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Home / Markets / Mark To Market /  For Devyani International, inflation is a big concern

Quick-service restaurant operator Devyani International Ltd’s March quarter (Q4FY22) was a decent one. True, disruptions caused by the Omicron variant of coronavirus in the initial months of Q4 impacted sales. Even so, Devyani’s consolidated revenues rose by 36% year-on-year to 590.7 crore, more or less in line with expectations. Further, earnings before interest, taxes, depreciation and amortization (Ebitda) margin stood at 24.3%, ahead of consensus estimate of 22.1%, largely aided by steep cost controls and, to some extent, by price hikes.

The company is India’s largest franchisee of Yum Brands. Its three core brands include KFC, Pizza Hut (PH), and Costa Coffee.

Holding on
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Holding on

“The average daily sales fell 9-13% for KFC/PH, because of Q3 seasonality and localized restrictions (because of the Omicron variant) in the first half of Q4. However, the Q4 exit run rate recovered fully, led by faster recovery in malls versus high-street stores during earlier waves," analysts at Emkay Global Financial Services Ltd said in a report on 3 May.

The company has sailed through a tough March quarter, but a couple of factors would decide the stock’s fate.

“Investors need to closely monitor the company’s same-store sales growth and trajectory of price hikes," said an analyst with a domestic brokerage house requesting anonymity. So far, the management seems to be confident on both these aspects, but any disappointment here could be a sentiment dampener, he said.

In FY22, Devyani opened 246 net new stores, taking the total count to 938. For the next two-to-three years, the management has maintained its store expansion target of 200-250. The management expects gains from fixed cost absorption to continue as it opens more stores.

The management hiked prices by 8-9% in KFC in April 2022 and will raise prices further, if required, to counter raw material inflation. It increased prices by 2-3% in October 2021. In the case of PH, price hikes were comparatively low, but adequate to maintain margins as the input cost inflation for pizzas was much lower than fried chicken, the management said.

Inflation remains a concern for the company despite the recent price hike in KFC as the pass-through is partial, according to analysts at Edelweiss Securities Ltd.

“Though the current performance trajectory implies scope for upgrading our expectations, we are maintaining estimates given the uncertainty on margins amid high inflation," the domestic brokerage house said in a report on 2 May.

In 2022 so far, the stock is up 3.5%. However, the stock is up nearly 90% from its issue price of 90 during listing in August, suggesting that investors are factoring in the optimism adequately.

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