Devyani International Ltd Q2 FY2026 Concall Summary

Key Takeaways

• Weak demand persisted, no near-term catalyst visible: The demand environment remained weak through Q2 and into October, with management describing it as "muted." Promotions lift transactions temporarily, but demand falls back when they are withdrawn, signalling fragile underlying consumption.
• KFC same-store sales declined 4%: The reported SSSG was hit by Shraavana, Navaratri and unseasonal rains in the East, but even adjusted for those, underlying trends are "moderately negative."
• Sky Gate is the margin drag with a March 2026 breakeven promise: Full consolidation of the acquired business pushed brand contribution into double-digit losses, and management is "hopeful" of reaching breakeven by end-FY26.
• Store rollout stays on track, but Pizza Hut openings are on hold: The company remains firm on ~100-110 new KFC stores this year, while Pizza Hut net additions are muted pending negotiations with Yum.
• What to watch next quarter: Whether the December quarter's seasonally strong period can lift demand out of "muted" territory, and any concrete progress on the Sky Gate margin recovery path.

Demand Environment

• Weak consumption, value-seeking behaviour: The demand environment continues to be weak. Promotions pick up demand well, but when withdrawn, demand falls back, signifying weak consumption. Consumers are becoming very value-conscious, with lower-value items picking up fast.
• Seasonal double-whammy: Both Shraavana and Navaratri fell in the same quarter, impacting out-of-home consumption, and unseasonal rains especially in eastern India during the crucial second half of September hit sales.
• KFC SSSG deeply negative: KFC reported -4% SSSG. Adjusting for the festive and rain impact is difficult to pinpoint exactly, but excluding that period, the number is "much better" than reported, though underlying trends remain moderately negative.
• October offers no relief: Post-Dussehra, some difference was seen, but the one-word conclusion for October demand remains "muted."
• Market share unmeasurable: There is no formal mechanism covering the QSR category to measure market data, so the company will not quote market share estimates.

Dawar: "Demand environment, in our view, continues to be weak. And therefore, we've seen that whenever, let's say, we do some promotions or increase promotional intensity, it kind of picks up very well. And the moment you kind of withdraw that, it falls back, which kind of signifies that the overall consumption side continues to be weak."

KFC: Margin Pressure & Promotional Intensity

• Brand contribution margin fell to 14.1%: The decline was driven by lower gross profit margin, higher delivery and aggregator costs, and deleverage on account of lower average daily sales.
• Promotional intensity rose QoQ, not fell: Because Q2 was a seasonally low quarter with Shraavan and Navaratri falling together, the company supported the brand to maintain transactions, increasing promotional intensity sequentially.
• Gross margin improved slightly QoQ: The QoQ gross margin expansion was driven by small changes in input costs, some operational efficiency, and tweaks in consumption, not by reduced promotional intensity.
• Gross margin sustainability caveat: On a material cost and efficiency basis, gross margins are sustainable, but they can vary depending on promotional intensity and the online vs. offline channel mix.
• Value-layer innovation underway: The company is working on innovation in the value segment, including the Epic Savers campaign and the Chana Chatpata Burger at INR 69, to balance margins with transaction growth.
• H2 discounting approach: The company will try to optimize promotions going forward, balancing online vs. offline promotions to maintain dine-in contribution, but Q3 is a big quarter and December is exceptional, so the call will be taken as it shapes up.

Sky Gate & Own Brands: The Margin Dilution Story

• Sky Gate is the primary margin drag: Full consolidation of Sky Gate adversely impacted margins, with the business sitting at double-digit brand contribution losses.
• Own brands dilution traced to Sky Gate and BBK: Dilution in gross margin and brand contribution for the own brands portfolio is primarily owing to the Sky Gate portfolio, with an additional dip from Biryani By Kilo. Vaango is steady with no exceptional movement.
• Start-up costs from new franchise brands: Start-up costs related to Tealive, New York Fries and Sanook Kitchen also impacted margin to some extent.
• Indian operations gross margin declined 1.9% YoY: The decline was primarily on account of consolidation of Sky Gate and investments to support transaction growth in the online business.
• Biryani By Kilo airport tests: BBK was tested at Bombay and Pune airport locations with an optimized preparation process for faster delivery; the same process will be applied for food court locations. In regular channels, the product has not been touched.

Dawar: "We are hopeful that by end of this financial year, at a brand contribution level, Sky Gate, we will achieve the breakeven numbers. And after that, we are going to be working on improving the margins to kind of come back to our average portfolio margins, which might take a little time."

Pizza Hut: Near Breakeven & Global Overhang

• Near breakeven at brand contribution level: Pizza Hut achieved near breakeven through prudent cost control, a bright spot in a difficult quarter.
• Store openings muted: Net new units for Pizza Hut are muted as the company is in negotiations with Yum on various other things.
• Yum global rationalisation not a threat: Management stated all agreements are well protected and there is no difference that will impact the India business or any other businesses where they have Pizza Hut. They added it could be positive for the brand but it is "too early to say" as Yum has only announced their intention.

Dawar: "As far as we are concerned, all of our agreements are well protected. And in case of any such event, there's no difference that is going to impact us as far as the India business or any of the other businesses where we have Pizza Hut."

International: Thailand Profitability, Tealive Tests

• Thailand delivered strong profitability: The international business was led by Thailand, with brand contribution higher YoY, despite negative SSSG.
• Thailand market study underway: The company is doing a market study with Yum to understand the potential, given Thailand has close to 1,150 KFC stores for a small country.
• Thailand free cash flow qualified: On an operational basis, Thailand will generate free cash flow, but debt sitting in the Thailand balance sheet needs to be repaid, and Tealive expansion there will consume some cash.
• Tealive tested in both India and Thailand: Six Tealive outlets opened in India with positive initial customer feedback; three stores opened in Thailand.

Store Expansion & Capex

• KFC store target maintained: The company remains firm on opening approximately 100 to 110 new KFC outlets this year, with 30 added during Q2.
• Thailand store openings may be optimized: The company will stay with ~20-21 KFC stores this year in Thailand, but for the future will optimize these numbers due to negative SSSG.
• Overall net store additions ~100: The company is looking at adding about 100 net stores between franchise brands and owned brands, including BBK expansion into retail channels and Vaango expansion. Capex will be at best INR 50-odd crore.
• BBK expanding into food courts: Biryani By Kilo is being planned for expansion into retail food court locations to test the model and work out the long-term strategy.

Guidance & Commitments

Key Metrics