Devyani International Ltd Q4 FY2022 Concall Summary

Key Takeaways

• Record FY22, but Q4 hit by Omicron: FY22 revenues nearly doubled to INR 2,084 crore with pre-IndAS EBITDA margin expanding to 14.4%, yet Q4 saw a sequential revenue dip as operating restrictions from the third COVID wave dented sentiment and ordering for 4–6 weeks.
• Pizza Hut restructuring complete, margins now sustainable: The shift from large dine-in stores to smaller delivery-focused formats has fully played out, lifting brand contribution margin to 17.5% in Q4, a level management calls representative of go-forward performance, though it could vary a little quarter to quarter.
• KFC absorbs double-digit input inflation with pricing power: An 8%–9% price increase was taken in April, but management deliberately did not pass on the full input cost rise, calling the move already challenging for consumers; further hikes are possible if inflation persists and does not come down.
• Store rollout engine stays aggressive: DIL opened a record 246 stores in FY22 and committed to 200–250 new stores annually for the next few years, with CapEx guided at close to INR 300 crore for FY23, funded entirely through internal accruals.
• What to watch next quarter: Consumer acceptance of the April price hikes once the Navratri/Roza period passes, any easing in chicken and edible oil inflation, and whether the nascent COVID variant resurgence disrupts the dine-in recovery.

FY22 Performance & Q4 Omicron Impact

• Full-year revenue nearly doubled: FY22 revenues rose to INR 2,084 crore from INR 1,135 crore in FY21, driven by 246 new store openings and strong brand performance across KFC, Pizza Hut and Costa Coffee.
• Margins expanded sharply: Pre-IndAS EBITDA margin improved from 8.1% in FY21 to 14.4% in FY22, while brand contribution margin rose to 19.9% from 14.4%, benefiting from operating leverage and cost initiatives taken over the prior 2–3 years.
• Gross margins held stable despite inflation: Well-timed forward contracts on key raw materials protected gross margins through a year of multi-year high input cost inflation.
• Q4 revenue dipped sequentially: The Omicron wave imposed weekend restrictions and late-night delivery curbs for 4–6 weeks, hurting overall sentiment and ordering behavior; management could not quantify the exact impact because it was not a full lockdown.
• Q4 employee cost fell unusually: Employee expenses dropped ~INR 10 crore QoQ, partly from true-ups on variable provisions linked to the Omicron disruption and partly from mix effects in the international business; this was described as an exceptional item.
• Mall recovery outpaced high streets: Unlike earlier COVID waves, malls recovered faster post-Omicron, while high street stores took longer to bounce back.
• March returned to pre-COVID levels: March numbers were back to pre-COVID figures, though not comparable to Q3 which is a seasonally high quarter.

Dawar: "This time, it was not an impact of lockdown and shut downs. Impact was majorly due to operating restrictions which were present. ... it's difficult to kind of measure that impact."

KFC: Pricing, Inflation & Delivery Normalization

• Revenue and margin growth in FY22: KFC revenues grew 89% YoY to INR 1,219 crore; brand contribution margin improved to 21.3% from 18.3% a year ago on operating leverage and cost management.
• Q4 margin dipped on deleverage: Brand contribution margin slipped to 21.8% in Q4, down both YoY and sequentially, because of deleverage on lower sales during the Omicron wave.
• Off-premise mix spiked temporarily: Delivery and takeaway rose to 41% of sales in Q4 from 36% in Q3 due to COVID restrictions; management expects this to normalize back to 35%–38% as dine-in recovers.
• Double-digit input inflation not fully passed on: Major inflation hit chicken and edible oils; the 8%–9% price increase taken in April deliberately does not cover the entire input cost rise because management judged a larger hike too challenging for consumers.
• Consumer acceptance still being evaluated: The April price increase coincided with Navratris (lower chicken consumption in the north) and Roza, so May data will give a clearer read on whether the hike has been absorbed without transaction loss.
• Further price hike possible: If input inflation does not ease, another price increase could come at the end of Q1 or middle of the year; management is in wait-and-watch mode on commodity prices.
• FY23 margin outlook cautiously optimistic: Management does not expect KFC margins to compress but also sees no growth in gross or brand contribution margin; any upside hinges on input inflation easing toward the back end of the year and efficiency gains as the brand scales.
• SSSG target of 4%–5%: KFC is targeting same-store sales growth of about 4%–5% going forward.

Dawar: "We don't think we've managed to pass on the entire input inflation to the consumers, because at 8% to 9% itself, we thought it was a very challenging price increase from consumer perspective."

