Devyani International Ltd Q1 FY2025 Concall Summary

Key Takeaways

• Demand remains stuck, not falling: Consumer sentiment stayed in line with the last 5–6 quarters of QSR-industry weakness, with no sequential change in behavior. Management is betting the festive season breaks the pattern, but it offered no data points to support that call.
• Pizza Hut is in active turnaround: The brand has been declining for 12–18 months, so management is deliberately spending on marketing and product innovation (Melts, Thin N Crispy) to rebuild it. That investment is holding down store-level margins despite a ₹4,000 ADS jump.
• KFC is protecting margin without SSSG: KFC India held brand contribution margin flat and even improved it 50 bps QoQ while same-store sales stayed negative, by optimizing promotions, marketing spend and value-layer offerings. Management says margins will improve ahead of any ADS/SSSG recovery.
• Thailand adds scale, not margin yet: The recent KFC Thailand acquisition is performing well and contributed a full quarter of revenue, but its gross margins are structurally lower than India’s because the brand is positioned as mass-premium. Gradual margin improvement is promised, not timed.
• What to watch next quarter: Whether the festive season actually delivers the industry rebound management is hoping for, whether Pizza Hut’s SSSG trend stays positive, and whether Costa Coffee’s SSSG recovers from the moderation caused by aggressive store expansion and a one-off food-supply disruption.

Demand & Consumer Environment

• No green shoots yet: Consumer sentiment in Q1 FY25 remained in line with the challenging trends the QSR industry has faced for 5–6 quarters, driven by macro and microeconomic headwinds. April, May and June showed no sequential change in behavior, with summer holidays and sporting events providing only a temporary pickup.
• Geopolitical drag persists: International conflicts and global boycotts continue to affect operations in certain geographies, with a similar impact visible in both Thailand and India.
• The festive-season bet: Management’s optimism about a rebound rests entirely on the historical pattern that festival seasons perk up consumer sentiment, not on any leading indicators or data points it could share. When pressed, it declined to make a forward-looking statement.

Dawar: "We have seen in the past that in any market, it is the festival season which kind of perks up the store and the overall consumer sentiment. This is the reason we are basing our view that this festival season we could see it, because we have been in this scenario for the last 5 to 6 quarters now. We hope that festival season could probably be a turned down situation for the industry."

Brand-Level Performance

KFC India

• Margin resilience without SSSG: KFC India delivered a 50 bps improvement in brand contribution margin and 12.3% QoQ revenue growth despite negative same-store sales, by optimizing marketing spends, promotions and value-layer menu offerings. ADS improved to ₹104,000 from ₹93,000.
• Off-premise stable in mix: Off-premise consumption held at 40%–41% of sales over the last 3–4 quarters; the revenue improvement came entirely from higher ADS, not a channel shift.
• Store expansion on track: 21 new KFC stores added in India during the quarter, with a full-year target of 100+ stores.

Dawar: "So, there are multiple equations at play, which is what we need to balance, and that's how we make sure that even though the SSSG is negative, we are able to deliver the margin. And once we see the ADS and the SSSG coming back, the margins will improve ahead of that."

Pizza Hut India

• Brand in deliberate rebuild: Management took a conscious call to increase marketing spend and product innovation after 12–18 months of continuous decline. New launches included Melts and Thin N Crispy, supported by a digital and TV campaign.
• Margin sacrificed for recovery: Despite ADS improving from ₹32,000 to ₹36,000 sequentially, store-level EBITDA margin did not improve because the incremental gross profit was reinvested in marketing. Brand contribution margin grew only 60 bps QoQ.
• Recovery path defined: Management believes that at ADS levels of ₹40,000–42,000, Pizza Hut can easily reach double-digit EBITDA margins. The heightened marketing spend is not a permanent requirement; margins should return once the brand stabilizes.
• Store openings slowed: Only 3 new Pizza Hut stores were added in India; management is approaching expansion cautiously, prioritizing brand recovery over unit growth.

Dawar: "Pizza is the largest QSR category, there is no reason why we should not play a Pizza Hut brand, or we should not be present in the Pizza category. Pizza Hut is a national number two brand and has a very high consumer recall and confidence. Therefore, it is important that we should bring back the brand."

Costa Coffee

• SSSG moderated sharply: Same-store sales growth dropped from high single-digits in prior quarters, due to aggressive store expansion and a one-off disruption in food supplies. Revenue was flat sequentially and brand contribution fell 2.9% on ADS deleverage.
• Expansion continues at pace: 13 new Costa Coffee stores were added in the quarter, with a full-year target of 50–60 stores, a more moderate pace than KFC or Pizza Hut.

International Operations

• Thailand fully consolidated: Q1 FY25 included a full quarter of KFC Thailand revenue following the acquisition. The business is performing well with a stable team and positive SSSG even after including southern stores affected by geopolitical tensions.
• Structural margin gap: Thailand KFC gross margins are lower than India’s because the brand is positioned as mass-premium, addressing a larger consumer space with higher transaction volumes. Management expects to capitalize on margin improvement opportunities gradually over time.
• Nigeria currency drag continues: The Nigerian Naira depreciated ~10% versus the USD this quarter, down from ~32% last quarter. Continuous depreciation generates losses; if the currency improves, losses stop. Management declined to disclose the specific Naira/USD threshold at which further losses would be triggered.
• International ADS improved across the board: ADS improved across all international operations (Nepal, Nigeria, Thailand), supported by cost-saving measures and better leverage from higher ADS, with no one-off benefits from Thailand.

Margins & Costs

• Gross margin flat: Consolidated gross margins held at 69.2%, with Thailand KFC operating at a structurally lower gross margin than India KFC.
• Brand contribution improved: All-round improvement in brand contribution came from better cost leverage across all operations, improved ADS, and a relatively better currency situation in Nigeria. This flowed fully through to operating EBITDA margins.
• India margin divergence explained: India pre-IndAS margins declined 70 bps (12.6% to 11.9%) while post-IndAS margins rose from 20% to 20.5%. The divergence was caused by lower store openings in the quarter, which affected IndAS lease accounting.
• Overhead costs held stable: Overhead costs remained flat sequentially despite annual increments and variable pay being paid on time, due to cost-saving measures initiated by management.
• Pizza Hut marketing spend is temporary: Management characterized the elevated marketing investment as a brand-stabilization measure, not a permanent cost increase. Once the brand is re-established, marketing costs will taper and margins will recover.

Store Expansion & New Initiatives

• 2,000-store milestone in sight: Total store count reached 1,836 as of June 30, 2024, and management confirmed it is on track to hit 2,000 stores within the current fiscal year.
• PVR food court JV incorporated: The joint venture with PVR has been incorporated, with the first food courts expected to open in Q4 of the current calendar year (October–December). Management wants to experiment and assess progress before committing to a big-bang expansion.
• R.K. Associates JV stalled: No stores have been opened under the Railways-station JV due to complications with the bidding process. Some stores opened in those locations are in Devyani International’s standalone financials; JV numbers will appear once basic issues are resolved.
• International store count: 10 new international stores were added, bringing the total to 363.

Guidance & Commitments

Key Metrics