Devyani International Ltd Q4 FY2025 Concall Summary

Key Takeaways

• Revenue up 39%, but core KFC ADS hit a floor: Consolidated growth was acquisition-led; KFC India ADS fell to ₹94,000 from ₹105,000 on bird flu, geopolitics, and cannibalization from doubling stores while consumption slowed.
• KFC margins held at 16–17% despite worst-ever ADS of 83,000: Management says this proves the business has been resized; a return to 100,000–105,000 ADS should restore margins to ~20%.
• Sky Gate acquisition opens a third brand leg in Indian food: An 80.72% stake in the loss-making Biryani By Kilo parent was bought for ₹519 crore equity value, with up to ₹90 crore more to be infused; turnaround is targeted within one year.
• Pizza Hut is on hold pending a Yum!-led turnaround plan: 14 stores were closed in Q4; management will present an exact plan next quarter after discussions with the franchisor on innovation, value, and communication.
• What to watch next quarter: Whether KFC ADS recovers as the four bird-flu and geopolitically hit states normalize; the Pizza Hut turnaround plan; and any early signs of Sky Gate integration delivering the promised food-court synergies.

KFC India: The Core Engine Under Repair

• ADS collapse had three distinct drivers: Bird flu in Andhra Pradesh and Telangana lasted 72–75 days and shut chicken supply; geopolitical sentiment hit Kerala and West Bengal; and store count doubling to ~700 from ~300 introduced cannibalization just as broader consumption slowed.
• Recovery is already visible outside the four hit states: Karnataka, the largest state, posted stable numbers with positive same-store sales growth; Uttar Pradesh was also positive; Andhra Pradesh and Telangana are beginning to recover.
• The new normal ADS is permanently lower: Management now targets 100,000–105,000, down from the historical ~120,000, because smaller-format stores and a much larger network make the old peak structurally unreachable.
• Margin resilience was engineered in advance: Even when ADS touched 83,000, the worst ever, brand contribution margin stayed at 16–17%. Management argues this proves the cost base has been restructured and that at 100,000–105,000 ADS, margins will return to ~20%.
• Input costs are being absorbed, not passed on: Palm oil, chicken, and flour prices rose, but management will not take price increases given the consumption slowdown; it is hopeful input prices will stabilize, with oil already showing signs in the current quarter.
• Value layers will become more aggressive starting this quarter: Currently only in test mode, these typically take 1–2 years to become a sizable share of the menu mix.
• Store additions stay on course: 110–120 new KFC stores are planned this year, with no deviation from the development agreement with Yum!, which spans 5–6 years and carries no annual targets.

Manish Dawar: "Despite a decline from 127,000 to 83,000 ADS, the brand has not turned loss making. We are still delivering 16% to 17% brand contribution margin. Therefore, that kind of gives you the proof that we have already resized the business and recreated that from an overall P&L perspective."

Sky Gate Acquisition: A Bet on Indian Food Consolidation

• Deal brings three Indian brands under DIL: Biryani By Kilo, Goila Butter Chicken, and The Bhojan were acquired via an 80.72% stake in Sky Gate Hospitality at a ₹519 crore equity valuation, settled through a preferential allotment of DIL shares; closing is expected in the next few weeks.
• Up to ₹90 crore of additional capital will be infused: Management says this should suffice from an operations perspective, but long-term plans are still being drawn up and it is too early to say whether further infusions will be needed.
• The business is currently loss-making: Management hopes to turn it around within one year, citing levers in material sourcing, labor deployment, rental optimization, and support function synergies.
• Integration strategy is real-estate-led: All three brands can fit into existing food-court locations on highways, in malls, and at airports. An exercise has already begun to replace third-party brands with Sky Gate portfolio brands wherever per-square-foot efficiency is weak.
• Ownership consolidation is still incomplete: Goila Butter Chicken is not fully owned by Sky Gate, and a Mumbai franchise partner's ownership must also be consolidated; founders have signed term sheets for both.
• Management expects category consolidation: It sees the Indian food category following the same path Western brands did as the food services sector grows, with scaled players absorbing smaller ones.

