Devyani International Limited analyst Q&A

Thank you sir. We will now begin the Q&A session. First question is from the line of Aditya Soman from CLSA.

So, 2 questions from me. Firstly, on KFC, we have seen sort of flattish like-for-like growth on a base that was already quite negative. So from here on, to see an improvement in trajectory at KFC, what in your view are sort of the 2 or 3 key things that need to happen to start seeing a meaningful improvement? And within this sort of flattish SSSG, is there any meaningful trend difference that we saw maybe in the first half of the quarter versus the second half or in the more recent period in July? And my second question is on these new brands that we are adding, whether it's Biryani by Kilo or New York Fries. Over what period does the management intend to make these significant from an overall company perspective?

Thanks, Aditya. Let me first talk about KFC SSSG. I agree that KFC has seen negative SSSG for a few quarters. In fact, to be precise , almost 8 to 9 quarters. Despite that, we have managed to stem the de -growth in KFC SSSG and we are virtually flat this time. This quarter there was a seasonal shift. Given that impact, we would have been probably virt ually flat or a small positive on KFC SSSG. Having said that, we have seen good growth momentum in the online category because we took initiatives specifically on online channels. And therefore, the SSSG on online, which is Zomato and Swiggy is positive. We are trying to address the dine -in piece, which we are hoping that we will be able to do that over the next 1 or 2 quarters. And therefore, with that, you will see the numbers kind of improving , because what we saw on online from a SSSG perspective is very heartening. Coming to the new brands, Biryani by Kilo or New York Fries, etc. Right now, as far as the new brands that we have signed up, we want to test those brands, see how the consumer responds and then scale them up. We have opened the first New York Fries store at Mumbai Airport. We will be shortly opening some of the Tealive stores and maybe Sanook Kitchen as well. We will start with a couple of stores to see how the consumer responds. So, therefore, these will take some time to scale up and become an overall meaningful contributor within the DIL portfolio. As far as Sky Gate portfolio is concerned, which is Biry ani by Kilo and Goila Butter Chicken, it's almost about 105 stores. So, the objective there is to first set the model right. As you all know, it's a loss-making portfolio at present. So, our first priority is to turn around the brand. We are hoping that in the next 12 months we will have a positive brand contribution and brand EBITDA. And post that, we will start to ramp up the brand in our own channels and elsewhere. Simultaneously, we ha ve also started experimenting the new formats and the new distribution channels for Biryani by Kilo, i.e. at the airports and food courts, again, to test how the consumer response is from a dine -in perspective. We are also starting to work on some bit of r ecipe optimization from the kitchen preparation time and so on and so forth. So, there's lot of groundwork which has already started to happen , along with the turnaround priority. And once this is all achieved, that is where we will talk about a significan t ramp-up in the new portfolio. Hope that answers your questions.

Yes. Thanks so much, Manish. Very clear. Maybe just on Biryani by Kilo, just as a follow-up, the current model is largely delivery-only, is it?

See, they do have some dine -in stores, but even from those dine -in stores, predominantly it's delivery. So, if I were to look at the overall portfolio, 90% plus is delivery, whether you talk about the dine-in stores or the cloud stores.

Next question is from the line of Gaurav Jogani from JM Financial.

Sir, my first question is with regards to the gross margin impact that we are seeing because of the promotional spends. How long do you expect these to sustain? And additionally, given that they will also help to drive the transaction growth, so at an EBITDA level, when do you expect this to start contributing positively?

So, Gaurav, we ran multiple campaigns online to see how the consumer is reacting, I mean, online, one is able to kind of measure such things much more closely and much faster compared to the offline channel. And that's the reason you see a significant impact in the gross margin as well as the brand contribution. Having done that for a couple of months, our plan is to continue with the same model for another 1 or 2 months, get our learnings , and then start to optimize in terms of what is working, what is not working. And therefore, within the next quarter, basically Q3, we will start to see the gross margin improving as well as the same flowing into the brand contribution margin. Right now, we are in the process of testing multiple things and then the objective is to basically fine-tune after that.

