Devyani International Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Subdued quarter, macro-driven: Consumer spending pullback across FMCG/QSR, geopolitical headwinds hitting American brands, and Nigerian currency devaluation combined to pressure revenue and margins.
• Pizza Hut is the pain point: Revenue fell 2.2% YoY and brand contribution margins contracted 1.6% QoQ as lower ADS hit a brand already more sensitive to deleverage, while local competition resurged via aggregator platforms.
• Thailand acquisition closed, 2,000-store target pulled forward: The deal completed January 17, 2024, and management now expects to hit 2,000 stores by end of calendar year 2024, two years ahead of the original 2026 goal.
• Nigeria currency hit is flowing through G&A: An extra ~₹20 crore in corporate costs this quarter stems from Nigerian Naira devaluation; if the currency stabilizes at 900, no further impact is booked and costs revert to the ~₹30-35 crore run rate.
• What to watch next quarter: Whether the promised consumer sentiment recovery materializes, the pace of Pizza Hut ADS stabilization, and the initial contribution from the consolidated Thailand business.

Consumer Demand & Same-Store Sales

• Broad-based spending pullback: Subdued consumer sentiment persisted through Q3 despite it traditionally being a strong festive quarter, with visible weakness across the FMCG and mass discretionary sector extending into QSR.
• Transactions drove the SSSG decline: Management confirmed a very clear correlation between SSSG and transactions, which dipped during the quarter; average per-check (APC) trended better than transactions.
• Geopolitical drag on American brands: International geopolitical events showed a strong correlation with KFC and Pizza Hut performance, though management declined to quantify the specific impact.
• Recovery framed as temporary: Management characterized the weak consumer sentiment and depressed spending as temporary and short-lived, expressing optimism about recovery over the next few quarters, but offered no quantitative data to anchor that confidence.

Dawar: "We are confident that Pizza Hut top line and the ADS numbers will come back once the overall macro sentiment improves..."

Pizza Hut: Competition & Margin Pressure

• Local competition returning: Competition that was eliminated post-COVID is coming back, with Zomato and Swiggy extending their reach and helping fragmented local players, particularly in the non-pizza category.
• ADS deleverage hits Pizza Hut harder: Because Pizza Hut's ADS numbers are lower than KFC's, a small change in top line impacts margins much more dramatically.
• Down-trading within the portfolio: During the hyperinflationary environment, the introduction of Fun Flavor pizza saw consumers trade down within the Pizza Hut portfolio; management compensated through the premium end and by reducing the number of Fun Flavor offerings.
• Expansion tapered, not paused: Pizza Hut store openings have been tapered to 60-70 per year from the previous 100+ annually; management said there are defined targets with Yum but did not confirm or deny a minimum commitment, noting they have never defaulted in 25-26 years.
• Store closures running at 6-7%: Closures are a mix of pre-COVID and post-COVID vintage stores, with the closure target always around 6-7% of new stores opened.

Thailand Acquisition

• Deal closed, consolidation from Q4: The acquisition of Restaurants Development Co. Ltd., the KFC franchise partner in Thailand, was completed on January 17, 2024, and will be consolidated from Q4 FY24.
• 2,000-store milestone pulled forward: Management now expects to reach 2,000 stores by end of calendar year 2024, versus the original 2026 target, driven by the addition of Thailand's ~275 KFC outlets.
• Long-term doubling potential: With approximately 1,000 KFC outlets in Thailand today, management sees potential to double that count over the next 7 to 8 years based on market studies.
• Margin ambition set: Management expressed confidence that over time, Thailand brand contribution margins can reach India levels of approximately 20%.
• Self-funding and new brands: The Thailand business is expected to be self-funded for store expansion and able to repay existing debt from cash flows; management also sees potential to introduce new brands from the existing portfolio in Thailand over time.
• India strategy independent: Management explicitly stated the Thailand acquisition will not impact plans or growth aspirations for the Indian business, calling India an independent strategy, while also framing Thailand as a good hedging bet given the current environment.

Dawar: "It's not that the Thailand acquisition will impact whatever plans or the growth aspirations we have for the Indian business. So, that will continue. But at the same time, given the current environment, it's a good hedging bet as well."

Nigeria & Currency Headwinds

• Naira weakness compounded: The Nigerian Naira continued weakening after significant prior devaluation, contracting local spending power and consumption, with an all-round impact on revenue and margins.
• FOREX loss and G&A impact: Currency restatement of dollar-denominated liabilities and further weakening drove a FOREX loss; expenses are now elevated because the Nigerian currency impact is merged into overall G&A rather than reported below EBITDA.
• Corporate cost run-rate distorted: The extra ~₹20 crore in corporate costs this quarter (versus a normal run rate of ~₹30-35 crore) is due to Nigerian currency devaluation. If the currency stays at 900, no further impact will be booked and costs will revert to the original level; if it moves to 700, a benefit accrues; if to 1,000, a further hit.
• Support commitment with no timeline: Management stated it must support the Nigeria business financially given the local situation for the next couple of years until stabilization, but gave no specific timeline for when elevated corporate costs will end.
• Self-funding once stable: Once the currency situation stabilizes, Nigeria is expected to return to being self-funding, as it was in the past.

Brand-Level Performance

Store Expansion & Portfolio Strategy

• 94 net new stores in Q3: Total India store count reached 1,452 as of December 31; post-Thailand acquisition, the count rises to 1,735. Seven new cities were added during the quarter.
• Dynamic allocation in action: Management has tapered Pizza Hut expansion while increasing KFC and Costa Coffee numbers, and will continue adjusting based on the operating environment.
• FY25 rollout plan maintained: Overall target of 250 to 300 stores: 120-130 KFCs, 70-80 Pizza Huts, and 50-60 Costa Coffee outlets, with quarterly reviews to reassess.
• No new international acquisitions: Management stated it is not evaluating anything else currently; focus remains on India and on integrating and learning the Thailand business to leverage opportunities there.

Dawar: "As of now we are not evaluating anything and our focus obviously is India and the focus is to kind of understand and learn the Thailand business, integrate it with the Indian business and make sure that we are able to leverage on the opportunities which are there in Thai market."

Guidance & Commitments

Key Metrics