Thank you. We will now begin the question -and-answer session. Our first question comes from the line of Vivek Maheshwari from Jefferies.

A few questions , first on KFC, Manish, this 83k ADS number looks very low. Let's say, if you go back to 2nd Quarter 2021, this is the lowest number that I have seen, at least in the last 18 quarters. What is the key reason for this number to be so low?

Vivek, we have seen primarily one or two markets where KFC got impacted, which has pushed the SSSG down and , thereby the ADS numbers. We have seen the impact of bird flu, which was in A ndhra Pradesh and Telangana this year , which lasted for about 72 to 75 days. This has primarily pushed down the table on SSSG as well as the ADS. However, now we are seeing the sales beginning to recover in Andhra Pradesh and Telangana. The other thing that we have seen is in Kerala and West Bengal, where the impact of the geopolitical situation continues. We hope that as things stabilize, we will see the SSSG coming back in Kerala and West Bengal also. As you know, these four are very important states for us , as we start to see improvement coming back in these states, things will start to improve. At the same time, Karnataka, which is the largest state for us, has seen very stable numbers. SSSG in Karnataka as a state and Bangalore as a city is positive , and the ADS momentum is maintained. Therefore, in our view, once these four states start to come back and we are already seeing positive signals. We expect improvement in both ADS and SSSG.

So, does that mean , Manish, 4th quarter marks the trough and things should sequentially get better, or you can be at this level for some time and then the improvement may still be away? The other way of putting this also is that the SSSG number of -6 is also on a base of -7 which was on a base of +2. So, it's not that the base has been very high, right? So, how do you think about the improvement? You get better from here or you stay here for some more time?

You are right , Vivek. We should see better numbers sequentially. And as we said, overall we are seeing the recovery , and that's the reason we called out these four states separately because most of the other states are performing well, for example, UP is a good state for us. There are other states also which have seen a positive SSSG.

And one last bit on this point, Manish, and again, apologies if I don't understand your business that well. But let's say if I go back to Fiscal Year 2022, Fiscal Year 2023, you were broadly ballpark 120 ,000 in terms of ADS. That number, let's say, in the last three quarters has been reasonably below Rs. 100,000. Do you think there is something which has changed in the business, or you think as and when urban consumption picks up, you can still go back to those, let's say 120 k or thereabouts kind of number, which are looking quite far, but do you think that issue will, you know, those numbers are achievable in the next few years?

Vivek, when we had an ADS of almost 125,000-127,000, there were about 300 KFC stores, which are now sitting at close to 700 stores, which is more than double. And all of this happened in the middle of the consumption slowdown. With this kind of store growth, there is some bit of cannibalization that impacts the ADS numbers. Therefore, the way we are looking at the business in terms of what used to be 120,000, the new normal should be about 100,000 -105,000. However, w e are confident that we can deliver the same margins at this new ADS . We have aligned our business accordingly, so from a profitability perspective, we should still be able to deliver the same margins.

So, what I meant , Manish, was that was a cyclical high at that point of time. I understand the stores have grown, but India as a growth market, as you know, you have been also highlighting over time. And we have seen cycles in this business particularly. My simple question is this 120,000 number is not an abnormal number. So, as, and when the cycle picks up, I am not thinking about average, but as and when cycle picks up, those are still possibilities, or you think that there was something specific we were coming out of COVID and so on and so forth. That's why that starting point was incorrect from that perspective.

We are resizing the business over a period of time , and we have also reformatted and reduced the store sizes while maintaining the payback periods. So, what used to be an ADS of 120,000-125,000 is now 100,000, 105,000. And as we said, we are confident that we can deliver the same margins at this new ADS.

Crystal clear, Manish. The second question is just a big picture or let's say, whatever your philosophical thoughts are. But as I see the kind of acquisitions that you have done, whether it's overseas or India in terms of brands, it is as an outsider, I get a feeling that the portfolio is getting a bit complicated. You have too much on your plate right now. There is KFC, which is the star, and then there are a lot of actors around it. How do you ensure that the management bandwidth stays on course and there is no accident in the journey, therefore?

