Devyani International Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Saurabh Kundan from Goldman Sachs.

My first question is on Chairman's opening comments. He has mentioned that the Company is optimistic of a rebound in the industry during the festive season. I just wanted to understand those comments better. Are there any signs or any data points that you are seeing based on which you are turning optimistic?

Saurabh we have seen in the past that in any market, it is the festival season which kind of perks up the store and the overall consumer sentiment. This is the reason we are basing our view that this festival season we could see it , because we have been in this scenario for the last 5 to 6 quarters now. We hope that festival season could probably be a turned down situation for the industry.

Second one on KFC. If I recall correctly, you were more impacted because of I think Adhik Maas in the September quarter last year. Should we expect a sharp improvement from the current -7 and your base is -4 next quarter. Can we hope for a flattish SSSG on that base?

Saurabh, you are right. The overall macroeconomic situation or the macro environment continues to evolve, our store count is also much better versus where we were last year. It is not the same environment which was there last year. We are facing headwinds on account of West Asia war and the boycott of brands which is going on. So, there are multiple other factors also at play, not just the Adhik Maas.

But at least an improvement from the current minus 7 that we are at, I would assume.

We will not be able to make any forward-looking statement.

One last one, if I can add , if I subtract the brand contribution of KFC India, Pizza Hut, and Costa from the total India brand contribution, I am getting a number of Rs.12 crore, which I am assuming is your non -core India businesses. This number is much higher than in the past. So , is there any one -off in the India non -core, which is bumping the profits or the contribution?

Saurabh, there are two, three things at play here. We have other small businesses also apart from the three core brands , which includes Vango, food courts and some of the non-core businesses at the airports. Also, this time we are giving India business and international business separately, and there are some elimination entries on account of the intercompany transactions. So , you would see that the total India and total international also would not equate to consolidated on account of elimination entries . However, if I were to evaluate India ’s performance and international performance separately, these are the precise numbers.

The next question is from the line of Gaurav Jogani from Axis Capital.

Sir, my question again is with regards to Saurabh's earlier question only because you know, earlier when you used to subtract the Pizza Hut, the KFC and all the other numbers, and you can derive the other domestic brand contribution numbers, the run rate used to be Rs. 3 to 4 crore, 5 crore, and this time around its 12 crore. So , I am guessing the eliminations would have been existing earlier as well. So, on the other way round, can this Rs. 12-crore number be su stainable number going ahead? That's the question.

The difference is that, if you look back a couple of quarters, Thailand wasn't included. Thailand is a large business compared to the operations in Nepal and Nigeria , which were present in earlier quarters. Also we charge a management fee from the business operations, which gets eliminated on a consolidated basis.

And sir, the other question , even as you said that if we total up India, the international business, that will not actually equate to the con solidated business. So , is it the adjustment for the Forex loss that is reflecting in the international business and that is why the difference is there?

Yes, the Forex loss is treated differently when we consolidate. Some elements of Forex loss are recorded in OCI, while others appear in the P&L line item, whereas at the Nigeria level, everything is recorded in the P&L.

Sir, if you can help us out , what is really driving the operational performance improvement in the international business because if you go by the last quarter run rate, it was around 10 %, 11% and it is a sharp jump this quarter around. So , what is really driving that?

Gaurav, if you see the ADS has improved across all our brands and operations. In KFC India, the ADS for Quarter 1, FY25 improved to Rs. 104,000 versus Rs. 93,000 in the previous quarter. In Pizza Hut India, ADS for the brand improved to Rs. 36,000 versus Rs. 32,000 in the previous quarter. If you look at Nepal, Nigeria and Thailand, the ADS is better versus the previous quarter and therefore that gives you a better leverage from a P&L perspective. At the same time there is some element of cost saving measures and a cost leverage impact because of the better ADS numbers.

So, anything specifically related to Thailand here because that business was only acquired by you in the last quarter and because now you have one full quarter that we have kind of assumed it? So, any particular one offs that you have been getting in terms of benefits that will be sustainable going ahead?

No, there are no one-off benefits from Thailand.

