Devyani International Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Resilient quarter with margin recovery underway: Operating revenue rose 12% QoQ to Rs. 847 crore, driven by store expansion and KFC throughput, while brand contribution margins improved sequentially across all core brands.
• KFC is stabilizing, Pizza Hut remains the problem child: KFC ADS recovered to Rs. 117,000 from Rs. 106,000 and management believes the worst on gross margin is behind it. Pizza Hut faces a multi-quarter slog back to 15%+ brand contribution margins, with input inflation still biting and value-layer dilution persisting.
• Inflation forced a value-layer pivot that is now structural: Both KFC and Pizza Hut introduced value meals to capture downtrading consumers, sacrificing ticket size for transactions. The strategy is margin-neutral on combos but changes the revenue mix.
• Vaango gets its debut, but remains a sideshow: Management disclosed Vaango numbers for the first time and targets a Rs. 100-crore run rate by fiscal year-end, but the brand will stay small relative to KFC and Pizza Hut for the foreseeable future.
• What to watch next quarter: Whether Pizza Hut's mass communication campaign and premium menu refresh can start pulling brand contribution margins off the floor, and whether the extended Sawan season materially dents KFC volumes.

KFC: The Anchor Stabilizes

• ADS recovery from trough: KFC ADS rose to Rs. 117,000 in Q1 from Rs. 106,000 in Q4, though still below the Rs. 127,000 peak in Q1 last year when dine-in demand surged post-COVID waves. Management expects stabilization in 1-2 quarters.
• Gross margin tailwind: Big input costs (chicken, oil, flour, packing material) have stabilized, and a marginal price increase taken in early April has flowed through. If current input pricing holds, management believes the worst on KFC gross margin is behind.
• Value layer built for asset utilization: The KFC Snacker range (Rs. 99) and KFC lunch (Rs. 149) target muted lunch hours to improve daytime throughput. The lunch combo is margin-dilutive standalone but neutralized on a combination basis.
• Brand contribution margin declined YoY: Fell 130 bps to 21.1% from 22.4% a year ago, driven by the ADS drop, employee cost inflation, and minimum wage revisions in Karnataka where KFC has heavy Bangalore exposure. Management expects recovery as ADS improves.
• SSSG deterioration is base-effect and mix-driven: YoY same-store sales growth declined because Q1 last year was an exceptionally strong quarter. Volume terms are positive; negative SSSG reflects the price/build-size impact of value-layer mix shift.

Dawar: "During the inflationary environment, people tend to kind of downgrade, so we are trying to build a value layer for KFC also so that we can focus on the number of transactions, and we are able to get more footfalls into our stores, which will be good for the brand as we go along."

Pizza Hut: The Long Road Back

• Brand contribution margin stuck in single digits: Pizza Hut brand contribution margin was 10.1% in Q1, up only 80 bps QoQ. Management says it will take a few quarters more to move back to the 15%+ range.
• Gross margin squeezed by dairy inflation: Milk and cheese prices rose during the quarter, and vegetable prices (tomatoes) spiked. Management hopes good monsoons and excess milk supply will stabilize dairy costs in the current quarter but cannot yet call the bottom.
• Value-layer dilution from Fun Flavor range: Introduced in July last year, the value range pulled down average per-check (APC) even as transactions built. The Pizza Hut Refresh menu now pushes premium pizzas to rebalance the mix.
• Demand structurally rebalancing: Pizza is the most expensive QSR subcategory, so high inflation hits it hardest. Sequential Q1 sales-per-store growth was only 3-4% versus a pre-COVID norm of 7-8%, as expanded choices from KFC, McDonald's, and Burger King pull demand away.
• Marketing push incoming: Mass communication around the menu refresh will break shortly, with additional marketing funding allocated in near-term quarters. Store expansion pace has been trimmed to 70-75 per year from 100+.

Dawar: "Globally, burger is the biggest category as far as QSR is concerned, whereas in India it has always been pizza because it got started very differently. There will be some rebalancing, which will happen in this category."

