Business

Devyani International bets on affordable options to save the day

Devyani International Ltd, the largest franchise partner for YUM! brand in India, is introducing pocket-friendly options to protect volumes from shrinking in a high inflation environment. One of its three core brands, Pizza Hut, introduced the Flavor Fun pizza series starting at 79 to make their product a great value for money. The remaining two core brands are KFC and Costa Coffee.

In August, India’s inflation as measured by the consumer price index rose to 7%, mainly due to cheaper food items. In a prolonged high-inflation environment, consumer spending on discretionary products and services can be put on the back burner. Expensive vegetables such as potatoes and onions also mean increased input costs, doubling for companies operating in the quick-service restaurant sector.

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“Risks to Devyani International emerge from further increases in raw material (mainly dairy) prices, as this could affect gross margins, pushing the company up further across its categories. products,” said Sachin Bobade, vice president, research at Dolat Capital Markets.

However, the addition of the latest pizza range helps Pizza Hut compete with the value menu offerings of its competitors. “With the introduction of the Flavor Fun product line, Pizza Hut has closed the main menu gap,” pointed out that Edelweiss Securities Ltd. Before this launch, Pizza Hut’s cheapest price was 200. “While this is a product with a lower gross margin, it will drive average daily sales and help attract younger and more price-conscious customers,” reports Edelweiss report dated September 15 said.

This mantra is also being followed by other QSR companies. Analysts note that McDonald’s Mc Saver combo and Stunner from Restaurant Brand Asia are some examples.

Meanwhile, in the CY22 year to date, Devyani’s stock is up 14%, but the valuation isn’t cheap. The stock is trading at an EV/Ebitda of 25.85x based on FY24 estimates, according to Bloomberg data.

“Devyani is valued above many QSR competitors due to its wide range of brands, higher Ebitda margins and strong balance sheets. Kaustubh Pawaskar, vice president, research, Sharekhan of BNP Paribas, said these factors support its fiscal year 24 valuation.

The addition of a store is an important factor that can be monitored for investors. In Q1FY23, both KFC and Pizza Hut saw strong improvement in same-store sales growth with the number of stores increasing continuously and year over year.

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