Vivek, the way we are structured, every brand gets a completely independent focus as far as the brand team is concerned. There is a separate CEO , marketing team, and operations team for each brand . Only the support functions that works as a common foundation for the entire business are shared across brands. If you were to look at our newer brands like Sanook Kitchen and Tealive, we have hired a new CEO. For our Thailand business, the team that existed prior to our acquisition has continued and there has been no change in the team, and they are doing a great job. So, we are not kind of tinkering too much as far as the brand teams are concerned and that's how we are scaling up. Obviously, the newer brands need more bandwidth initially, but over a period of time, our objective is to create multiple legs for the business so that we are not just dependent on one or two brands. And if you look at our recent acquisition in terms of Biryani, that's the largest online ordered and consumed item as far as the Indian cuisine is concerned , and it is a large category. We acquired a company which is one of the market leaders in this space. And even in this acquisition, the founders and the promoters who originally founded the brand will continue to run and manage the brand. We will only look to harmonize the support functions to be able to draw synergies, but we have no intention to change the fundamental brand management from that perspective.

And just one last follow -up, if I may, Manish, on this point . You know, for longest time, Devyani had, let's say, Yum! portfolio and Costa alongside a couple of your own brands. And we have now seen a pickup in pace in terms of what you have done both outside India and in India. It just gives a feeling that, are you a bit concerned about KFC or a deceleration in the growth of that business, which is why you are actually going after quite a few opportunities? I mean, it's just the pace has surprised. So, if you can just elaborate a bit more on that part, why do so many things instead of just focusing on a couple of big things?

As far as KFC is concerned, it remains our star brand. We are as bullish on KFC as we ever were. There is no change in terms of the way we look at the brand, the way we are bullish and the way we are expanding the brand. With Pizza Hut we have slowed down a little bit and we have communicated that earlier as well . Now our focus is on creating a leg which kind of becomes another, Pizza Hut for the business. As you know, the new brands that we have signed up, they all are unique brands which are currently not so prevalent in the market . We are trying to create th ose categories and we are quite bullish on t he potential of these new brands . Take Biryani for example, it is the largest Indian food category. So , we are creating different legs for the business and at the same time we are grabbing different opportunities as and when it comes. Having said that, we are absolutely in sync and cognizant to whatever you are saying, we have to focus and pay attention to all these new brands and the existing businesses that we have. And th at is exactly what we are doing.

Got it, Manish. Thank you for your detailed response. Wishing you and your team all the very best.

The next question is from the line of Gaurav Jogani from JM Financial.

Manish, my first question is with regards to the corporate overheads and specifically the overheads in the international business. That seemed to have jumped quite high. If you can provide any details why so and how is the outcome there?

As far as international business is concerned, we have made a reclassification related to management fee charge d to Thailand. This was done to harmonize the accounting treatment between India and Thailand. Otherwise, the corporate overheads are absolutely in control and there has been no change. If at all, if you look at the current quarter, they are down by a few BPS versus those in the previous quarter. On a full-year basis it is more or less the same versus what it was last year. So, what you are seeing is only a reclassification between the corporate overheads.

Manish, if you look at the absolute terms, last quarter the corporate overheads were around Rs. 54.4 crore and this quarter it's around Rs. 59 crore. So, in bps terms also Q-o-Q and Y-o-Y both it has increased actually.

So, there is a reclassification between the brand contribution and the corporate overheads. Otherwise, if we were to negate that , it would have stayed on course. That's what we said.

And Manish, the other question is with regards to the margins again. I mean , you partly alluded that KFC margins despite a lower ADS , you might be able to do the same number that you were doing earlier. So, how should we think of the margin in the next two years given that the recovery has been gradual versus what your expectation was?

So, if you look at the current margins, we are sitting at about 16.2% . As Vivek mentioned, the worst ever ADS in the brand history is 83,000. As said earlier, once we can hit 100,000-105,000 ADS, we will be able to get back to ~20% margins. The way we have reshaped our business, we are confident that th ese numbers are doable once the top line recovers . Despite a decline from 127 ,000 to 83,000 ADS, the brand has not turned loss making. We are still delivering 16 % to 17 % brand contribution margin. Therefore, that kind of gives you the proof that we have already resized the business and recreated that from an overall P&L perspective.

The next question is from the line of Jignanshu Gor with Bernstein.