Pizza Hut: Restructuring Complete, Margins Sustainable

• FY22 revenue and margin improvement: Pizza Hut revenues grew 85% YoY to INR 532 crore; brand contribution margin improved to 16.3% from 12.9% a year ago.
• Q4 margins stable despite lower ADS: Gross margin at 75.5% and brand contribution at 17.5% held steady sequentially even as average daily sales declined, because benefits from the business model restructuring continued to flow in.
• Restructuring benefits fully captured: The pivot from large dine-in stores to smaller delivery-focused formats has run its course; all margin advantages from that shift are now embedded, and management describes current margins as sustainable and representative of go-forward performance, with only minor quarterly variation expected.
• Delivery mix stabilizing: Delivery share was 58% in Q3 and 59% in Q4; the business appears to be settling around that level, though Q4 was COVID-impacted so the true steady-state could differ.
• Product innovation filling portfolio gaps: The new San Francisco Dough (hand-tossed sourdough) addresses a big gap versus pan pizza; Momo Mia pizza launched in the prior quarter was well received, with version two planned for the back end of the year; new sides include tear-and-share cheese-filled garlic bread and Mexican garlic bread.
• Pricing strategy aims to narrow competitive gap: Management wants to keep innovating and bring the price gap versus the market leader down over time, but acknowledges Pizza Hut is a follower in the pizza category and closing the ADS gap will take a long time.
• SSSG target of 7%–8%: Pizza Hut is targeting higher same-store sales growth than KFC, though quarterly performance has been volatile due to COVID waves.
• Input inflation well covered: Unlike KFC, Pizza Hut has largely covered its input cost inflation; a small price increase was taken in April and another is planned over the next few weeks.

Dawar: "We think now on Pizza Hut, we've managed to kind of completely restructure the brand, all the benefits that are supposed to be had as a result of that restructuring have already flown in."

Costa Coffee & New Brand Building

• High SSSG from a low base: Costa Coffee delivered same-store sales growth of 95.2% in FY22, reflecting recovery from a depressed prior year.
• Brand contribution margin near 30%: The strong unit economics give management confidence to scale the brand rapidly.
• New agreement and leadership in place: A new agreement with Costa was signed around September 2021; a new CEO has been hired and teams are being built out.
• Five flagship stores targeted: Management is pursuing prime real estate for flagship locations but acknowledges supply is constrained, with multiple brands competing for the same sites.
• ADS ambition of INR 40,000: Management is confident of reaching this level within the next couple of years, partly by increasing food contribution to build brand loyalty and boost ticket size.
• Store rollout tilted toward Costa: Of the 200–250 new stores planned annually, roughly 100 each will be KFC and Pizza Hut, with the remaining 50 split between Costa and Vaango, heavily weighted toward Costa.
• Own app launching shortly: A Costa Coffee app is in the works, complementing existing apps for KFC and Pizza Hut.

Store Expansion & Capital Allocation

• Record 246 store openings in FY22: The highest-ever annual store addition drove the near-doubling of revenue.
• 200–250 new stores annually for the next few years: The guidance is unchanged, with a rough split of 100 KFC, 100 Pizza Hut, and 50 across Costa and Vaango.
• FY23 CapEx guided at ~INR 300 crore: This covers ~250 stores (the upper end), plus refurbishments, IT and corporate CapEx; management says plus or minus 10% is a fair assumption.
• Expansion funded entirely through internal accruals: Management is focused on the India geography and three core brands; it is not actively looking for other opportunities but will evaluate if something makes sense.
• Net cash position modest: Management corrected an analyst's figure of INR 570 crore to INR 57–60 crore net, but did not directly address whether the balance could be deployed more aggressively.
• Rental costs to improve marginally: Rentals normalized at ~11% of revenue for FY22 with no major COVID-related credits; newer stores are being signed at better rent-to-revenue ratios, so a small improvement is expected as the portfolio turns over.
• Per-store employee cost leverage: Store expansion is driving leverage on fixed employee expenses; the Q4 true-up impact on employee cost was small relative to the structural benefit from scale.

Consumer Demand & Inflationary Context

• All-round inflation is unprecedented: Unlike past episodes where inflation hit categories at different times, today's broad-based price rises across food, fuel and other essentials are squeezing consumer wallets simultaneously, which management expects will impact consumption to some extent.
• KFC pricing power has limits: The 8.5%–9% increase already taken is seen as the near-term ceiling; anything immediately further would risk hurting transaction volumes.
• Pizza Hut positioned on value and quality: Management believes superior product quality drives repeat visits, and the pricing strategy is to keep narrowing the gap versus the market leader through innovation rather than discounting.
• Dine-in recovery underway but fragile: March saw a return to pre-COVID numbers, but early signs of a new COVID variant resurgence are being monitored closely, and the recovery could stall if restrictions return.

Dawar: "If you look at this time round, I mean, there is an all-round inflation which is impacting the consumer wallets, and therefore, to that extent, it is a little different and everywhere the consumers are getting impacted, and therefore it will impact the consumption to some extent."

Guidance & Commitments

Key Metrics