Markets
KFC operator Devyani's domestic struggles continue as it integrates Thai acquisition
Summary
- The company reported almost 39% year-on-year revenue growth thanks to its acquisition of 274 KFC restaurants in Thailand, but KFC and Pizza Hut continued to struggle in India in Q4.
Devyani International Ltd’s March-quarter (Q4FY24) results were adversely affected by muted growth in the Indian market. Yet, the company reported almost 39% year-on-year revenue growth thanks to its acquisition of 274 KFC restaurants in Thailand.
“Organic growth (excluding acquisitions) is expected to be about 5% year-on-year (against the estimate of 7.5%) despite 20% store growth," said analysts at Motilal Oswal Financial Services.
KFC and Pizza Hut – Devyani's mainstays in India, accounting for more than 60% of total revenue – continued to struggle in Q4 amid lower disposable incomes, weak consumer sentiment, and increased competition for Pizza Hut.
Same-store sales growth, a key measure of comparable sales, paints a concerning picture. The pace of decline worsened in the past quarter, with KFC’s same-store sales down 7% Pizza Hut's falling 14%. Unsurprisingly, average daily sales were also affected, with Pizza Hut and KFC reporting year-on-year declines of 18% and 12%, respectively.
Also read | Mint Explainer: What's behind the slowdown in fast-food sales?
On profitability, the domestic brands clocked strong gross margins thanks to a benign raw-material basket. However, the overall Ebitda margin was 16.6%, down 340 bp year-on-year, owing to negative operating leverage in the domestic business and the onboarding of the Thailand restaurants, which have lower margins than the Indian business.
Additionally, the devaluation of the Nigerian naira hit the bottom line hard, wiping out ₹42.4 crore from total profits.
Devyani's juggling act
Devyani will now have to navigate a challenging domestic environment while integrating its new Thai acquisition. Success will depend on reviving same-store sales in India amid increased competition, and leveraging its Thailand business for further growth.
Also read: Why Devyani International's entry into Thailand looks appetizing
Despite the challenges, management remains optimistic. It views the current consumer slowdown as temporary and anticipating an improvement after the general elections. To navigate this period, Devyani will focus on medium-term revival strategies such as premiumisation and increased brand marketing.
Management also reiterated its store-addition guidance of 275-300 in FY25, saying it wold take a cautious approach in expanding Pizza Hut. The company is also looking to expand by operating food courts in shopping malls through a strategic partnership with PVR-INOX. This aligns with Devyani's aim to capitalise on India's growing travel and tourism sector by offering food options at key places.
Also read: Young professionals must read everyday: Merrill Pereyra, MD, Pizza Hut India
Investors should keep a close eye on Devyani's ability to manage competing forces in the domestic business and deliver sustainable profits. An increase in consumer demand and a decrease in competition in the pizza segment could also be significant catalysts for its success.
For now, investors appear to have reacted to the sustained weakness in sales, with the stock price down more than 16% over the past six months.
