Devyani International Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Record revenue, record EBITDA: Consolidated revenue nearly doubled YoY to INR 705 crore and pre-IndAS EBITDA hit an all-time high of INR 114 crore, though the comparison is against a COVID-depressed base.
• Inflation absorbed, margins held: Gross margins stayed at 71.1% despite multi-year high input inflation, aided by timely price hikes and cost management; brand contribution dipped only slightly to 20.5% on higher utility and logistics costs.
• Store engine accelerating: The company crossed 1,000 stores and added 70 in the quarter, with a clear plan to double the network over the next four years across KFC, Pizza Hut, and Costa Coffee.
• Pizza Hut transformation paying off: A multi-year shift to smaller-format stores has improved per-square-foot efficiency and pushed brand margins to 17.5%, a seven-quarter upward trajectory that management now wants to stabilize.
• What to watch next quarter: Whether Pizza Hut margins normalize back down as guided, the early demand response to the Flavor Fun INR 79 launch, and any relief from edible oil and chicken price stabilization.

Topline & Recovery

• Revenue nearly doubled YoY: Consolidated revenue reached INR 705 crore, driven by growth across all brands and strong dine-in traction; the base quarter (Q1 FY22) was severely impacted by the second COVID wave, so the comparison is not strictly like-for-like.
• Beat a seasonally stronger quarter: Q1 FY23 revenue surpassed Q3 FY22 levels, which is normally a high-season quarter, signaling a robust demand recovery.
• Transaction volumes stable: Management does not disclose transactions separately but stated that both transactions and value are stable and doing well; in the current quarter, ADS growth was more pricing-driven, whereas previous quarters saw more transaction-driven growth.
• Delivery times improved: 70% to 80% of orders are now delivered within 30 minutes, down from 35 to 40 minutes around the IPO, driven by higher store penetration that automatically shrinks delivery radii.

Jaipuria: "We reached an important milestone of 1,000 stores this quarter. It took us 25 years to get to this important landmark. We believe this is just the beginning of our exciting journey and hope to cross many more such milestones in the coming year."

Brand-Level Performance

KFC

• ADS and SSSG surged: ADS grew to INR 127,000 with same-store sales growth of 63.6%, surpassing pre-pandemic levels, as on-premise consumption rose to 65% with the receding of COVID restrictions.
• Gross margins held at 69%: Brand contribution improved sequentially to 22.4% from 21.8%, benefiting from operating leverage on higher sales.
• Price hike covered input inflation: A nearly 9% price hike was taken in the quarter; gross margins are slightly diluted versus the prior quarter but largely covered input inflation because edible oil prices have started to come down and chicken prices have stabilized.
• Menu mix: Chicken-on-the-bone remains the largest item sold; burgers are the second-biggest contributor and growing well; biryani and other sides are small contributors.
• Normalized SSSG target: Management targets about 3% to 4% normalized same-store sales growth on a year-to-year basis and hopes to meet that.

Pizza Hut

• ADS and SSSG improved: ADS rose sequentially to INR 44,000 with same-store sales growth of 31.5%; on-premise consumption inched higher to 46%.
• Format transformation drove efficiency: Over the last 2.5 to 3 years, stores were converted from large formats to smaller formats (1,000 to 1,100 sq. ft.); on a per-square-foot efficiency basis, Pizza Hut is in far better shape because the smaller formats improved topline efficiency despite lower headline ADS numbers.
• Channel mix normalizing: Delivery share declined from over 60% in Q3 FY22 to approximately 54% now, attributed to normalization after exceptional COVID-period delivery performance and work-from-home becoming a choice rather than a norm.
• Margins on a seven-quarter upswing: Brand contribution reached 17.5%; management says they have picked all the low-hanging fruits and would like to stabilize at current levels, with the aspiration to reach KFC margins described as a long haul.
• Q1 margin uptick was a timing advantage: Pizza Hut took price hikes a little ahead of input inflation because its forward contracts delayed the impact; margins are expected to normalize back down in Q2 FY23.
• Flavor Fun launch at INR 79: Launched about a week before the call, addressing a significant portfolio gap; test market response was encouraging, and a marketing push through digital and mass media will continue during the quarter.

