Markets
Devyani waits for a demand seasoning
Summary
The quick service restaurant operator has noted a sequential demand uptick in Q1FY24 led by Indian Premier League, summer vacations and festivals.Devyani International Ltd’s management commentary on its business outlook appears to have comforted investors, even as March quarter results (Q4FY23) were far from encouraging. It sees initial signs of inflation stabilizing. The quick service restaurant operator has noted a sequential demand uptick in Q1FY24 led by Indian Premier League, summer vacations and festivals. Devyani’s three core brands include KFC, Pizza Hut (PH), and Costa Coffee. Moreover, costs of key inputs such as chicken, oil, packaging materials and wheat flour are softening, which augurs well for margin. However, milk and cheese prices remain elevated and the company expects some respite here in about six months.
Against this backdrop, shares of Devyani closed nearly 6% higher on Thursday, reversing the losses seen on Wednesday in reaction to Q4 results. The muted show in Q4 has prompted some analysts to slash the company’s earnings estimates. For instance, Jefferies India has cut FY24-25 Ebitda forecasts by 1-4% to factor in the weak average daily sales. The brokerage has downgraded the rating on the stock to ‘Hold’ from ‘Buy’ earlier.
In Q4, KFC and PH’s average daily sales dropped by 5-6% year-on-year. KFC saw same store sales growth (SSSG) of 2%, while this measure for PH was at -3%. Note that SSSG performance is broadly in line with its peer Sapphire Foods India Ltd. However, KFC’s brand contribution margin fell by 430 basis points (bps), faring much weaker than the 10bps rise that Sapphire clocked. “The impact of adverse operating leverage is higher in case of Devyani compared with Sapphire," said analysts at Kotak Institutional Equities in a report on 18 May.
Besides moderating input costs, price hikes in KFC will aid margin, though it remains to be seen if raising prices will hurt demand. In the case of PH, margin recovery is likely to be gradual at best. In this price-sensitive category, there have been no price hikes in the latter part of FY23. Also, its value offering, Flavour Fun pizzas, will dilute margin even as it drives volume growth.
Meanwhile, the company added 305 stores in FY23, taking the total count to 1,243. It aims to add a similar number of stores in FY24. Devyani remains optimistic of a recovery in overall consumer spending only in the second half of FY24. Investors will closely track SSSG performance and positive surprises here will boost confidence. As things stand, shares of Devyani are down by about 14% from their 52-week highs of ₹215 seen in August.