Manish, one question on Pizza Hut. So, what do we think is our plan for reviving that brand? Because I think it seems to have stabilized at these ADS levels and they are not levels at which we can generate returns for us. So, what are our plans for that? And I think there was some conversation in your sister concern’s investor call also regarding this. So, would love to hear your perspective, please.

So, Jignanshu, on Pizza Hut, as we have communicated in the past, we have slowed down the growth exactly because of the same concerns. We are in discussions with Yum! in terms of how we can turn around the brand because most of the levers in terms of innovation, price point, promotions, and so on and so forth are controlled by Yum!. So, we are currently in discussions with Yum ! in terms of how we take this brand forward. Overall, if you were to look at between us and our second franchise partner, it remains a strong brand, it's almost Rs. 1,200-1,300 crore brand and Number 2 brand in the country after the market leader. We are hopeful that the brand can be turned around. We have to make few tweaks as far as innovation, value offerings, communication is concerned. We should be able to come back to you by next quarter in terms of what is our exact plan on Pizza Hut.

And the second question was on Thailand. So, any specific details we can share about what is the shape of the business there and what is your outlook for going forward there in terms of either growth or profitability?

See, Thailand business is very stable. We have improved the margins from the time we have taken over the business. We have managed to maintain SSSGs as well as the ADS numbers at a healthy level compared to the rest of the business. So , therefore, it's going at a right clip. We are also evaluating introducing new brands in Thailand, for example, Tealive, as you know, we communicated that we have signed up this brand for India and Thailand , you will see new Tealive stores opening both in India and Thailand in the current quarter . Our idea is to leverage the existing Thailand infrastructure with the new brands from our portfolio, with the new brands that we are signing and therefore build it further from there. We are bullish on the Thailand business as well as the overall market.

A small follow-up on Thailand itself. So, are we profitable PAT level this year?

No, at PAT level we are not. However at a brand contribution and EBITDA level, we are positive. Thailand has more aggressive depreciation policy than India and we have not tried to realign that to the Indian business because of tax reasons . This is the reason the PAT is negative, otherwise on a cash basis it is self-sufficient.

It will be part of the main business and the legal entity. It will not be a new subsidiary.

The next question is from the line of Saurabh Kundan from Goldman Sachs.

Most questions were already answered . Just one that you might have already had your development agreement discussions with Yum! on an annual basis. If you could just let us know, format -wise, what would be your targets this year and a few years ahead as well?

So, Saurabh, we do not have annual development target discussions with Yum! We enter into an agreement which spans over a period of five to six years. In case of any exceptional situation, we obviously go back to Yum! and mutually align in terms of what is doable in the current circumstances. As far as KFC is concerned, there is no change. We have talked about adding about 110 to 120 stores this year and we are on course of that. There is no deviation. As far as Pizza Hut is concerned, we are having an overall discussion, in terms of how we take the brand forward, and that includes the development discussions also. We will be able to come back to you by next quarter in terms of what is our exact plan on Pizza Hut , but for KFC it stays absolutely on course.

The next question is from the line of Devanshu Bansal from Emkay Global.

Manish, there has been a gross margin decline across formats. Checking if you can segregate this into impact due to value offerings and the second that you mentioned that there is some input inflation as well. And an allied question is, are you planning to take some price increase to beat this inflation?

Sure. So, Devanshu if you look at KFC, we have seen an input price increase in palm oil, a small bit in chicken and the flour. We do not want to take a price increase given the current overall consumption slowdown so we will try and absorb to the extent we can. We are hopeful that things will improve from where we are and believe the input prices will probably come back. We can already see that, from the oil prices that are stabilizing in the current quarter, therefore it is not a big worry. As far as Pizza Hut is concerned, there is no big input price increase with stable gross margins. In case of Costa, we have seen a very strong input increase as far as the raw coffee bean pricing is concerned , we have taken and balanced it out from a pricing , as well as from a deals and promotions perspective. We are trying to introduce some value layers in our brands, we have seen that happening very strongly with the competitive brands as well. We are planning to become a little more aggressive on the value layers. And we will see that happening from the current quarter.

And these value layers, at least from an annual perspective, can have some impact on the gross margin or that is manageable?