Dawar: "Look our aspiration will be to kind of get to the KFC margin, but that is a long haul. As of now I think we have kind of picked all the low hanging fruits and we would like to stabilize at the current level of margins."

Costa Coffee & Vaango

• Costa Coffee scaling begins: ADS improved to INR 36,000 from INR 30,000 in Q4 FY22; brand contribution stood at INR 5 crore with a 30.5% margin; 14 new stores were added after final agreements were closed late last year.
• Vaango expanding selectively: The brand is being scaled only in locations where it has seen success, such as shopping malls, airports, and hospitals with captive consumption; unit economics are established and margins are good, and the speed of opening will accelerate.

Jaipuria: "We see a huge opportunity in the coffee segment, and I think we will scale it up reasonably fast. You may see this in the coming quarters. And the opportunity for coffee is very large - it is huge."

Margins & Cost Structure

• Gross margins stable at 71.1%: Maintained despite multi-year high inflation across raw materials and packing materials, supported by timely price hikes and strict cost management.
• Brand contribution slightly diluted: Declined to 20.5% from 21.2% in Q4 FY22 due to an increase in utilities and logistics charges, partially offset by leverage benefit on higher revenues.
• Pre-IndAS EBITDA at record high: Reached INR 114 crore with a margin of 16.1% versus 16.5% in Q4 FY22.
• Other expenses driven by seasonality: Q1 is typically a high-summer quarter, so air conditioning costs are at their highest, contributing to elevated utility and electricity expenses.
• Corporate overhead stabilized: Running at approximately INR 30 crore per quarter and expected to grow more or less in line with inflation; organization building to fill skill gaps will have only a marginal impact on the overall basis.
• No further price hikes taken: As of the call date (August 3, 2022), no additional price hikes have been implemented in either KFC or Pizza Hut.

Dawar: "Our basic philosophy, where we come from, is that QSR as a category is highly under penetrated in the country. And if you have to really cover the population and we have to grow the store count and we have to kind of, take the industry to a different level, then we have to be kind of reasonable in terms of gross margin expectations, and yet ensure that it gives us a good ROI and return on equity for the investors."

Store Expansion & Capex

• Crossed 1,000 stores: The 1,000th store opened is a Pizza Hut outlet at Sion, Mumbai; 70 new stores were added in the quarter (27 KFC, 23 Pizza Hut, 14 Costa).
• Non-metro penetration rising: Contribution of non-metro locations within Core Brands reached 52%.
• Four-year expansion plan: Management plans to open approximately 100 KFC stores per year, approximately 100 Pizza Hut stores per year, and the remaining 40 to 50 stores from Costa Coffee and Vaango, totaling roughly 1,000 new stores over the next four years.
• Capex per store: Estimated at INR 1.25 to 1.30 crore for the next three to four years, apart from normal inflation of 5% to 7%.
• Pizza Hut format mix going forward: A few larger-format stores may open as flagships in new locations, but they would remain less than 5% to 10% of new openings.
• KFC under-penetration thesis intact: Store openings of about 100 per year are expected to continue for the reasonable future, given the under-penetration and the mismatch between the non-vegetarian offering and population consumption patterns.

Input Costs & Demand Outlook

• Input cost peak expected in Q2: The full impact of input costs will be fully evident in the current quarter (Q2 FY23); management expects input prices should stabilize in the coming quarters.
• Commodity-specific trends: Edible oil prices have started to come down; chicken prices have started to stabilize; some inflation on flour prices is currently visible but expected to stabilize in the next couple of quarters.
• Monsoon tailwind: With a normal monsoon forecasted, management expects better demand and softer raw material prices towards the latter half of the year, helping both top-line momentum and margins.
• Delivery mix settling: Overall delivery versus in-store consumption is expected to settle at pre-pandemic levels in the next few quarters; Pizza Hut off-premise is expected to be close to 60%, and KFC off-premise between 35% and 40%.

Guidance & Commitments

Key Metrics