Store Expansion & Portfolio Strategy

• 47 net new stores added in Q1: Network reached 1,290 stores across brands and geographies. Management remains confident of hitting 275-300 new stores this fiscal year, with an ambitious target of 2,000 stores by 2026.
• Capex self-funded: The entire expansion is being funded through internal accruals, which management says underscores financial strength. Store expansion has not materially impacted operating margins, with accelerated breakeven on new stores.
• KFC leads the pipeline: 121-125 store additions planned per year. Costa Coffee is comfortable at 60-70 stores annually, while Pizza Hut has been dialed back to 70-75 from 100+ pending performance improvement.
• Vaango disclosed, Rs. 100-crore target set: 52 stores now open, focused on high-footfall locations (airports, mall food courts, hospitals). Management sees South Indian cuisine as a healthy-meal opportunity across age groups. Once basic scale is achieved, marketing spend and High Street stores will follow, but that journey is not immediate.
• Corporate restructuring progressing: NCLT approval received for two subsidiary mergers into the parent; certified copy to be filed with ROC in 1-2 weeks. A new Dubai subsidiary has been set up to hold overseas investments and provide management services for Nepal and Nigeria operations.

Dawar: "We as a business and as a group remain bullish on the South Indian cuisine opportunity in the country and that is the reason, we have started disclosing Vaango."

Costa Coffee: Growth Pains from Rapid Expansion

• Revenue dipped on lower ADS: ADS fell to Rs. 33,000 sequentially as new store openings dragged the average down. New stores typically open at lower ADS and mature over time.
• Gross margin hit by input inflation: Milk and coffee bean prices rose during the quarter, pushing gross margin to 77.3%. Brand contribution margin still improved 70 bps QoQ to 20.9%, but the interplay with rapid expansion means new stores carry higher rent-to-revenue ratios that compress returns until ADS builds.
• Stabilization expected through the year: Management expects new stores to stabilize as the financial year progresses. The 60-70 store annual pace is seen as sustainable.

Cost Structure & Margin Mechanics

• Staff costs spiked on three fronts: Annual increments took effect in April, significant minimum wage increases hit in Karnataka/Bengaluru, and Q4 FY23 had benefited from a reversal of variable pay provisions that were not payable due to below-plan performance.
• Corporate overheads driven by employee cost: The increase in corporate overheads is primarily the same wage revision and increment effect. Management hopes it will balance out as the year progresses.
• KFC brand contribution margin walk: The 130 bps YoY decline (22.4% to 21.1%) reflects the leverage effect of ADS dropping from Rs. 127,000 to Rs. 106,000 before recovering to Rs. 117,000, plus employee cost inflation and Karnataka minimum wage impact.
• Nigeria devaluation hit below the line: A more-than-60% devaluation in Nigerian official currency rates in June created an exceptional item of Rs. 47 crore from outstanding USD-denominated liabilities at the local level. Management emphasized there is no cash impact.

Demand Environment & Consumer Behavior

• Inflation drove downtrading, not demand destruction: High inflation across industries has pressured consumer sentiment for several quarters, but performance remains resilient. Consumers are downgrading within categories rather than abandoning them, which is why value layers are building transactions even as ticket sizes shrink.
• Q2 seasonality adds headwinds: Q2 is normally the seasonally lowest quarter, and an extended Sawan period this year means a portion of the non-vegetarian population turns vegetarian. Management says it is too early to quantify the impact.
• Recovery expected from Q3: With input material inflation stabilizing, KFC input prices stable, and Pizza Hut dairy costs showing early signs of easing on good monsoons, management hopes the demand environment will start to pick up from Q3 onwards.
• Consumer behavior uniform across geographies: SSSG trends and downtrading patterns are consistent across metros and non-metros. SSSG is also linked to store expansion strategy: not growing city coverage in a given quarter mechanically impacts same-store metrics.

Dawar: "Our fundamental philosophy is that we would not like to kind of reduce the headline pricing because if you look at as of now, things are only stabilizing."

Guidance & Commitments

Key Metrics