Markets
Why Devyani International's entry into Thailand looks appetizing
Summary
- QSRs in the Indian market are currently struggling to boost growth and an acquisition in the Indian market would have commanded a premium valuation
Devyani International Ltd's expansion into Thailand has cheered investors with the shares of the quick service restaurant operator closing 5% higher on Tuesday.
The company's entry into the Southeast Asian market involves its subsidiary acquiring a 93% stake in Restaurant Development Co. Ltd, a KFC franchise partner. The remainder has been allocated to a local partner. Besides Devyani, Temasek Holdings also has a stake in this subsidiary.
Investors are excited about the deal's attractive valuations. The consideration for the acquisition is Rs1,066 crore, which will be funded through a combination of equity investment by Devyani ( ₹341 crore), Temasek ( ₹328 crore), a local Thai partner ( ₹11.9 crore) and local debt.
The consideration implies an acquisition valuation of 0.9 times FY23 enterprise value/sales and about 7.5-8 times EV/Ebitda.
Quick-service restaurants (QSRs) in the Indian market are currently struggling to boost growth. "Moreover, an acquisition in the Indian market would have commanded a premium valuation as the QSRs are trading at a higher multiple of 30-35 times EV/Ebitda," says Karan Taurani, analyst at Elara Securities (India). As such, an international acquisition seems fitting, he added.
In Thailand, KFC leads the QSR segment with more than 1,000 stores – more than four times the next competitor McDonald’s. Devyani sees an opportunity to double the KFC store count in the next 10 years in Thailand. As of September end, Restaurant Development operated 274 KFC stores. Moreover, the average daily sales of the company stood at ₹135,140 in the first half of FY24, which is higher than ₹113,000 clocked by Devyani’s KFC business.
The quantum of boost to Devyani’s consolidated earnings remains to be seen. This is because Restaurant Development’s brand contribution margin, a measure of profitability, in the first half of FY24 stood at 14.4%, which is lower compared with the 20.3% clocked by Devyani.
Preliminary workings of JM Financial Institutional Securities showed the acquisition is broadly earnings-neutral for FY25. Moreover, “International business performances in QSR have been quite volatile & haven’t seen a major success whether it is existing Nigeria business of Devyani, Sri Lanka for Sapphire or Indonesia for Burger King," noted the broking firm. Hence, all eyes would be on execution here.
To be sure, shares of Devyani have risen only 7% in 2023 so far amid a weak macro environment. The December quarter saw tailwinds in the form of the Cricket World Cup and the festive season. Whether these translate into a significant improvement in the operating metrics is something to watch out for.