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

So, just reconfirming what you said. So , basically, the sales of India plus international minus consolidated, the difference I am getting is 77 million. So , does this mean that basically the services that the parent is providing to the Thailand subsidiary for which it is getting charged, that is roughly equal to about 77 million , which comes into the sales of India and probably goes into the cost line item of Thailand?

Yes, it is for Thailand, Nepal and Nigeria.

So, if I have to evaluate the India performance, I should be deducting 77 million from the pre-IndAS EBITDA or the post-IndAS EBITDA to get the true performance of India. Would that understanding be correct?

Percy it's a regular income and these are the costs that are incurred by India on account of the other subsidiaries in terms of the supply chain services and central negotiations. It is that cost which gets nullified.

And where does that cost sit in India? It would not be sitting in any of the four major brand contributions, right? It would be outside that, right?

It will be spread across various sites.

But would it be part of let's say a KFC brand contribution because that's a service provided for our entity outside India, no need to have it as part of the brand contribution of KFC India or Pizza Hut India, right?

There could be some small elements which could be there because we do nominate some of our store guys to go and visit there.

Secondly, just wanted to understand on the India margins that you have reported in your presentation on a pre-IndAS basis, the India margins have declined by 70 basis points from 12.6% to 11.9%. But on post-IndAS basis, they have increased from 20% to 20.5%. So, there is 120 basis points kind of differential or rather swing, which is happening. So, what is causing that?

Percy, as you know, the IndAS calculations are based on how many new stores you opened, which stores you have shut, the variable rental deals, and the fixed rental deals in place. And therefore, it operates quite differently from the pre-IndAS numbers. This is entirely a separate lease accounting standard, and the entries are recorded accordingly.

Sure, I got that. But generally, the rough basis points change in the pre-IndAS and post- IndAS roughly speaking is similar. This time the direction only is different. So , is there any particular reason for this quarter?

The reason is that our store openings have been relatively lower in the current quarter.

I will probably take this offline.

We have talked about 7% to 8% difference in the pre-IndAS and post-IndAS numbers. So, it's pretty much close to that.

The next question is from the line of Shirish Pardeshi from Centrum Broking.

I have one question on KFC India. I think that in the last two quarters we have been seeing that the ADS and the same store sales growth is also under pressure. Obviously, it's a function. If the SSSGs are higher, you will see the ADS will improve. And obviously, the overall business will improve. So , I just wanted to understand the product interventions and whatever we are doing, is it enough giving us the confidence that the recovery will happen if the festive season come back with a strong momentum?

Shirish, see, product innovation is always a continuous process, but at the same time if you look at the ADS numbers and the SSSG numbers, we have been able to deliver the margins very well. And it's a combination of how do we optimize on the marketing spends, what promotions we run, what we offer from a perspective of value layer menu, all these results into the margin numbers. So, there are multiple equations at play, which is what we need to balance, and that's how we make sure that even though the SSSG is negative, we are able to deliver the margin. And once we see the ADS and the SSSG coming back, the margins will improve ahead of that.

Manish, I got that. The reason why I am asking, when you look at the Pizza Hut, which is most affected and Pizza Hut has seen a higher decline of SSSG, but we have been able to maintain the revenue. So, what is it that the change consumer is seeing between KFC and Pizza Hut? That's what my bigger question is.

Shirish, on Pizza Hut, we are spending some extra because, we have seen a continuous decline in this brand over the last 12 to 18 months. And we have taken a conscious call to increase our marketing spend on Pizza Hut and as well as the product innovation. But again, because of that, you will see that the brand contribution margin for Pizza Hut are still low. So we are going back to basics and building the brand again.

So, therefore, my larger question on Pizza Hut is that in the medium term, we have taken a pause on more number of stores opening. So , as a management priority, what is the important thing? Is it SSSG, ADS, or profitability is important?

See, Pizza is the largest QSR category , there is no reason why we should not play a Pizza Hut brand, or we should not be present in the Pizza category. Pizza Hut is a national number two brand and has a very high consumer recall and confidence. Therefore, it is important that we should bring back the brand.

