Devyani International Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Soft quarter, structural bets: KFC SSSG stayed at (-7%) as vegetarian days and geopolitical headwinds persisted, while Pizza Hut brand contribution margin fell to just 3.1%. Management used the quarter to sign three new lifestyle QSR brands on more attractive terms.
• Margin reset, not panic: KFC brand contribution margin fell more than the SSSG decline would suggest because ADS dropped to ₹96,000 (vs ₹104,000 in Q1), causing deleverage, alongside deliberate pricing experiments. Management says it will withdraw promotions if they do not drive transactions.
• New brands are the story: DIL signed exclusive master franchise agreements for tealive, New York Fries, and SANOOK KITCHEN, all in emerging categories, with lower capex, smaller formats, and royalty rates described as "far more attractive" than the existing portfolio.
• International is healing, slowly: Thailand SSSG improved in the South and Nigeria's currency depreciation moderated to 9%, helping international numbers. Management is not changing the Thailand strategy but working on margins gradually.
• What to watch next quarter: Whether KFC pricing experiments are withdrawn or expanded, any lapping of geopolitical headwinds from December, and the first operational details on the three new brands.

KFC: The Core Engine Under Pressure

• SSSG stuck at (-7%): Same decline rate as Q1, driven by vegetarian days whose geographic impact has broadened (Sawan shifting South, Ganpati Puja now affecting North) and geopolitical headwinds in certain states. Some larger markets gave better numbers while impacted states worsened.
• Transactions fell more than ticket size: Management held average per-check (APC) through upselling and cross-selling, so the SSSG decline came disproportionately from fewer transactions.
• Margin drop was sharper than the topline: Brand contribution margin fell more than expected because ADS dropped to ₹96,000 from ₹104,000 in Q1, causing operating deleverage as expense ratios rose. Delivery mix was also slightly higher, and management ran pricing promotions in certain small markets to test price sensitivity.
• Experiments are reversible: If the pricing promotions do not show a significant transaction benefit, management will withdraw them and margins will recover. The experiments could, if successful, lead to a differentiated pricing strategy for large versus small cities.
• Store opening target held: 100-110 new KFC stores in 2024, same number planned for 2025.
• Q3 outlook withheld: Management declined to give SSSG guidance for Q3, saying only "more of the same thing" when asked about early experience. An analyst noted Sapphire had indicated (-4%) to (-5%), but management would not confirm.

Dawar: "Overall if you were to look at our view from a medium-term perspective, we are absolutely bullish on the food consumption outside home. And that's how we are looking at the overall portfolio and our overall strategy."

Pizza Hut: Investment Mode, Uncertain Payoff

• Brand contribution margin at 3.1%: The thin margin reflects additional marketing investments made during the quarter. Management is monitoring results daily and weekly, and will decide whether to extend or discontinue based on outcomes.
• Store expansion under review: The 2024 target of 60-70 stores stands, but the 2025 plan is being evaluated. Management wants to meet 2024 commitments first, see how the brand shapes up over the next 1-2 quarters, and then take a final call on whether to moderate next year's additions.
• Menu innovation continues: Momo Mia pizza was brought back in a new improved version.

New Brands: The Portfolio Bet

• Three brands signed in one quarter: DIL added tealive (Malaysian tea and beverage), New York Fries (Canadian quick-service snacking), and SANOOK KITCHEN (Singapore-based Thai and Asian cuisine chain), with exclusive rights for India. All three address modern food and beverage categories and can operate in small formats.
• Terms are structurally better: Royalty rates are more attractive than the existing portfolio, and marketing and advertising spend will be controlled and spent by Devyani, with only a royalty paid to the brand owners. Management called the agreements "far more attractive" and a product of learnings from years of operating KFC and Pizza Hut.
• SANOOOK KITCHEN positioning: A smaller format than Mainland China, operating like QSR with fast serve times in a small casual dining format, at attractive pricing. It can run efficiently in food courts or as small casual dining outlets.
• Pricing strategy is "mass premium": More mass than KFC or Pizza Hut but not down to local brand pricing. Smaller format, lower capex, and differentiated categories give management confidence.
• Capex is minimal for now: The first year is an experimentation phase with very small capex. Store opening commitments in the development agreements are very low, and management expects to open "much more than committed" once the testing phase succeeds. Details on localization, menu, and store plans were withheld as "sensitive in nature."
• Rationale is category creation: Management sees these as bets on emerging categories for the future, addressing young consumption trends. The strategy is to experiment first, then scale.

Dawar: "These are much more attractive agreement terms because we had our learnings over so many years and therefore the royalty rates are more attractive in terms of marketing. We are going to be controlling and spending the marketing."

International: Gradual Repair

• Thailand improving at the margin: SSSG turned slightly better in the South of Thailand. A promotion run in Q2 did not work, and the geopolitical situation impacted the South. Management is happy with the existing team and is working on margin improvement gradually, noting it cannot be aggressive on day one in South Asian economies.
• Nigeria currency headwind easing: Naira depreciation was 9% in Q2, lower than the more volatile earlier quarters. The combination of Thailand improvement and Nigeria stabilization drove better international numbers.
• Thailand was opportunistic, not strategic: Management reiterated that the greatest opportunity remains India and the Thailand acquisition was opportunity-led. The company is "unwavering" on its India focus.

Dawar: "Thailand came as a good opportunity... It was more of an opportunity-led acquisition rather than a strategy-led acquisition. Our strategy continues to be India."

Costa Coffee & Vaango: The Smaller Engines

• Costa Coffee revenue grew 41.6% YoY: Driven by new store expansion and positive SSSG. Airport stores are doing very well, while new city stores take time to ramp up, pulling down average ADS. Captive small formats are performing extremely well.
• Vaango reached 90 stores: The brand won Food Court Restaurant of the Year at the Indian Restaurants Award 2024 and introduced a new lineup of traditional snacks including banana chips, murukku, and Madras mixture, alongside filter coffee decoction.

Consumer Environment & Costs

• Broad consumption slowdown: Management acknowledged slow consumption across FMCG and QSR. DIL addresses the top 15-16% of the population (metro, Tier I/II), with very small rural contribution. Investments have picked up in recent years, and the hope is that investment leads to consumption recovery, though job creation remains a big opportunity.
• Vegetarian day impact is about frequency, not magnitude: The ADS drop during vegetarian days is "not more than 10%," per management. The real impact comes from the number of such days, not the depth of the drop on any single day.
• Gross margin diluted by Thailand consolidation: Consolidated gross margins were lower by 1.5% versus Q2 FY24 because the Thailand business operates at a lower gross margin than the Indian KFC business.
• Geopolitical lapping uncertain: Management hopes the negative geopolitical impact begins to lap from the December quarter, but said it is difficult to predict consumer behavior. With new regimes in the US, there is hope the situation will thaw.

Guidance & Commitments

Key Metrics