Brokerages are bullish on Devyani International, the 2nd largest QSR chain in India after Jubilant FoodWorks. According to analysts, the stock may further rally as the company continues to aggressively expand its store network, aided by an improvement in ADS. KFC enjoys a strong brand equity, while Pizza Hut is headed for a turnaround which will push growth. In the last one month, the stock has tumbled over 6.5%, but it has rallied over 41% in the past one year. Going forward, the stock may rally further up to 22%. “While strong demand tailwinds in 3QFY22 boosted KFC’s ADS, the same may normalize going forward. However, the gradual uptick in ADS for Pizza Hut is likely to continue on account of the brand’s focus on the delivery channel,” said Motilal Oswal in its report.
Should you buy, hold or sell?
Motilal Oswal: Buy
Target price: Rs 210, Upside: 22%
According to MOFSL analysts, while there was a beat in 3Q, the COVID-led restrictions will impact Devyani International’s 4QFY22 performance. The brokerage raised its FY22E EBITDA estimate by 3.2%. However, there is no material change to FY23E/FY24E estimate. “We remain bullish on DEVYANI’s prospects due to: a) KFC’s strong brand equity, b) turnaround in PH, led by the focus on delivery, c) sharp network expansion across the portfolio, d) healthy mid-teen operating profitability,” it said. The firm maintained Buy rating on the stock with target price of Rs 210 per share.
Emkay Global: Buy
Target price: Rs 210, Upside: 22%
Emkay Global is also bullish on the stock. “After years of sub-par and volatile return ratios, DIL’s RoIC is likely to surge to c.20% in FY22E, thanks to the remodeling of store formats. While store sizes have reduced, the average daily sales (ADS) have not. We model RoIC of 40% by FY25E. We initiate on DIL with a Buy rating and a Mar’23E TP of Rs 210, based on 42x FY24E EV/EBITDA, derived from a two-stage growth model. Slower pace of execution is a key downside risk to our forecasts,” the brokerage said in its report.
Thanks to improved profitability, the QSR chain has embarked upon aggressive store-count expansion, and is on track to add 218 stores in FY22. Emkay forecasts store-additions of 210 per annum from FY23 through FY25, near the lower end of company’s target range (200-250). The growth outlook is also supported by company’s significant network gap of Pizza Hut in comparison with Domino’s in key states; exclusive rights from Yum Brands for delivery-only Pizza Hut stores across India (excl TN); favorable footprint—DIL’s KFC geography accounts for a larger addressable chicken market than Sapphire’s, with >80% non-vegetarian population vs. an average of 73% for India.
Company talk: Strong financials, expanding store network to boost growth
Financials
– Input costs have risen, but the company has not taken any price hikes yet. The management is evaluating hiking prices and will take a decision soon.
– ADS calculation includes all operational stores up to the reporting date, weighted for the number of operational days in the re-porting period.
– Average capex is around 12m per store across its brand portfolio.
Store network
Devyani International is currently present in 200 cities across its brands, and metros account for 49% of its stores. New cities have been a mixed bag, with some seeing strong performance, while others are lagging. Total store additions across all brands is likely to be around 250 in FY22. For KFC, the management expects 5-6% SSSG on a sustainable basis.
The company has also managed to migrate Pizza Hut brand from dine-in to a delivery focused one. The management expects this to strengthen further as most new stores are delivery focused. PH’s newly launched Momo Mia Pizza has also seen strong consumer adoption. Adding more stores will increase its network density and reduce delivery time, according to the management. Additionally, there has been a reduction in the ramp up period of new stores from 15-18 months earlier.
(The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)
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