KFC operator sails through Q1 but investors should bake in a slow recovery

The quick service restaurant operator’s consolidated revenue increased by as much as 44% year-on-year to ₹1,222 crore in the June quarter (Q1FY25). However, this robust growth was mainly due to the consolidation of the Thailand business. The acquisition, completed in January, added 283 Thailand KFC stores to Devyani’s portfolio back then.

Amid dull demand, the company’s India revenue increased at a much slower rate of 6% to ₹840 crore in Q1FY25. KFC India’s revenue grew 7.4%, while Pizza Hut’s fell 1%. Comparable sales performance was subdued, with same-store sales of KFC and Pizza Hut in India falling yet again, by 7% and 8.6%, respectively. This was a tad better than in Q4FY24, when KFC’s and Pizza Hut’s same-store sales were down 7.1% and 14%. The sequential improvement could be attributed to seasonality, marketing initiatives and new launches.

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Motilal Oswal Financial Services said about the Q1 performance, “Growth metrics saw sustained weakness; a similar trend was witnessed across its QSR peers." Overall, Devyani’s Q1 gross margin was flat sequentially at 69.2% and 160 basis points lower year-on-year, bogged down by the Thailand business consolidation. KFC in Thailand has a lower gross margin than in India, management said in the earnings call.

Cautious on Pizza Hut expansion

The company will be slightly cautious about increasing the number of Pizza Hut outlets until metrics improve. Devyani opened three new Pizza Hut outlets in Q1, after adding two in Q4FY24. In total, it added 54 net new stores in Q1FY25, including 10 overseas.

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The total store count was 1,836 at the end of June, and 1,738 of these were its core brands – KFC, Pizza Hut and Costa Coffee. The company will need a run rate of about 55 new stores in each of the next three quarters to meet its target of 2,000 stores in FY25. Management is optimistic that the industry will rebound during the upcoming festive season.

Devyani’s shares are up 14.5% in the past six months, although they are still down 10% so far in 2024. “While the worst is behind, the pace of the recovery is critical for stock performance," said analysts at Jefferies India. “We cut FY25-27 India Ebitda to factor in a slower recovery, which is largely offset by an increase in international on account of strong Thailand margins," they added.

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