Sure, Manish. And I am assuming that this will be across both the brands, KFC and Pizza Hut?

The nature and the extent, and therefore, the impact is different. But as an initiative, it is for both brands.

Sure. And Manish, the next question is with regards to this drag from the Sky Gate Hospitality brands on the own brands portfolio. If you can quantify how much of that has contributed negatively towards the margins in this quarter for the own brands?

Maybe I can quantify it on a one -time basis, but we will not be able to do it on a continuous basis, because we are going to be presenting the divisional results as own brands. Otherwise, given the multiple brands we have, it will become very, very complicated for everyone. So, the negative brand contribution for the first 20 days that we have consolidated is about INR 1.2 crore from the portfolio. Therefore, if you were to look at the own brands portfolio, excluding the Biryani by Kilo portfolio, then the numbers are virtually flat.

Okay. And Manish, sir, last question is with regards to the impact that you called out from the GST bit of the rental , and some impact of that increase in the aggregator expenses. If you can elaborate that a bit?

If you remember, last year, October, there was this GST ruling change, whe reby earlier, for example, there was this whole exemption, which was available for rentals lower than a threshold level, which government kind of brought in as a reverse charge mechanism. And therefore, as far as the corporates are concerned, they are supposed to pay GST on 100% of the rents, wherein earlier, given the lower income levels of the landlords, you would save some bit of GST. So, that impact has carried out. So, since in QSR, as you know, the GST is not allowed to be set off. Therefore, in our case, it kind of hits the bottom line. So, that's the impact that I talked about.

Okay. And you said something about the aggregator bit as well, the aggregator cost also increasing?

If you see in the current quarter, KFC online sales are higher than earlier quarters. And with online sales becoming higher, because we have these multiple initiative on the online channel, obviously, your aggregator cost also goes up because the aggregator proportion is going up in the overall sales.

Next question is from the line of Sujit Jain from Bajaj Allianz Life Insurance.

This is to Mr. Jaipuria, and these are not quarter-related questions. A few points. Our categories are urban-centric, so that brings cyclicity. When urban is in a slowdown, we also slowdown. We don't have an answer to the entire industry except Jubilant to 20-minute delivery, which has worked for them. For us to even think about something like that, maybe we need to get our store economics right before we start thinking of adding an additional expenditure line. The third thing is that if I look at 9 to 10 quarters, the SSSG has been negative to flat, whereas the like -to-like for someone like Jubilant has been positive. So, there is at least one player that has done better in the industry. And the 4th thing is some of the categories that you have entered, there's a regional variation such as in biryani. And for example, when I tasted at Vaango, because of the batter that will change locally from place to place, there's a limited standardization you can do. So, how do you address that?

Okay. Let me address a few questions, Sujit for you, and then Mr. Jaipuria would also come in. So, you talked about Biryani in terms of the regional piece. You are right, there are multiple types of biryanis available in the country. If I remember my number right, there are almost 300 types of biryanis which are available. But if you were to sub -segment the entire market , and you were to analyze in terms of what works in the overall category, Hyderabadi birya ni is the biggest piece, followed by Lucknowi biryani and then Kolkata biryani. Therefore, if you were to look at almost 70% of the market , these would be top 4 to 5 types. Now if you look at the BBK portfolio, we have Hyderabadi, Lucknowi and Kolkata, which is already present, and that is working well for us. Hyderabadi biryani works on a PAN India basis. Lucknowi biryani works virtually on an all India basis. Kolkata biryani is predominantly in the East. So, they have already fine-tuned the portfolio on the basis of these 3 biryanis. Maybe, if we need to add 1 or 2 more, we can do that. But otherwise, we are largely covering what is important from an overall market perspective. Coming to your point on the bran ds being urban -centric, if you look at the overall QSR market, Jubilant is there in 400-plus cities. We are also in about 280-290 cities. If you look at the penetration of the food aggregators, they are currently in more than 800 cities. So, therefore, we are straddling much beyond what are historically understood as urban centers. The growth opportunity lies in the Tier-2 segment , because the awareness and the aspiration is there; but the income levels need to go up further. We have started to have a presence beyond the urban cent ers. That's how we managed to cover almost about close to 280 to 290 cities. Again, it is not just about opening a store, you need to have the portfolio, you need to have the right product mix, right price points, what works in a s maller town from a promotion point of view, etc. So, all of that also need to be worked out. We have already optimized a few things and we are working on the rest. So, therefore, we are geared up beyond the urban India. Obviously, we are far far away from rural as of now. But let's say, urban itself is still a very very big opportunity. Your another question was about delivery. Am I right?

