivery focus and
strong brand equity. Pizza Hut lags Dominos in terms of store network, ADS, product portfolio, pricing value equation, delivery experience.
Pizza Hut was more dine-in focused, with large formats, leading to high costs and lower sales than Domino’s, which had poor delivery
offering. In the recent years, Pizza Hut has taken few initiatives to address these gaps.

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DIL has accelerated store additions; in FY22 as it added net 116 stores. Even after scaling up operations and replacing large format stores
with smaller format, its ADS were maintained. Maintaining ADS at similar levels, despite cutting down the store size, has reduced its
payback period. The company is planning to add ~100 stores per annum in the medium term. Devyani has an advantage as it has exclusive
rights to open smaller sized omnichannel ‘Delivery’ format stores. Also store expansion would delivery time due to better store density
and strengthen brand equity. Compared to Dominos, Pizza Hut stores are less penetrated providing opportunity to scale up. The company
is pivoting from dine-in format to a delivery focused format. These delivery focused omni-channel stores have better unit economics than
a typical dine-in-focused store. Off-premise share increased from 31% in FY19 to 63% in FY22. DIL along with Yum brands are working on
improving the delivery experience by leveraging technology and working closely with food aggregators.

(Source: Company, HDFC sec)

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Pizza Hut’s constant menu innovations and affordable pizza offerings make it a strong competitor in the Indian QSR industry, driving
consumption of pizza as a regular meal. It launched San Francisco Style Pizza; and its product innovation Momo Pizza saw strong adoption
by customers in the East and Northeast. Pizza Hut launched Fun Flavour Pizzas at affordable prices of Rs 79 in Q1FY23 to bridge the gap
with the market leader. The launch is a step towards value brand proposition of Pizza Hut which was perceived to be a more expensive
brand. Filling portfolio gaps and adding value-for-money products in the menu would drive SSSG (average of ~4% over FY19-22).

Reduced store size and improving unit metrics (especially in delivery format) could narrow the gap with the market leader in the next few
years. Exclusive rights to open delivery format stores offer higher expansion opportunity to go deeper in the market (in Tier 2/3 cities) and
increase Pizza Hut presence. We expect Pizza Hut revenues to grow at CAGR of 31.7% over FY22-24E (ADS to grow at CAGR of 10-12%).
Improving store economics and ADS would consistently improve brand contribution margins in the coming years and we expected to
reach 17.6% level.

Costa Coffee – faster scaling up of operations in cards:

Costa Coffee contributes ~2% of revenue in FY22 and operates 88 stores in India. It operates in two format - full retail stores at high-street
locations and malls, and branded kiosks at airports, hospitals and food courts at highways. Costa Coffee stores have an extensive menu
featuring coffee, sandwiches, wraps, Indian snacks, desserts, and other beverages. Costa coffee’s revenue saw de-growth during FY19-22
impacted by Covid and store closures. It posted high gross margins (80.3% in FY22) despite its low scale of business and not-so -premium
positioning compared to Starbucks. Its brand contribution margin improved from 20.2% in FY19 to 30.4% in FY22.

DIL extended partnership with Costa Coffee parent in Aug 2021, and under the revised agreement, it has been granted development
rights for pan-India in a phased manner. Devyani will be the sole franchisee for Costa coffee, and this gives them the edge to design and
recreate the brand. The company’s focus is on adding new stores, launching new products, driving brand engagement. Compared with
Starbucks, Costa’s pricing is lower and more affordable. DIL will continue to focus on smaller sized outlets in contrast to Starbucks’
strategy of opening large format stores. The beverage segment is expected to grow at higher rate on the back of rising demand from the
young population, rapid urbanization, business culture, and western lifestyle.

Revenues of Costa Coffee brand is expected to grow at CAGR of 101.4% over FY22-24E as we expect ramp up in store additions after the
revised development agreement. Margins have improved in recent quarters for Costa and we expect gross margin to hover around 79-
80% and brand contribution margin of ~28% in FY24E.