My last question on Thailand. Since you have done the acquisition, and you gave us the logic why we have taken Thailand under our stride, just wanted to be more curious, what are the changes we have made, what are the things which has not yet happened, and whether you think, because somewhere, when we did the acquisition, you said there is a gross margin opportunity and there is a margin improvement which can happen . So, in that journey, if you can give some qualitative comments.

Thailand is a recent acquisition which we got at a great valuation, the team there is very stable and the business is doing well. So, there is no need to think of the model which is there on a huge basis. We will be able to improve the margins and it will happen over a period of time . Structurally, the gross margins in Thailand for KFC brand are lower because the brand positioning is more mass premium versus premium as compared to India. Thailand addresses a far bigger consumer space, and therefore, the number of transactions are higher than the number of transactions in India. From the overall brand hierarchy point of view KFC is very well positioned. But again, there are margin opportunities at brand contribution or at the EBITDA level, which we will gradually capitalize on as we go along.

Just one suggestion . Like you have started giving much more information on Va ango, can you start giving such details for Thailand business at least for next two to three quarters?

We will evaluate that, Shirish.

The next question is from the line of Latika Chopra from JP Morgan.

My first question was on KFC India. Could you give us some flavor of how the month - on-month trends behave during the quarter? It seems the April month would have been a little tougher because of the shift in Navaratri, but any color on how May and June progressively looked to you?

Latika, there are seasonal months in between the quarter. Whenever there's a summer holiday season or whenever some sporting event is happening, those months kind of pick up. The same thing has played even in the last quarter between April, May, and June, there are no different trends.

So, it doesn't give much color on whether sequentially you have sensed any change in consumer behavior?

Not yet.

The second question was, when you analyze, or if in case you have that data on market share of KFC on third-party aggregator platform revenues, have you seen any discernible change?

Latika, if we were to look at our ADS numbers, the revenue, whatever the percentage contribution from the aggregators have remained similar. We don't formally measure the market share on the aggregator platforms. I think we have an opportunity to improve on the dine-in for KFC and Pizza Hut, and we are working on that piece as well.

The third question was, would it be possible for you to give us some color on what was the same store sales growth for Thailand in the quarter?

We have not disclosed the Thailand numbers and we will evaluate that later, but just to give you a comfort for Thailand, the same store sales growth is positive. And at the same time, the geopolitical impact that we are seeing in India, is similar for our stores in Thailand and South. And, if I were to negate that, the overall SSSG is healthier. So, even after including the South stores, the Thailand SSSG is positive.

And since you brought up, you talked about the geopolitical issues , I remember in the previous quarter, we were kind of talking about some stabilization from this impact, but is there any change in that expectation given the recent development?

There is again big news flow which has started to come in last couple of days. Obviously, as these things happen, there is this whole WhatsApp campaign , which again tends to build up.

And lastly, any incremental update on the Food Court partnership?

We have incorporated the company which is between us and PVR. And you will see some business to start coming in from the last quarter of the current calendar year, which means October, November, December.

The next question is from the line of Nihal Mahesh Jham from Ambit.

Three questions. Manish, I was asking in case of Pizza Hut, is it the launch of Melts along with the marketing campaign around that the immediate driver of the revival that you are trying, or there are other aspects also in the background that are happening to get the brand back to its early performance?

Maybe the SSSG numbers that you have reported still point to the overall weakness, but anything over the last few months that is pointing to the brand showing improvement or say these specific product launches helping you out?

Sequentially the SSSG numbers are better. It's too early to kind of call out, but we are moving in the right direction. Pizza Hut has started moving in a positive direction. So , let's hope it continues.

And until then, is there a thought on the number of stores you plan to open or that remains depending on how the performance goes?

Nihal, as we have mentioned earlier on Pizza Hut, we are approaching a little caution, in the current quarter the new store openings are relatively lesser versus what we used to do in the past. The whole objective is to make sure the brand comes back. We remain bullish on the pizza category as well as the brand.

The second question was on KFC Thailand. During the acquisition, you mentioned that it's a three-player market in terms of you plus others. If I look at India and say experiences globally, there are a lot of places where there are two franchises that operate. Is it a possibility in the future where you are interested that you could acquire one of the franchises? Would that be a possibility just to think of from our side?

