Devyani International Ltd Q1 FY2026 Concall Summary

Key Takeaways

• KFC SSSG decline stemmed: After 8–9 quarters of negative SSSG, KFC reached virtually flat at -0.7%, driven by online momentum.
• Margin compression from structural costs: EBITDA margin dipped to 15.1% as higher aggregator/delivery costs and a GST rule change on rent hit the P&L, with mitigation only partially offsetting.
• Pizza Hut rationalization underway: The brand is slowing organic store openings and closing non-performing locations; SSSG remains negative at -4.2% and brand contribution is slightly negative.
• Sky Gate acquisition is a 12-month turnaround bet: The newly consolidated Biryani by Kilo portfolio is loss-making, contributing a ₹1.2 crore negative brand contribution in just 20 days; management targets positive brand EBITDA within a year.
• What to watch next quarter: Whether gross margins begin improving as promotional testing yields learnings, the pace of Pizza Hut footprint rationalization, and any sign that dine-in traffic responds to value offers.

KFC: Stabilizing the Core

• SSSG trajectory: Negative SSSG persisted for 8–9 quarters but was virtually contained this quarter at negative 0.7%, attributed to online strategies.
• Online vs. dine-in split: Online sales (Zomato and Swiggy) delivered positive SSSG, while dine-in sales declined 14% YoY in rupee crore terms despite store additions. On a per-store basis, the decline was likely in the high teens.
• Value offer test: The 'Epic Savers' 9 pieces for ₹299 combo, launched mid-quarter and available only for dine-in, exceeded its menu mix target. However, online offers proved more compelling, so online momentum remained much stronger than offline.
• Format adaptation: KFC store format has been reduced from 3,000 square feet to approximately 1,400 square feet to align with delivery trends and lower dine-in traffic.
• ADS target: Management's normalized KFC target is approximately ₹100,000 of ADS on a consistent full-year basis; once achieved, rationalization of promotional spends will begin.
• Store opening pace: On track to open approximately 100–110 net new KFC stores in the current financial year.

Dawar: "I agree that KFC has seen negative SSSG for a few quarters. In fact, to be precise, almost 8 to 9 quarters. Despite that, we have managed to stem the de-growth in KFC SSSG and we are virtually flat this time."

Structural Cost Pressures

• Aggregator and delivery costs: High salience of off-premise sales across KFC and Pizza Hut led to higher aggregator and delivery expenses. These costs have increased structurally and the impact will continue for the year.
• GST on rentals: A GST ruling change last October removed the exemption for rentals below a threshold, moving to a reverse charge mechanism. Corporates now pay GST on 100% of rents, and since QSR GST is not allowed to be set off, this hits the bottom line directly.
• Mitigation insufficient: Tight control on utility costs and other operational expenses could not fully offset the delivery and rental cost increases.
• India gross margin decline: Down 2.3% YoY primarily due to investments to support transaction growth, with a small impact from raw material price increases in cheese, flour, and edible oil.
• KFC brand contribution: Margin at 15.5%, pressured by lower gross profit margin, higher delivery/aggregator costs, and deleverage on lower ADS.

Pizza Hut: Rationalization Mode

• Footprint reset: Continued rationalizing the store footprint with closures of non-performing stores; planning to slow down organic expansion of Pizza Hut store openings in the current financial year.
• SSSG and ADS: SSSG at negative 4.2%; ADS recovered slightly sequentially to ₹33,000.
• Brand contribution: Slightly negative, with gross margin lower due to inflation in flour and edible oil prices and investments to support the brand.
• Format shift: Pizza Hut has moved from a dine-in-first brand to a delivery-focused format.
• Product innovation: Launched the 'Juicylicious' range with three unique flavors of marinated toppings and Indian sauces, with good response and adoption. Piloted 'Unlimited Pizza Fridays' at select stores, where participating stores showed healthy growth in transactions and ADS.

Sky Gate & Own Brands: The Turnaround Bet

• Acquisition closed: Transaction consummated June 10; results consolidated from June 11, giving 20 days of impact in the consolidated numbers. Stake subsequently increased to 86.13%.
• Immediate drag: The Biryani by Kilo portfolio contributed a negative brand contribution of ₹1.2 crore in its first 20 days of consolidation. Excluding this, own brands numbers were virtually flat.
• Own brands margin: Brand contribution margin declined to 6.7% owing to consolidation and dilution from the Sky Gate portfolio of brands.
• Turnaround timeline: Management's first priority is to turn around the Biryani by Kilo brand, targeting positive brand contribution and brand EBITDA within the next 12 months. Only after that will ramp-up begin in own channels and elsewhere.
• Early experiments: Testing new formats and distribution channels including airports and food courts; working on recipe optimization to reduce kitchen preparation time.
• Delivery-heavy model: Over 90% of Sky Gate's business is delivery, whether from dine-in stores or cloud stores.
• Disclosure limitation: Management declined to quantify the Sky Gate margin drag on a continuous basis going forward, citing complexity given the multiple brands within the own brands segment.

Dawar: "As you all know, it's a loss-making portfolio at present. So, our first priority is to turn around the brand. We are hoping that in the next 12 months we will have a positive brand contribution and brand EBITDA."

Promotional Strategy & Margin Recovery Path

• Testing phase: Multiple online campaigns were run across both KFC and Pizza Hut to test consumer reaction. The current promotional model will continue for another 1–2 months to gather learnings, after which optimization will begin.
• Gross margin recovery: Management expects gross margin to start improving within the next quarter (Q3), flowing into brand contribution margin, as promotional testing yields insights and fine-tuning takes hold.
• Dine-in vs. online cannibalization: Management is working on a differentiated strategy for online and dine-in to minimize cannibalization. More dine-in-focused promotions and value offers are being planned.
• Promotional detail withheld: Management declined to share specifics on which promotional initiatives are proving effective and which will be scaled back.

Dawar: "The value always works for the Indian consumer, right. That's normal, you pick up any category, any industry, you give value to the consumer, there will be queues."

Sector View & Consumer Outlook

• QSR sector conviction: Management believes there is nothing wrong with the QSR sector and sees it as one of the highest-opportunity industries. Densification over the last 4–5 years by listed players has come at the cost of SSSG, but management views densification as necessary for industry growth and expects SSSGs to return once consumption picks up.
• Consumer bottoming thesis: Management believes the consumer slowdown phenomenon is probably bottoming out. If consumption strengthens, it could come back even more strongly, potentially leading to good times.
• Delivery strategy in development: Management is internally strategizing on how to capture the delivery market quickly and may report back in the next few quarters on how they are better catering to current consumer preferences.
• Positive SSSG expectation: With a slightly reduced pace of store addition, driven by limited Pizza Hut organic expansion, management is hopeful of seeing positive SSSGs over the next few quarters.

Dawar: "If the consumption is strong, it comes back even more strongly. And given this phenomenon also probably is bottoming out, it could be some good times."

International & New Brands

• International business: Brand contribution improved to 16.7% margins, supported by better gross margin performance in the Thailand business. Revenue grew 11.2% YoY.
• New brand launches: Three new international brands (New York Fries, Tealive, Sanook Kitchen) to be launched in the next quarter. The maiden New York Fries store opened at Mumbai International Airport.
• Scaling approach: New brands will start with a couple of stores to test consumer response before scaling; no specific timeline for meaningful contribution to the portfolio.
• Franchised brands: Stable quarter, though results include start-up costs associated with new brands.

Guidance & Commitments

Key Metrics