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(Source: Company, HDFC sec)

International & Others Business – modest growth opportunity; revenue share to remain at current levels
DIL operates KFC and Pizza Hut stores in Nepal, and KFC stores in Nigeria. Contributing ~9% of the topline, it has 29 KFC stores in Nigeria
and 20 KFC & Pizza Hut stores in Nepal. The business segment reported ~20% CAGR growth over FY19-22, exhibiting decent brand
contribution margins in the range of 14-15%. The international business is profitable and cash-generating, the funds are re-invested in
capex for store expansion (7-9 stores per annum) in the respective markets. Although Nepal is not a huge market, there is greater market
opportunity in Nigeria. We expect modest business growth with revenue CAGR of 21.4% and expect brand contribution margin to hover
around 23% levels.

Devyani operates own brands such as Vaango, The Food Street which contributes ~5% of the topline. Vaango is a one stop destination for
all South Indian food lovers serving pure vegetarian meals. Food Street offers its consumers variety and depth in menu under one roof.
These brands are located within larger food courts in malls, shopping complexes and airports. Fall in footfalls at airports and malls
impacted its revenue share (15%+ in FY19). These in-house brands under Other Business have been a drag on their overall profitability.
We expect the revenue mix to remain in similar range given the company’s focus on its core brand portfolio.

Industry Insights:
The organised foodservice market provide a multi-year growth opportunity. The organised foodservice market (comprising chains and
standalone outlets) is expected to grow ~15% CAGR over FY20-FY25 (market size increasing from Rs 1.6 tn to Rs 3.2 tn in FY25) and its
share in the total food services market is expected to increase to 51% in FY25 from 37% in FY20, surpassing unorganised market. Rising

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population of youth, higher income levels, changing lifestyles with greater frequency of eating out, wider internet penetration, growth of
online food delivery & food tech and growing acceptance in smaller towns drives the growth of organised food service in India.

The QSR (Quick Service Restaurant) segment is focused on service speed, affordability and convenience. It includes dine-in, takeaways,
delivery, drive-thru and on-the-go sub formats. The QSR industry clocked 19% CAGR over FY15-20 and has added outlets at a healthy
CAGR of ~9% over FY15-20. QSR segment comprises 22% of the organised foodservice market and is expected to grow at 23% CAGR over
FY20-25E, outpacing all other chain food segments. The headroom for expansion remains very large with low penetration beyond Top-8
cities as these cities contribute ~85% of chain industry revenues currently. Also, restaurant chains currently address <15% of overall
population, indicating significant room for penetration increase.

Segment-wise growth – Chain Food Segment

Format FY 2010-15 FY 2015-20 FY 2020-25E
CAGR CAGR CAGR
Quick Service Restaurants 29% 19% 23%
Casual Dining Restaurants 18% 19% 19%
Café 16% 8% 10%
Frozen Dessert/ Ice Cream 15% 16% 17%
PBCL 25% 22% 16%
Fine Dining Restaurants 5% 3% 2%

(PBCL - pub, bar, café and lounge; Source: Sapphire RHP, HDFC sec)

Big QSR players have been proactive in their product offerings, omni-channel focus, menu innovation, competitive pricing strategy (low
entry pricing) and aggressive expansion (especially in smaller towns & cities). Moreover, the pandemic led the shift from unorganized to
organized due to health and hygiene concerns. Post Covid, QSR’s have recovered faster and are better geared to drive growth through
convenience channels and digital initiatives. The pandemic led to growing digital adoption, ordering-in habits and acceptance of delivery

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 Devyani International Ltd.
fees. QSRs have used the crisis to improve economics by optimizing their cost structures, store networks and store designs. These along
with several closures of other chain restaurants is likely to drive faster growth and share gains in favour of established QSR players.

Economies of established QSRs brands improved, especially after covid. Aggressive review of cost structure, closure of non-performing
store, rental negotiations (linked to revenue), focus on omni-channel (delivery + takeaway). All these measures improve unit-level cost
structure and economics; which would go long way in improving the return ratios. Also, the pandemic triggered lower discounting and
higher delivery fees by aggregators. Cloud kitchens, especially new entrants and weaker players, which earlier thrived on subsidized
delivery costs and discounts/promotion of food aggregators saw some slowdown. So, the value proposition for western QSRs has
improved versus restaurants/cloud kitchens. The evolution of delivery ecosystems and gradual improvement in economics provides an
opportunity for QSRs to step-up the pace of expansion.

Given the prevailing opportunities in QSR industry, we expect both Yum brands franchisees – KFC and Pizza Hut are well poised for growth
led by rapid store expansion. Both brands have adopted various initiatives – store size reduction, cost rationalising, menu innovations and
network expansion - to expand market share and improving store efficiency.