Nihal, there are multiple types of markets and Y UM has all kinds of models. There are markets which are operated by single franchise partner, there are markets with dozens of franchise partners, and there are markets where one franchise partner is operating multiple countries. Therefore, that does not give us any trend that what could happen in Thailand.

Manish, just last bit on the PVR tie -up, I think PVR alluded to some kind of outlook in terms of the number of food courts you all are planning. Any sense from your side as to what will be the ballpark opening of the food courts you are trying for this year and next?

Nihal, it will be a similar number, because it's a joint business plan.

As in like the clarification from your side because it was not very certain, that number was penciled out. It's obviously been three months and there is no clarity on it.

Yes, you will start to see some of the food courts opening in Quarter 4 of the current calendar year. We want to experiment with the food courts and see how the JV is progressing. We want to test it before we go with the big bang expansion.

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

Congratulation on a good margin performance. Manish, if we look at channel performance, KFC's off-premise channel has grown faster at about 19 odd percent while Pizza Hut has seen about 4% to 5% decline. What is the reason according to you for this different consumer behavior across Pizza Hut and KFC?

If you look at KFC, our off-premises consumption was 41% in the current quarter, which has remained the same over the last three to four quarters. The off-premises consumption percentage has remained the same, however there is an improvement on account of higher ADS. The uptake you are seeing is coming from a higher ADS. Similarly, from a contribution perspective in terms of off-premise and on-premise, even Pizza Hut has remained the same around 55%-56%, with an improvement in the overall ADS.

So, you are saying last time around in Q1 , off-premise was 37% for KFC which has moved to 41%. But over last three quarters, it is about 40%-41%. So, maybe lower base was there, right? Is that what you mean?

Correct. And even Pizza Hut if you look at, in last four quarters it's been pretty much in the same zone 55%-56%.

And second is on Costa Coffee . SSSG has sort of mod erated this time around in Q1 versus high single digit in past few quarters. Anything to call out here or is this some one- off because of which the performance has been impacted?

So, we are expanding on Costa and because of the aggressive store expansion we are seeing some impact. Also in the current quarter there were some one-off’s disruption in our food supplies, we are not seeing these numbers coming back.

Any call on the store openings for Costa or they are expected to continue?

They are expected to continue. But again , Costa has a much more moderate target compared to KFC or Pizza Hut.

Third, book-keeping question . If I look at your overhead costs , they have largely remained stable sequentially this year versus a significant pickup last year. So, have we deferred our annual increments, etc?

No, we have not deferred our annual increments, it was on time. We have been on time with our variable pays as well. So, that is not an issue. But we have initiated some cost saving measures and therefore we are trying to control the cost in the environment we are in.

The next question is from the line of Dhiraj Mistry from Antique Stock Broking.

So, first question is on Pizza Hut. I am looking at sequential number where your ADS has improved from 32,000 to 36,000. But we have not witnessed that kind of margin improvement at the store level EBITDA despite no material store addition during the quarter also. Can you explain that sir?

Dhiraj, we have started investing back in marketing and are trying to get the brand back. We have invested in the innovation and the marketing campaign. These are the reasons, we can see better ADS numbers and not on the brand contribution side. As we go along, and once we have managed to re-establish the brand, the marketing cost will taper down and from there you will start to see the brand contribution improving.

And sir, if I go back in the history , let's say, two years, three years before where your average daily sales was somewhere around 38,000 and at that time you were making store level EBITDA margin of almost mid-teens type of numbers and currently, we are at mid-single digit. So, can we expect that once the ADS crosses 40,000 or 42,000 that double-digit EBITDA margin can be made in this Pizza Hut franchisee?

Yes, at that level of ADS, we will be able to easily get into the double-digit margin.

And sir, another question on KFC. During this quarter, there was Navaratri festival which was there in April and also geopolitical tension which impacted KFC sales . Excluding number can you give us what kind of SSSG decline we would have witnessed during the quarter?

Dhiraj, if this is a one-time event in a year, we would be happy to give you those numbers. In India, festival seasons, for example Navaratri, comes twice in a year. We are moving into Sawan or the month of Shravan, where people turn vegetarian, and it is not a festival season. So, there are multiple such occasions which pass around the full year , and it is difficult to measure by those blocks.