Yes, the 20-minute delivery.

Yes. So, we have experimented, as I said, on the delivery platform, and that's given us good results from a SSSG perspective, both for KFC and Pizza Hut. But obviously, you are right that Jubilant is doing a far better job versus what we are doing, because their model fits very well with the overall deliver y portfolio, because it's a delivery - first brand. And we have kind of over a period of time, moved from a dine -in-centric brand to a delivery brand. We are also moving in that direction. We are internally strategizing in terms of how do we kind of capture that market quickly and maybe we will be able to come back to you in the next few quarters on how we are able to better cater to the current consumer preferences. At the same time, on the dine -in basis, we have to work on our menu options and what we offer to the consumers on a unique basis versus what is there in delivery. So, that is again something that we are already working on.

Sure. And how to improve the store economics so that you can accommodate more branding expenditure and including more expenditure on this delivery initiatives?

See, we need to continue to optimize the formats for the dine-in channel. And as you know, over the las t few years, we have reduced the store format sizes. So, KFC format used to be 3,000 square feet. We are down to about 1,400 to kind of catch up with the delivery trends and the lower dine-in. Similarly, for Pizza Hut also, we have moved away from a dine -in-first brand to a delivery focused format. And this needs to be continuously optimized. At the same time, we also need to be cognizant of the fact that there is a category of consumers who prefer a good dine -in experience, so which kind of have started to work on a very segmented basis. So, therefore, more than the format optimization, we also need to combine formats along with the channels that will give us good results and that also is a plan that we are c urrently working on.

Just wanted to hear Mr. Jaipuria, how he wants to take this company at the pole position.

I think it's better that Manish answers this since he is on the ground level with this , and that's why I have kept quiet.

Next question is from the line of Niharika Karnani from CapGrow Capital.

Couple of questions. First question is more towards the QSR sector. So, do you think QSR sector has kind of bottomed out? Or is it also facing thr eats from the likes of, say, cloud kitchen or consumers ordering more from the likes of Swiggy, Zomato? Is this more of a structural change? Or is it related to QSR slowdown? And second is, when do we see SSSG getting ramped up? Like is it a matter of a couple of more quarters? Or will the turnaround take some more time?

Hi, Niharika. See, to your first question in terms of what is happening with the QSR sector and where is it headed , i n our view, there is nothing wrong with the QSR sector. We believe that this is one of the highest opportunity industries. Now when you talk about, let's say, just the listed QSR space, obviously, it is different. When talking about QSR as an industry, it will include aggregators, local competition, that all the new players who are coming in , etc. There are also multiple start-ups which have experimented with traditional foods that they have tried to convert into QSR format. Coming to the listed players, we have expanded very, very aggressively over the last 4 to 5 years. If you look at, let's say, Devyani numbers, what they were around the time we listed to where we are now, we are multi -fold in terms of the top line. Similarly, the competition has also grown. Now that densification has come at the cost of SSSG. But if the overall industry has to grow, we have to make sure that we are densified . Take U.S. as a market. In the U.S., QSR industry is bigger than the FMCG industry , because of the food habits, because of the multiple choices available, because of the densification and so on and so forth. So, therefore, in our view, there's a significant opportunity in the QSR space. The densification is required. Once consumption sta rts to pick up, we will see the SSSGs also coming back. It is impacted by how aggressively we open and add new stores. And I have said in my comments that you will see a very limited Pizza Hut organic expansion. And therefore, we are hopeful that with slightly reduced pace of store addition , we should see positive SSSGs. On KFC, if you look at the current quarter’s performance, virtually we have contained the decline, which was there for the last many quarters , because we have played out some online strateg ies. So, therefore, we are working on these things and you will start to see positive SSSGs over the next few quarters.