Devyani vs Sapphire
Sapphire Foods is a leading YUM franchisee operator in the Indian subcontinent with presence in India, Sri Lanka and Maldives. Sapphire
Foods started operations in September 2015, by the acquisition of about 270 KFC and Pizza Hut Stores in India and Sri Lanka, by a group of
leading Private Equity firms and is managed by a team of professionals. The company owns and operates 301 KFC and 249 Pizza Hut
restaurants in India, 99 Pizza Hut and 7 Taco Bell restaurants in Sri Lanka and 1 KFC and Pizza Hut each in Maldives as of Sep 30, 2022.
Devyani Sapphire
South (except Tamil Nadu), east, and northeast territories West, North India, Tamil Nadu (core markets - Mumbai, Delhi,
KFC
(high non-veg easting population) Pune, Chennai)
Dine-in: North & East Dine-in: South & West
Pizza Hut
Delivery: Pan India (except Tamil Nadu) Delivery: Tamil Nadu

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 Devyani International Ltd.

(Source: Company, HDFC sec)

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 Devyani International Ltd.
Concerns:
Weak execution and lower than expected SSSG: The company is set its plans to aggressively expand its Core business brands. Although a
large part of DIL’s revenue would be driven by store expansion, lower than expected SSSG (especially for Pizza Hut) could impact its
operational performance. Slow SSSG growth could be because of slowdown in discretionary spends or higher impact from store expansion
due to store splits.

Increased Competition: QSR players continue to see increased competition intensity from unorganised small players. Burgeoning number
of players are added in the market every year and many face closedowns due to stressed economics. Apart from unorganized player, DIL’s
KFC face increasing competition from McDonalds and Jubilant’s Popeyes. Pizza Hut has direct competition with the market leader
Dominos and other regional pizza chains. Moreover, growth of cloud kitchen format restaurants also could dampen revenue growth of
established players. But the rise in delivery costs and lower discounting by aggregators, especially post the pandemic, have impacted the
value proposition of some cloud kitchen brands and also strained economics.

Food inflationary pressures: Although DIL has a well-integrated vendor supply management, it is vulnerable to high food inflation. Sharp
increases in raw material costs and inability to pass on prices to consumers could impact profitability.

Increased dependence and bargaining power of food aggregators: Food aggregators has seen rapid expansion and acceptance, especially
after the Covid. Growing digital adoption, ordering-in habits and acceptance of delivery fees have strengthened their foothold. Given the
company’s plan to expand into smaller cities & towns, dependence on food aggregators would increase. Although the company is making
strides with its own delivery apps, support of food aggregators would be vital.

Disruption in supplies for key ingredients: Typically franchisees rely on third party logistics/ registered suppliers for supply, warehousing
and transportation of ingredients and packaging materials. Disruption to the supply chain due to transportation of resources, non-
compliance with license and quality requirements, could impact the supply of key ingredients and adversely impact operations.

Negative news regarding food incidents: Any negative news regarding the food quality and related incidents would impact its reputation.
There is a risk of food tampering incidents or contamination during transport or handling. The occurrence of such events might lead to
litigation by customers and fines by food safety regulators.

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 Devyani International Ltd.
About the company:
Devyani International Ltd (DIL) is the largest franchisee of Yum Brands in India and is among the largest operators of quick service
restaurants chain in India and operates 1096 stores across 224 cities as of Sep 30, 2022. As the franchise partner of Yum Brands, the
company operates their iconic brands KFC and Pizza Hut in India as well as in Nigeria and Nepal. DIL is also a franchisee rights for the Costa
Coffee brand and stores in India. KFC, Pizza Hut and Costa Coffee together comprise its ‘core brands’ which contributes ~95% of topline. In
addition, the company has established in-house brands such as Vaango and Food Street.

KFC contributes ~58% of the topline followed by Pizza Hut and Costa Coffee which contributes ~26% and 2% of the revenue respectively.
The company operates 423 KFC, 466 Pizza Hut and 88 Costa Coffee outlets in India; 29 Pizza Hut outlets in Nepal; 20 KFC and Pizza Hut
outlets in Nigeria. The company has been consistently expanding its store network. Stores in Core Brands grew at CAGR of 21% over FY19-
22 to 832 stores as at March’22. Its strong association with Yum Brands coupled with large addressable population in KFC states (>80%
non-vegetarian) and exclusivity for Pizza Hut delivery only stores indicates significant growth opportunities in India’s growing QSR market.
DIL plans to add 250 outlets per annum with a cluster-based approach in India. DIL’s stores are concentrated in North (39%) and South
(35%). The company has equal presence in both metro (48%) and non-metro cities (52%). DIL is seeing a strong turnaround and improved
unit metrics for KFC and Pizza Hut led by store size reduction, boosting value proposition through innovative menu and focus on delivery
with enhanced digital capabilities.