Not so much, because as of now, it's only test mode. We will try to implement and introduce that to the market. Typically, it takes almost one or two years by the time it becomes a sizable composition of the menu mix. But again, what is important is you need to have these value layers and price offerings so that you can get the footfalls in the stores. And once the consumer comes into the store, then obviously it's not such a big issue.

Last question, sir, Biryani By Kilo, currently the brand is having some operational loss. So, what are the medium-term expectations on the scale that this can achieve and the margin improvement that can happen in this format? You mentioned some infusion of Rs. 90 crore in this brand. What is the period from which the growth can sustain with this infusion that you are making?

So, with Sky Gate portfolio there is a huge opportunity. As we took over the brands, there is opportunity in all lines , we can improve the GMs from where they are, we can improve the brand contribution and so on and so forth. On an organic basis, we will be able to turn around the brand in one year's time. At the same time, in terms of the expansion growth, there are three brands, which is Biryani By Kilo, Goila Butter Chicken and The Bhojan . These brands can easily fit into all of our Food Court locations, whether highways, malls or airports. There is a good synergy that we can drive because, as you know, even today we deal with third -party brands. We have already started th is exercise, wherever on a per square feet basis we have some inefficiency coming in, we will replace the third -party brands with our own brands , coming out of the Sky Gate portfolio. At the same time, they have a network of cloud kitchens and we are also evaluating whether in their cloud kitchen we can put some of our other brands depending on the location and size of the cloud kitchen. So, both ways the synergies can work. It can become a very strong leg in the business over a period of time. And that's the reason we are bullish on this entire portfolio , we see it as a great opportunity.

And for the period, this Rs. 90 crore infusion, is this the only infusion that we plan or this is going to be a continuous process where some money will be required to be infused in this brand for some time?

See, it is too early to comment on that because we hop e that with this, the overall brand will turn profitable one for sure. And second, we have to understand, the first two phases of brand expansion, from a store perspective it will be very efficient because we will just house the brands within our own foo d courts and airports. So therefore, it will not be a huge capex. But from an operations perspective, Rs. 90 crore should be enough. But let's see what our growth aspiration is, because we are drawing up long -term plans to be able to figure out. At the same time, please remember that as the overall portfolio exists today, we have to do a buyout of one or two subsidiaries and that is where some of the cash out of Rs. 90 crore will go away. Because Goila Butter Chicken is not fully owned by Sky Gate. So , we have to complete that ac quisition, that is part of the terms. At the same time, Mumbai franchise partner ownership has to be consolidated. So, some money will go towards consolidation of that and the founders have already signed the term sheets on that.

Understood, Manish.

The next question is from the line of Percy Panthaki with IIFL Securities.

My question is on the KFC. You earlier mentioned that you are basically making it such that at Rs.105k sort of ADS you would still make close to about 20% ROM. So, just wanted to understand apart from the store size change, what other measures are being put in place for this to happen? And for the store size change, is it just a change for the stores which are open in the last year or so, or even the older stores you are somehow resizing downwards?

Percy, we have done that analysis, to answer your last question first. Over a period of time we have opened new KFC stores, and therefore there has been some cannibalization in the existing stores. We are also planning to carve out the space for our newer brands, which are very small kiosk type of formats. These brands will be independent, but we will be able to carve out some space for them. Regarding your earlier question in terms of where these margins are going to be coming from, one is obviously the format that we discussed earlier, and the other one is in case the ADS is a little down, we would have synergies and opportunities from a labor and overheads perspective. That is what we have looked at for bringing efficiencies in the business. Also, we are negotiating some terms with the landlords, which again is a continuous process in the business , we are hopeful that we will be able to control the rentals to some extent also.

And i s there any change in terms with the brand owner in terms of ad spends, royalties, etc.?

There is no change, and it remains the same. Our commitment on royalty as well as the brand spends is on a percentage to the top line. So , there is no change on that. And we do exactly as per the agreements that we have committed to.

Got it. Just wanted to understand in terms of Sky Gate, the business has an EBITDA loss. So, do you have a plan in terms of how many more quarters it will take for it to be a EBITDA breakeven?

Percy, we will be able to turn around the business in one year's time. And therefore, we are confident that this should happen.