Manish Dawar: "We have already started this exercise, wherever on a per square feet basis we have some inefficiency coming in, we will replace the third-party brands with our own brands, coming out of the Sky Gate portfolio."

Pizza Hut: A Franchise in Search of a Plan

• Growth has been deliberately slowed: Management cited concerns with the brand's performance and noted that most levers, including innovation, price points, and promotions, are controlled by Yum!. Discussions with the franchisor are ongoing.
• 14 stores were closed in Q4: Net additions for the full year were 63, roughly flat versus 61 in FY24.
• A turnaround plan is promised next quarter: Management says it needs to make tweaks to innovation, value offerings, and communication, and will return with an exact plan.
• No disagreement with the sister franchisee on ad spends: Management attributed differing approaches to geography and format: the sister franchisee operates larger dine-in stores while Devyani runs small delivery-focused outlets.

Manish Dawar: "We are hopeful that the brand can be turned around. We have to make few tweaks as far as innovation, value offerings, communication is concerned. We should be able to come back to you by next quarter in terms of what is our exact plan on Pizza Hut."

Margins: Input Costs and Sales Deleverage Bite

• Consolidated gross margin fell 140 bps to 68.9%: The drop was driven by cooking oil prices, coffee bean prices, and a higher deal composition in the sales mix.
• Brand contribution margin fell 130 bps to 14.2%: Sales deleverage and an amendment in GST law on rentals were the primary culprits.
• KFC brand contribution margin fell 100 bps sequentially: The entire decline was attributed to sales deleverage from the ADS drop.
• Costa Coffee gross margin fell 140 bps to 75.4%: Raw coffee bean inflation was the driver, partially balanced through pricing and promotions.
• International business margins improved: Gross margin rose 3% and brand contribution margin rose 2.3% versus FY24, primarily due to the Thailand consolidation.
• Corporate overheads reclassification distorted the optics: An apparent jump in international business overheads was caused by harmonizing the accounting treatment of management fees charged to Thailand; underlying corporate overheads were down a few bps QoQ and flat YoY.

Thailand and New Brands: The Diversification Play

• Thailand is stable and self-sufficient: Same-store sales growth and ADS have been maintained at healthy levels since the KFC store acquisition. PAT is negative due to a more aggressive depreciation policy than India, but the business is cash-flow self-sufficient at the brand contribution and EBITDA level.
• Three new international brands were signed: New York Fries (first store opened in Mumbai), Tealive, and Sanook Kitchen will expand in the current year, with Tealive stores opening in both India and Thailand this quarter.
• Thailand infrastructure will be leveraged for new brands: Management is evaluating introducing brands like Tealive into Thailand using the existing operational backbone.
• The objective is to create multiple brand legs: Management wants the business not to be dependent on one or two brands, and sees the new tie-ups plus Sky Gate as building that diversification.

Ravi Jaipuria: "While the revenues for the listed QSR industry grew at a CAGR of 29.6%, DIL achieved a significantly higher CAGR of 44.5%. The industry store count expanded at a CAGR of 22.5%. Against that, DIL recorded robust store growth of 31% CAGR."

Brand Operating Model: Independent Focus, Shared Backbone

• Each brand has a fully independent front-end: A separate CEO, marketing team, and operations team runs each brand; only support functions are shared across the portfolio as a common foundation.
• Management pushed back on the bandwidth question: When asked whether the growing portfolio was becoming too complicated, management pointed to the independent brand structure and did not directly address whether overall bandwidth is stretched.
• KFC has been reformatted for smaller stores: The business is shifting to small-format, capital-efficient stores that are scalable, part of the resizing that allows margins to hold at lower ADS.

Manish Dawar: "The way we are structured, every brand gets a completely independent focus as far as the brand team is concerned. There is a separate CEO, marketing team, and operations team for each brand. Only the support functions that works as a common foundation for the entire business are shared across brands."

Guidance & Commitments

Key Metrics