Devyani International, the largest franchisee of Yum! brands Ebitda’s Q2 revenues were broadly inline with our consensus’ estimates. PizzaHut (PH) store sales growth (SSG) was muted at 3% due to factors like aggressive additions, potential downtrading and product price hike, in our view. KFC SSG was however strong at 13%. GM declined to a multi-quarter low on key input inflation, but mgmt is seeing softening recently, and Q2 may mark the trough, in our view. Steady network expansion continues as Q2 saw ~90 store adds. Retain Buy.
Inline revenues: Q2 revenues grew 6% q-o-q and 45% y-o-y, albeit on a soft base, to `7.5 bn, inline with JEFe and consensus. Store adds drove revenue growth as the company added 293 stores last twelve months and 88 stores in Q2.
GM decline: GM declined 80-90 bps y-o-y & q-o-q to 70.2%, a multi-quarter low. The GM decline was broad-based across formats, despite price hikes LTM, as key RMs (chicken, cheese) saw significant cost inflation.
Ebitda inline: Ebitda grew 34% y-o-y and was flat q-o-q at Rs1.7bn – in line with JEFe. GM decline and higher overheads drove Ebitda margins 120/180bps lower q-o-q/y-o-y to 22.1%.
KFC: 47% y-o-y revenue growth in KFC was driven by 37% store additions and recovery in dine-in. SSG was also healthy at 13%. However, q-o-q growth was soft at 4% despite 8% store additions due to muted non-veg demand during ‘shradh’. Per-store revenues grew 7% y-o-y, but declined 3% q-o-q. However, there has been some softening in chicken, edible oil and cooking gas recently which should help.
Pizza Hut: SSG was muted at 3% – this could be due to several factors viz. (i) product price hikes impacting demand; (ii) aggressive store additions; (iii) likely downtrading to the new value range ‘Flavour Fun’ launched in Q2.
Costa: 19 store additions in Q2 on a base of 69 was a positive. Mgmt maintained the guidance of 40-50 additions for full year, but we see an upside. Revenues more than doubled y-o-y, but brand margins saw a sharp decline due to store adds.
Mgmt comments: Stayed with its guidance of 250 store adds although did not rule out an upside to guidance. Continued inflation has impacted staples & discretionary demand to some extent. Customer response has been good on Flavour Fun (PH) and Peri-peri chicken (KFC).