And just one last question. In a conference call with one of your sister franchisees, they said that there was a little bit of a sort of difference of opinion in terms of the ad spends on Pizza Hut. So, would like to know your take on that.

See, there is no difference of opinion, because we both have different geographies. We both have a focus in terms of the formats because they are operating little larger stores which are more dine-in focused, whereas our portfolio is small format which is more delivery focused. So , as such, there is no difference of opinion. All we are trying to do is basically do whatever is required locally to ensure that the business kind of gets back on track.

The next question is from the line of Sanjeev Raj from Anand Rathi Institutional Equities.

Just want to understand a little bit better on our recent entry into the Biryani business. So, we know that we are a differentiated brand in QSR through strong execution and positioning. But if you look at the Biryani business, it's highly fragmented. Around 70% to 80% of the business is unorganized players. So, it's very competitive, and it's a low entry barrier, and it's tough to scale. So, what's the thought process behind this move and how we are planning to bring differentiation in terms of value in such a competitive space? And also you mentioned that currently the business is loss making. How you are planning for a turnaround strategy here?

Biryani, as you know , is a large category and highly fragmented. However, as the food services sector continues to grow in the country and overall consumption increases, we’ve seen significant consolidation in Western brands , and we expect the same to happen in the Indian food category as well . So, the brand is very well positioned, it's a premium brand with a very strong repeat rate from the consumer's point of view. And the consumers indeed love this brand.

So, if you look at the QSR space, it's been changing from state-to-state or region-to- region. If you look at e very 200 kilometers, the taste seems to change, right? So in that regard, how are we developing the taste and planning to manage the overall strategy?

If you look at the Biryani market overall, the largest category is Hyderabadi Biryani followed by Lucknow Biryani and then Calcutta Biryani. So, if you were to look at between these three, that will be almost like 60 % to 70% of the market. From that point of view, it varies from state to state, but it is not as fragmented as we used to think in the past. And we have gone into the details of how much is what category and which state and so on and so forth. And that is how we took a call. Coming to your question in terms of the turnaround, as we said earlier, we have the opportunity on material sourcing. There is a good opportunity there in terms of the way we buy , and obviously we will start to buy and source for Biryani By Kilo as well. There is a sourcing opportunity, there is an opportunity on the labor, the way the labor gets deployed, there is an opportunity on the rentals because currently the space or the premises that they operate from has potential available. We can house some of our brands there or we can actually cut the space wherever it is not required. There could be a lot of synergies which will be coming in because of Sky Gate becoming part of a bigger portfolio, including all the support functions and so on and so forth. That is how our plan is to turn around the business.

Second question is that, are we trying to position ourselves as a full-range QSR player with a wide variety of food offerings? Because we are already present in star categories such as KFC with chicken & burgers, Pizza Hut with pizza, Costa Coffee with coffee, Vaango with south Indian veg meals and now biryani. Is that the idea is to build a broader portfolio to serve different customer preference?

We already are present in all the categories . As you know, in the Indian market , QSR, big categories are basically chicken, pizza, burgers, coffee and we are present in all of these categories. We have now got into the Indian category, which we were missing earlier apart from Vaango, because that was only focused on South Indian. And at the same time, we have taken some new brands, which are typically indulgent brands on the go , rather than a planned occasion, it's more , whatever, temptation buying or temptation consumption . We are trying to position ourselves to cover various spaces available, not only from a brand perspective, but also from a channel perspective. And that's the reason we talked about our Food Court strategy in the past and all this portfolio will help us with our Food Court strategy as well.

So, finally, on K FC, we have reported almost 6.57 %, roughly negative 7% SSSG. And last two years, we have been reached the bottom. So, can we say this is the bottom? And you have mentioned that two markets have been affected by birds flu. Apart from this, this negative SSSG is coming largely from Tier 1 or Tier 2 city?

Yes, it's largely coming from the markets as we said. One is A ndhra Pradesh, Telangana, Kerala, and West Bengal. And the rest of the markets have already turned round. We are absolutely hopeful that these four markets will also turn round in the next few months.

Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Thank you very much. We hope we have been able to answer all your questions satisfactorily. Should you need any further clarifications or would like to know more about the Company, please feel free to contact our Investor Relations team. Thank you once again for your interest and support and for taking the time out to join us on this call. Thank you very much once again.

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