KFC operator Devyani International’s stock has doubled since listing. Where is it headed now?

Quick service restaurant (QSR) chain Devyani International Ltd, which operates KFC and Pizza Hut outlets in India, has had a stellar run since its shares listed on the stock exchanges five months ago.

The stock trades at Rs 188.70 apiece on the NSE on Thursday, up 2% from the previous close. The stock has yielded nearly 110% returns since mid-August.

Domestic brokerage firms Choice Broking and KR Choksey Securities had assigned their respective ‘buy’ ratings three months ago.

Now, Hong Kong-based investment advisory firm CLSA has initiated coverage on the Pizza Hut India franchisee with an ‘outperform’ rating and a target price of Rs 207 apiece.

CLSA says Devyani operates highly recognised global QSR brands. This makes it a multi-dimensional diversified QSR player in 177 cities in India.

Devyani International has three verticals. One, the core brands of KFC, Pizza Hut and Costa Coffee stores in India that contributed 84% to its FY21 revenue. Two, the international business of KFC, Pizza Hut and other brands operating in Nepal and Nigeria, which accounts for 10% revenue. And three, other businesses such as its own brands and other food and beverage operations.

Building on its core

CLSA said the restaurant company is positioned to ride its core brand business momentum with an aggressive compound annual growth rate of 29% in store network estimated for FY21-24.

KFC has been a strong format for Devyani in terms of operating metrics and store economics. Pizza Hut has a weak track record but is improving due to various turnaround measures, the investment advisory firm said.

Based on a largely underpenetrated market, a robust business model for KFC, and a turnaround in Pizza Hut business, CLSA expects a CAGR of 50% in sales during FY21-24. 

Improving store unit economics

Devyani International has shifted its strategy to smaller, delivery-focused stores, resulting in a capex per-store savings of about 25% for KFC and 40% for Pizza Hut. On the bright side, this has not hurt average daily sales for either brand, CLSA said.

Lower capex with improving store-level economics should yield quicker payback for new stores. Along with cost-saving initiatives, this has boosted profitability across formats.

Valuation

CLSA expects a four-fold growth in operating income led by aggressive network expansion, operating leverage benefits, and improving store-unit economics for Pizza Hut.

Further, a net-cash balance sheet (ex-lease liability) and expected Rs 580 crore of cumulative adjusted free cash flow (FCF) between FY22 and FY24 provides enough headroom for inorganic growth opportunities.

“The target price is based on 26 times consolidated FY24 enterprise value-to-Ebitda, at a 10% discount to target multiples for Jubilant Foodworks,” said Chirag Shah, executive director and India consumer research head at CLSA.