Okay. Got it. Just one follow-up here. So, what are your views on cloud kitchen? Will it be a threat? Or is it just complementary to listed players?

See, it is complementary because today, if you look at the consumer convenience, they prefer to consume food at home, given urbanization, traffic jams, etc. We have to ensure that we become a very meaningful player as far as the cloud kitchen or, let's say, online food strategy is concerned , because it's important that we are able to satisfy the consumer demand. And as Sujit mentioned, for example, Domino's has kind of worked very beautifully on thi s whole 20-minutes delivery time and they are seeing good results. We are also working on a similar strategy , because if 50% of the orders are getting delivered at home, then obviously, you need to make sure that you have a proper location strategy, you have to have a cloud strategy so that you are able to serve the consumer demand through the aggregators. So, all of those pieces are work-in-progress and we are already working on those.

Next question is from the line of Jignanshu Gor from Bernstein.

Manish, just one question. I think a lot of it has been discussed already. On KFC and Pizza Hut, I hear the argument and the logic behind the marketing investments or the promotional investments to bring transaction growth. So, 2 parts to this question. (a) For the current quarter in the Y-o-Y or sequential improvement in SSSG that we have seen, would you be able to share what kind of transaction growth have you seen in both these brands? (b) Do you have a particular ADS number in mind at which you will sort of start to taper these specific investments in growing transactions, if at all?

Okay. So, obviously, we don't disclose the transaction numbers, but we have seen almost 10% plus improvement on the transactions overall with the initiative that we have taken. If you look at only the online strategy, which is where this whole initiative was focused on, we have seen much higher transaction growth. So, therefore, this was one, as I said, to test. Second is to kind of spur consumer momentum a little bit. And within this, now we will select in terms of what to do and how aggressively to do that. On the ADS side, our normalized KFC target is about INR 100,000 of ADS on a consistent basis for the full year. And that is what we want to kind of aim at on an immediate basis. And once that is there, obviously, we will start to rationalize. So, they both kind of work together from that point of view.

Okay. Great. Just a clarification. These promotions or campaigns were done across all stores/ cities? Or was it selected clusters for KFC and Pizza Hut?

Jignanshu, there was a differentiated strategy for online and offline. Where we have seen a huge momentum is the online strategy. Obviously, those promotions and schemes were not run in the dine-in channel. Dine -in had different sets of promotions. So, that's how it has been. But obviously, as you know, the entire servicing is from the stores only.

Correct. But it was across geographies, right? It wasn't like focused only on metros or on Tier-2 and so on?

No, across geographies, you are right.

Next question is from the line of Saurabh Kundan from Goldman Sachs.

My question is also regarding these promotions. Just wanted to understand them a little better, Manish. What is the nature of these spends that you are doing, especially on online? Is it something paid to aggregators for better visibility? Or are these some menu level strategic pricing or combos that you have done , based on insights th at are leading to better revenue growth?

Saurabh, there are multiple ways to handle the entire online piece. One is banner advertising, which in any case, we have been doing in the past . We have continued with it and it comes out of the overall advertising spends. It predominantly goes into the aggregators apart from the other targeted digital media. In terms of the last spend, that has been mainly consumer-focused, in the shape of participating in some flash sales. It could also be a new combo. It could be a little bit of a different structure and therefore, a higher discount and so on and so forth. So, there have been multiple combinations which we have tried.

Right. So, some of those spends are for visibility.

Spends on visibility have been more or less in line with whatever we have done in the past. Largely, it has been targeted directly at consumers.

Okay. All right. My second-to-last question is, at this stage, could you provide some color on the initiatives you mentioned? Specifically, which ones are proving effective, which you intend to scale back, and which you plan to continue?

Understood, sir, I just meant, is it something like value that's working? Or is it, I don't know, some combos, any pattern to the initiatives that are working?