Peer Comparison:
Revenue EBITDA Margin (%) PAT
Mcap (Rs cr)
FY22 FY23E FY24E FY22 FY23E FY24E FY22 FY23E FY24E
Devyani International 22,408 2,084 3,099 3,853 22.8 22.9 23.4 156 278 335
Sapphire Foods India 8,652 1,722 2,321 2,907 17.7 19.4 20.5 46 124 172
Jubilant Foodworks 36,031 4,396 5,326 6,284 25.2 24.7 25.1 428 531 681
Westlife Development 11,279 1,576 2,273 2,688 12.0 16.9 17.7 -2 120 171

RoE (%) P/E EV/EBITDA

FY22 FY23E FY24E FY22 FY23E FY24E FY22 FY23E FY24E
Devyani International 39.1 33.7 29.6 143.3 80.6 66.9 49.6 33.2 25.9
Sapphire Foods India 6.2 11.3 13.8 175.0 71.5 51.2 29.6 20.1 15.2
Jubilant Foodworks 24.9 24.0 26.1 84.2 68.5 52.9 34.2 28.9 24.0
Westlife Development -0.4 22.2 25.3 NA 93.7 62.1 64.6 31.7 25.8
(Source: Bloomberg estimates, Company, HDFC sec)

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 Devyani International Ltd.
Financials
Income Statement Balance Sheet
(Rs Cr) FY20 FY21 FY22 FY23E FY24E As at March (Rs Cr) FY20 FY21 FY22 FY23E FY24E
Net Revenues 1516.4 1134.8 2084.0 3098.8 3852.6 SOURCE OF FUNDS
Growth (%) -25.2 83.6 48.7 24.3 Share Capital 106.2 115.4 120.5 120.5 120.5
Operating Expenses 1342.0 900.2 1608.0 2389.1 2951.1 Reserves -295.3 -1.6 565.8 843.9 1178.8
EBITDA 174.4 234.6 476.0 709.6 901.5 Shareholders' Funds -189.1 113.8 686.3 964.3 1299.2
Growth (%) 34.6 102.9 49.1 27.0 Minority's Interest -39.1 -41.9 -4.7 -6.2 -7.2
EBITDA Margin (%) 11.5 20.7 22.8 22.9 23.4 Long Term Debt 1516.1 1153.1 1137.9 1267.9 1447.9
Depreciation 223.3 277.5 224.9 271.7 328.5 Net Deferred Taxes -7.6 -9.6 -48.2 -68.2 -48.2
EBIT -49.0 -42.8 251.1 437.9 573.0 Long Term Provisions & Others 17.9 22.8 22.9 30.8 38.2
Other Income 53.2 82.4 16.1 26.3 32.7 Total Source of Funds 1298.3 1238.2 1794.1 2188.5 2729.9
Interest expenses 158.4 149.5 127.0 131.5 159.3 APPLICATION OF FUNDS
PBT -154.2 -109.9 140.3 332.7 446.4 Net Block & Goodwill 1612.9 1327.8 1691.1 1818.4 1856.7
Tax 1.8 -1.1 -32.0 44.9 112.5 CWIP 13.5 14.3 6.8 6.8 6.8
RPAT -121.4 -63.0 155.1 276.5 333.9 Other Non-Current Assets 106.4 152.2 180.2 233.3 266.7
APAT -121.4 -55.2 156.3 278.0 334.9 Total Non-Current Assets 1732.9 1494.3 1878.2 2058.6 2130.2
Growth (%) -54.5 -383.2 77.8 20.5 Current Investments 0.0 0.0 0.0 50.0 100.0
EPS -1.1 -0.5 1.3 2.3 2.8 Inventories 72.1 62.2 85.5 110.4 137.2
Trade Receivables 17.3 16.9 21.1 25.5 31.7
Cash & Equivalents 16.0 40.5 65.9 301.2 761.3
Other Current Assets 37.8 44.9 163.7 237.7 274.4
Total Current Assets 143.2 164.5 336.1 724.7 1304.6
Short-Term Borrowings 202.7 182.7 116.3 176.3 216.3
Trade Payables 163.2 161.9 196.4 263.2 306.1
Other Current Liab & Provisions 211.9 76.1 107.5 155.3 182.5
Total Current Liabilities 577.8 420.7 420.2 594.8 704.9
Net Current Assets -434.6 -256.1 -84.1 129.9 599.7
Total Application of Funds 1298.3 1238.2 1794.1 2188.5 2729.9

