Inflation bites into KFC operator Devyani International’s Q2 margins | Mint
Active Stocks
Fri Feb 23 2024 15:58:13
  1. Tata Steel share price
  2. 145.50 -0.24%
  1. State Bank Of India share price
  2. 759.40 -0.86%
  1. HDFC Bank share price
  2. 1,420.90 0.08%
  1. NTPC share price
  2. 337.70 -0.54%
  1. ITC share price
  2. 411.60 -0.65%
Business News/ Markets / Mark To Market/  Inflation bites into KFC operator Devyani International’s Q2 margins
BackBack

Inflation bites into KFC operator Devyani International’s Q2 margins

In the past one year, shares of Devyani International have risen by about 28%. Investors would do well to track how consumer demand plays out given elevated inflation

Devyani International Ltd is the largest franchisee partner for YUM brand in India.Premium
Devyani International Ltd is the largest franchisee partner for YUM brand in India.

Devyani International Ltd, the largest franchisee partner for YUM! brand in India, saw the adverse impact of raging inflation on its profitability in the September quarter (Q2FY23). Gross margin fell to a multi-quarter low of 70.2% last quarter thanks to sustained rise in input prices. The company took judicious price corrections earlier this financial year to protect margins.

What is encouraging is that Q2 margins may mark the trough, according to analysts from Jefferies India. Even so, margin recovery will likely be slow hereon. That’s because, while input cost inflation is stabilizing, overall pricing levels continue to remain higher year-on-year. 

There is, however, cheer on the store addition front. In Q2, Devyani added 88 net new stores, its ‘highest ever,’ taking the total store count to 1,096. What’s more, the management has also retained the annual guidance of 250 store additions.

Devyani’s core brands are KFC, Pizza Hut and Costa Coffee. Store additions and recovery in dine-in lead to 47% year-on-year (y-o-y) growth in KFC’s revenues. Understandably, sequential growth was soft at 4% despite 8% store additions as consumers shied away from consumption of non-vegetarian food due to 'Shravan' month and ‘Navratra.’ Overall, same store sales growth (SSSG) was healthy at 13% coming on a high base of 72% in Q2FY22.

Pizza Hut SSSG was muted at 3%. Jefferies analysts believe this could be due to several factors such as product price hikes impacting demand, aggressive store additions and likely downtrading to the newly launched value range 'Flavour Fun.' Pizaa Hut’s saw 36% y-o-y revenue growth, led by 33% store additions. Inflation in cheese hut gross margin. Management retained Pizza Hut SSSG outlook of 7-8% on a steady state basis. Separately, Costa revenues doubled y-o-y, rising 134%, but brand margins saw a sharp decline due to store adds.

In the past one year, shares of Devyani have risen by about 28%. Investors would do well to track how consumer demand plays out given elevated inflation.

To be sure, analysts broadly remain optimistic on Devyani’s prospects. Kotak Institutional Equities has raised FY2023-25 revenue estimates by 2% and broadly maintain adjusted Ebitda forecasts. Ebitda is earnings before interest, tax, depreciation and amortisation. The broking firm has retained its ‘Reduce’ rating with a revised fair value of Rs195 (which implies 31X December 2024E EV/Ebitda). 

Devyani’s shares are currently hovering around 189 apiece. “There is a lot to like, but rich valuations offer limited upside in the near term," said Kotak’s analysts.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Check all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates.
More Less
Published: 04 Nov 2022, 03:37 PM IST
Next Story footLogo
Recommended For You
GENIE RECOMMENDS

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started
Switch to the Mint app for fast and personalized news - Get App