See, the value always works for the Indian consumer, right . That's normal, you pick up any category, any industry, you give value to the consumer, there will be queues. So, therefore that’s working.

Next question is from the line of Percy Panthaki from IIFL Securities.

Hi Manish, I was just looking at the dine-in numbers for KFC. So, you have given the total sales and you have given the dine-in percentage, so you can calculate that. And I see that the dine -in sales in rupee crore terms has declined 14% Y -o-Y. This is in spite of whatever store additions we have. So, on a per store bas is, it's probably declined in the high teens. So, just wanted to understand this, like while we are seeing a growth in the online format, is it just a customer shifting the channel from online to offline? And if so, it's really not very good, right? Becaus e we have had negative SSSG for the last 2, 3 years, which means that the capacity utilization in the store is anyways low. And if we get higher capacity utilization in store, the flow - through from gross margin to EBITDA is going to be huge. So, we should focus on that rather than diverting the customer away from the dine -in towards delivery by launching these schemes and all that.

So, Percy, what you are saying is right , because if you see Q1 FY25, the ADS was INR 104,000. And now it is INR 98,000 with a much higher share of delivery. As I said, we have taken some specific initiatives for online. And obviously, when we focused more on online, there are some consumers who shifted, because they were able to get the value proposition sitting at home. If you see the last few quarters, we have been kind of protecting our margins, not participating, whereas the competing businesses have been doing that and the margins were eroding. So, therefore, we also wanted to kind of test. We have seen better transaction growth. We have seen better SSSGs and so on and so forth. As Mr. Jaipuria also said in his address and I also mentioned, we need to have a very, very differentiated strategy now for online and for dine-in, which is what we are working on, so that we are able to differentiate the consumers. But with our learnings, obviously, we will now be balancing out in terms of what is happening in the online and dine -in to ensure minimal cannibalization.

So, this Epic Savers, 9 pieces for INR 299, which is for dine -in, was that run only towards the end of the quarter or was it running for the entire quarter?

It was somewhere in the middle of the quarter, and it was only a dine-in. This offer was not available on online basis.

Yes, which is why my question that if it is available only for dine -in and despite that, the dine-in salience has fallen and the absolute sales per store has fallen. So, does it mean that this offer is not really having the kind of impact that we hoped for? Or is it that just it was for a very small part of the quarter , and therefore, the impact is not visible?

See, whenever we experiment with new offers, we set some kind of targets for ourselves on the target menu mix. From that perspective, Epic has kind of exceeded that menu mix target. But at the same time, some of the offers which were available online were much more compelling than this value proposition from a consumer point of view. And therefore, we have seen the online momentum much more than offline. So, that's the reason I said that once we now try and balance out things, you will see a better one coming in.

Understood. So, for bringing the dine-in growth back, do you think just continuing the Epic Saver is going to be enough or some more intervention will be required?

So, this will obviously continue. Obviously, we are also planning on some more promotions which are dine-in focused. We are also looking at some more value offers there. So, therefore, that's the overall strategy that I talked about.

Understood. Just one more question from me, again, possibly on KFC only. So, we have seen almost 2 to 3 years of bad top line and demand scenario. Now generally, there is one school of thought which says that when we are having this kind of a backdrop, then the recovery can be equally sort of steep. So, rather than just go into a low-single or mid-single digit, we can have 1 year, 1.5 years of double-digit kind of SSSG, just because we have had a poor performance in the past. So, do you think that the avera ging just works out on its own? Or there is something very specific, which would be needed for the double -digit growth to happen or just a normal consumer recovery will help that double-digit SSSG to happen?

See, we have seen th is consumer be havior in multiple cycles in the past, right . Whenever it's weak and then suddenly it kind of spikes up, we have seen that in other industries also. Now overall, it's a play of whether the consumption is strong or not. If the consumption is strong, it come s back even more strongly. And given this phenomenon also probably is bottoming out, it could be some good times. So, we can discuss this more on an offline basis. But we are as hopeful as you are.

Thank you. Ladies and gentlemen, we will take this as the last question and would now like to hand the conference over to the management for the 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 our 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.

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