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Devyani International shares double over IPO price, CLSA initiates coverage sees further upside

Devyani International, the operator of quick-service restaurants (QSR) such as KFC, Pizza, Hut, and Costa Coffee, has seen its stock price more than double from its IPO price in 5 months.

Devyani International
Devyani International is Yum! Brands’ largest franchises in India, operating 56% of all Yum Brands’ stores in India. (Image: REUTERS)

Devyani International, the operator of quick-service restaurants (QSR) such as KFC, Pizza, Hut, and Costa Coffee, has seen its stock price more than double from its IPO price in 5 months. Initiating the coverage of Devyani International, analysts at CLSA have predicted another 8% upside with a target price of Rs 207 per share. The company is Yum! Brands’ largest franchises in India, operating 56% of all Yum Brands’ stores in India and is the biggest operator of KFC and Pizza Hut stores in India. On Tuesday morning, Devyani International was up 3% at Rs 192 per share.

Strong portfolio of QSR brands

Devyani International (DIL) is seen as a multi-dimensional diversified QSR player. CLSA noted that Devyani International has three business verticals which include its core brands of KFC, Pizza Hut and Costa Coffee stores in India, international business of KFC, Pizza Hut and other brands operating in Nepal and Nigeria, and other business of own brands and other food and beverage operations. “DIL is positioned to ride the momentum provided by its core brand business with an aggressive expansion of its store network in the medium term,” said CLSA. 

After a successful IPO, DIL is now expected to expand into the underpenetrated Indian market. “India ranks 12th worldwide for KFC store count, way behind China, which has a network of more than 7,900 KFC stores. Compared with other comparable emerging market countries, India also ranks behind South Africa, Thailand, Malaysia and Indonesia,” CLSA said. DIL is expected to ramp up its store expansion in the medium term.

Unit economics improving

DIL’s shift to smaller, delivery-focused stores has resulted in a capex per-store savings of about 25% for KFC and 40% for Pizza Hut without hurting average daily sales for either brand. “Lower capex with improving store-level economics should yield quicker payback for new stores. Along with cost-saving initiatives, this has boosted profitability across formats,” said CLSA.

Valuations

CLSA has initiated the coverage of KFC with an ‘Outperform’ rating and Rs 207 target price based on 26x FY24CL EV/Ebitda. Analysts value DIL at a 10% discount to their target multiples for Jubilant despite superior earnings growth, given Jubilant’s stronger unit economics, pan India presence and superior technology capabilities. “We expect 4x Ebitda growth in FY21-24, helped by aggressive network expansion, operating leverage benefits and improving store unit economics for Pizza Hut,” the brokerage firm said. DIL is expected to generate Rs 5.8 billion of cumulative FCF between the financial years 2022-2024, this would provide the firm enough headroom to pursue inorganic growth opportunities. 

Devyani International, the operator of quick-service restaurants (QSR) such as KFC, Pizza, Hut, and Costa Coffee, has seen its stock price more than double from its IPO price in 5 months. Initiating the coverage of Devyani International, analysts at CLSA have predicted another 8% upside with a target price of Rs 207 per share. The company is Yum! Brands’ largest franchises in India, operating 56% of all Yum Brands’ stores in India and is the biggest operator of KFC and Pizza Hut stores in India. On Tuesday morning, Devyani International was up 3% at Rs 192 per share.

Strong portfolio of QSR brands

Devyani International (DIL) is seen as a multi-dimensional diversified QSR player. CLSA noted that Devyani International has three business verticals which include its core brands of KFC, Pizza Hut and Costa Coffee stores in India, international business of KFC, Pizza Hut and other brands operating in Nepal and Nigeria, and other business of own brands and other food and beverage operations. “DIL is positioned to ride the momentum provided by its core brand business with an aggressive expansion of its store network in the medium term,” said CLSA. 

After a successful IPO, DIL is now expected to expand into the underpenetrated Indian market. “India ranks 12th worldwide for KFC store count, way behind China, which has a network of more than 7,900 KFC stores. Compared with other comparable emerging market countries, India also ranks behind South Africa, Thailand, Malaysia and Indonesia,” CLSA said. DIL is expected to ramp up its store expansion in the medium term.

Unit economics improving

DIL’s shift to smaller, delivery-focused stores has resulted in a capex per-store savings of about 25% for KFC and 40% for Pizza Hut without hurting average daily sales for either brand. “Lower capex with improving store-level economics should yield quicker payback for new stores. Along with cost-saving initiatives, this has boosted profitability across formats,” said CLSA.

Valuation and target price

CLSA has initiated the coverage of KFC with an ‘Outperform’ rating and Rs 207 target price based on 26x FY24CL EV/Ebitda. Analysts value DIL at a 10% discount to their target multiples for Jubilant despite superior earnings growth, given Jubilant’s stronger unit economics, pan India presence and superior technology capabilities. “We expect 4x Ebitda growth in FY21-24, helped by aggressive network expansion, operating leverage benefits and improving store unit economics for Pizza Hut,” the brokerage firm said. DIL is expected to generate Rs 5.8 billion of cumulative FCF between the financial years 2022-2024, this would provide the firm enough headroom to pursue inorganic growth opportunities. 

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