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 Devyani International Ltd.
Cash Flow Statement Key Ratios
(Rs Cr) FY20 FY21 FY22 FY23E FY24E FY20 FY21 FY22 FY23E FY24E
Reported PBT -119.6 -64.1 123.2 321.4 446.4 PROFITABILITY RATIOS (%)
Non-operating & EO items -7.4 -124.0 -17.7 -70.5 -11.5 EBITDA Margin 11.5 20.7 22.8 22.9 23.4
Interest Expenses 159.4 151.8 118.0 131.5 159.3 EBIT Margin -3.2 -3.8 12.0 14.1 14.9
Depreciation 246.7 235.7 221.3 271.7 328.5 APAT Margin -8.0 -4.9 7.5 9.0 8.7
Working Capital Change 22.3 39.7 16.2 16.6 6.0 RoE NA NA 39.1 33.7 29.6
Tax Paid -0.8 0.5 -10.3 -44.9 -112.5 RoCE -3.2 -2.9 14.8 20.1 21.3
OPERATING CASH FLOW ( a ) 300.7 239.6 450.6 625.8 816.2 Solvency Ratio (x)
Capex -98.8 -133.0 -293.0 -399.0 -366.8 Debt/EBITDA 9.9 5.7 2.6 2.0 1.8
Free Cash Flow 201.9 106.6 157.6 226.8 449.4 D/E -9.1 11.7 1.8 1.5 1.3
Investments 0.0 0.0 0.0 -50.0 -50.0 PER SHARE DATA (Rs)
Non-operating income 7.4 -221.9 -81.8 0.0 0.0 EPS -1.1 -0.5 1.3 2.3 2.8
INVESTING CASH FLOW ( b ) -91.4 -354.8 -374.8 -449.0 -416.8 CEPS 9.6 1.9 3.2 4.6 5.5
Debt Issuance / (Repaid) -179.1 -73.9 -369.3 190.0 220.0 Dividend 0.0 0.0 0.0 0.0 0.0
Interest Expenses -43.5 -131.8 -123.0 -131.5 -159.3 BVPS -17.8 1.0 5.7 8.0 10.8
FCFE -20.7 -99.0 -334.7 285.3 510.1 Turnover Ratios (days)
Share Capital Issuance 0.0 347.6 448.6 0.0 0.0 Debtor days 4.8 5.5 3.3 2.7 2.7
Dividend 0.0 0.0 0.0 0.0 0.0 Inventory days 15.3 21.6 12.9 11.5 11.7
Others 0.0 0.0 -14.6 0.0 0.0 Creditors days 36.1 52.3 31.4 27.1 27.0
FINANCING CASH FLOW ( c ) -222.6 142.0 -58.4 58.5 60.7 VALUATION
NET CASH FLOW (a+b+c) -13.4 26.7 17.5 235.3 460.1 P/E (x) NA NA 143.3 80.6 66.9
P/BV (x) NA 188.6 32.7 23.2 17.2
One Year Price Chart:
EV/EBITDA (x) 21.1 97.0 49.6 33.2 25.9
EV/Revenues (x) 2.4 20.0 11.3 7.6 6.1
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
Dividend Payout (%) 0.0 0.0 0.0 0.0 0.0
(Source: Company, HDFC sec)

HEMANSHU Digitally signed by

HEMANSHU VIJAY PARMAR
VIJAY PARMAR Date: 2022.11.30 08:51:32
+05'30'
(Source: Company, HDFC sec)

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 Devyani International Ltd.
HDFC Sec Retail Research Rating description
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their mettle in handling cyclicality of their business. If they are successful in navigating challenges, the market rewards their shareholders with handsome gains; otherwise their stock prices can take a severe beating. Overall these stocks offer high risk high return opportunities.

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