So, what I meant to ask is , like, if Navaratri was in April and then May and June was relatively much smoother month , the SSSG growth or decline during those two months versus April month would be materially different or not?

It is not materially different, but it is different. Sawan time in North and in South behaves differently. Similarly whenever Navaratri’s are there and at the time of Kolkata Durga Puja, the sales actually go up. So, there are multiple variables which are there.

And sir, can you give your guidance on KFC store addition for the year? Pizza Hut, yes, we have maintained our conscious stance on store addition, but what are the expectations for KFC during the year?

We are looking at 100 plus store count for KFC, for the full year.

And for Costa Coffee?

Costa Coffee will be about 50-60 stores.

The next question is from the line of Marut Chaudhary, an individual investor.

Sir as you have informed two quarter ago that if the Nigerian Naira goes below or above 900 it will impact us positively or negatively. Last quarter we got impacted as it went up and this time also we got impacted as it went up 10%. So, at what level of th e Nigerian Naira going up or down will result in gain or loss for us?

Marut if currency depreciates continuously then we will ke ep on losing . And if the currency improves, then that stops. In the previous quarter Nigerian currency devalued by almost 32% versus dollar, whereas in this quarter, it is around 10% compared to last quarter, this quarter is a little better from a currency point of view . But, if the currency depreciates then there will be a loss.

Can you give us a number that if it goes above 1600 we will be in loss and if it goes below 1500 we will not see that much of a devaluation?

We will not be in loss below 1500 because we have already recognized up to that level, if it falls further we will make a loss and above that level we will not be in loss.

What is that level sir, is it 1500?

We cannot disclose that number.

Sir Q3 seems to be a good quarter for QSRs, is there any such seasonality in Thailand as well?

Yes, it is there in Thailand as well. Christmas and New Year season in Q3 is a good quarter for KFC in multiple parts of the world , and Thailand also sees the uptick of that. Similarly, in the summer season Thailand has a festival called ‘ Songkran’ when it also does well.

We are seeing an engagement in our JV with PVR so sir if you can tell us that we have had a JV with R. K. Associates what is happening on that side? How many stores have we opened and what you can see going forward?

We have not opened any stores under the JV because there are some complications with respect to Railways bidding. Some stores which have opened are considered in the standalone financials in Devyani International. Although the business is coming in Devyani, the numbers in the JV will be seen once the basic things get sort out.

The last question is from the line of Tejash Shah from Avendus Spark.

Just one question from my side. I was just looking for a reconciliation in two statements that you made on Pizza Hut margins. We said that despite higher ADS, the margins were under pressure because there was heightened marketing activity. And I think at some point you also said that brand was slightly under -invested or perhaps we wanted to add on the branding franchise. So, should we see this heightened activity as a normal spend so that brand doesn't suffer again in future and then we don't have to go through this volatility on brand franchise from the consumer perspective?

Tejash, post-COVID there have been multiple exceptional situations. There was a strong inflation which led us to reduce the intensity on promotions and other activities. We had issues with our fun flavor pizza , there were multiple such issues which impacted the brand. We have corrected most of that now and are introducing new innovations to the market to build the brand back. We believe that this will not be a constant requirement . It's a matter about stabilizing the brand and with that we will see the margins coming back again.

Can you elaborate on the nature of this spend? Is it like we actually increase ad spend or we support innovation with slightly lesser margin discounts? What exactly it entails?

It's predominantly the ad spends across mass and digital media and the heightened one around the stores in terms of outdoor media. We have kind of tweaked promotions a little bit so that the consumers can get a good value when they walk into the store. And therefore, you would have seen that there is a small impact on the gross margin as well.

And the last one on this, does the larger proportion of this heightened spend goes into food aggregator platform or is it equal between, among the two platforms?

It's mainly on mass media.

Ladies and gentlemen, I would now like to turn the conference over to the management for closing comments.

Thank you. I 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 taking the time out to join us on this call. Look forward to interacting with you soon.

This is a transcription and may contain transcription errors. The transcript has been edited for clarity. The Company takes no responsibility for such errors, although an effort has been made to ensure a high level of accuracy.