Largest franchise partner for Yum in India:
DIL operates franchises of several highly recognized global QSR brands and is the
largest franchise partner for Yum in India. DIL operates 284 KFC stores (a global
chicken restaurant brand with over 25,000 restaurants in over 140 countries), 317
Pizza Hut stores (the largest restaurant chain in the world with 17,639 restaurants)
and 44 Costa Coffee stores (a global coffee shop chain with over 3,400 coffee shops
in 31 countries) in India as of June 30, 2021.
Cluster-based expansion across India:
The company follows cluster-based expansion approach and therefore has been able
to address demand in high-potential domestic markets. DIL has a strong presence
in key metro regions of Delhi NCR (comprising Faridabad, Ghaziabad, Gurgaon, Delhi
and Noida), Bengaluru, Kolkata, Mumbai and Hyderabad. DIL has established a standardized
and scalable development model for their stores based on their know-how and experience
that has led to faster and more cost-effective roll outs. Their expansion model
is supported by streamlined store network planning, a robust supply chain network
and an efficient staff recruitment and development program. The other factors considered
as part of the cluster based approach includes retail presence at a particular location
along with brand recognition and brand recall value. In assessing the expansion
of their store network, they target an optimal mix across different formats, including
dine-in, delivery, take-away and drive-through.
Focus on improving unit-level performance:
The company intends to continuously manage unit economics and achieve economies
of scale. DIL has been able to rationalize certain stores that were loss-making
to improve their overall store level profitability. They have shut down airport
concession stores and non-performing stores to improve efficiencies. Store rationalization
will help improve their margins going forward. They also intend to switch from frozen
supplies to chilled supplies which will reduce transportation and storage costs.
The large store network coupled with the supply chain infrastructure will allow
them to improve their gross margins.
Delivery business to drive future growth:
Given the COVID-19 pandemic, DIL anticipates considerable growth in the delivery
business. Revenue generated from delivery sales represented 51.15% of the revenue
from operations in their Core Brands Business in FY20 and increased to 70.20% of
the revenue from operations in their Core Brands Business in FY21. To facilitate
growth, DIL intends to open additional stores for Pizza Hut and KFC that will be
primarily focused on delivery. Their focus going forward will be to have limited
dine-in capacity at their delivery focused stores and to work with third-party delivery
aggregators to increase the number of dedicated riders for KFC and Pizza Hut.
Highly competitive market:
DIL competes within the food service industry & the QSR sector not only for
customers, but also for personnel and suitable sites for their restaurants. Their
biggest competitors include international QSR chains operating in India, such as
McDonalds, Domino’s Pizza, Subway, Starbucks, and Burger King. DIL may or
may not be able to identify and obtain suitable store locations, which could impact
their ability to achieve growth.
Loss making business:
The company has been reporting losses for the last three years. Temporary as well
as permanent store closures and reduced store-level operations, including reduced
operating hours and dining-room closures as mandated by regional regulatory bodies
due to pandemic will further add pressure on the financial performance of DIL.
Poor capital allocation in the past:
The company had invested in tea trading business (not related to the core business)
under the brand name of TWG which had operations in India and UK. It reported loss
of Rs 43 cr in FY20 and hence was sold off in FY21 by way of slump sale. Any un-related
investments in future could be detrimental to the business.
Incorporated in 1991, Devyani International Ltd (DIL) is the largest franchisee of Yum Brands and among the largest quick-service restaurant (QSR) chain operators in India on a non-exclusive basis. The company operates 696 stores across 166 cities in India. Company’s business is broadly classified into 3 verticals that include:
DIL’s core brands business, together with their international business, represented 83.01%, 82.94% and 94.19% of the revenue from operations in fiscals 2019, 2020 and 2021, respectively.
The company is expanding its business but with a leaner cost structure by adding 100+ smaller stores for KFC & Pizza hut in FY21. They intend to continue with this strategy for next 2-3 years. Increasing internet and mobile penetration within India and the advent of food delivery apps are key factors to lead consumers away from traditional dine-in experiences and towards convenience-driven options. The prevalence of home delivery in the Indian QSR industry is expected to continue to grow due to changing lifestyles and changing consumer eating patterns in the post-COVID atmosphere. At the upper price band of Rs 90, the IPO is valued at 10x of FY21 sales, which looks reasonable considering its peers (Jubilant Foodworks & Burger King India) trade at a much higher multiple. Hence, we recommend SUBSCRIBE to the IPO for long term perspective.
Peer comparison (Rs crore) | FY19 | FY20 | FY21 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Company | Revenues | EPS | ROE (%) | Revenues | EPS | ROE (%) | Revenues | EPS | ROE (%) | PS ratio |
Devyani International | 1311 | 0 | - | 1516 | (1) | - | 1135 | (1) | - | 10 |
Jubilant Foodworks | 3563 | 24 | 29% | 3927 | 21 | 24% | 3312 | 18 | 18% | 15 |
Westlife Developments | 1402 | 2 | 4% | 1548 | 0 | - | 986 | (6) | - | 9 |
Burger King India | 633 | (1) | - | 841 | (2) | - | 494 | (5) | - | 14 |
Use of Proceeds:
The offer comprises of a fresh issue and an offer for sale. The total issue size
is of Rs 1838 cr. Out of the fresh Issue of Rs 440 crores, Rs 324 crores is proposed
to be utilized for debt repayment/prepayment and Rs 116 crores is to be used for
general corporate purposes. The balance ~Rs 1398 crores of the issue would be through
offer for sale by the shareholders and proceeds would go to such selling shareholders.
Book running lead managers:
Kotak Mahindra Capital, CLSA India, Edelweiss Financial, Motilal Oswal
Management:
DIL is led by Virag Joshi, Whole-time Director (President and CEO). He has been
a key strategist in expansion of Pizza Hut, KFC, Costa Coffee outlets from a small
base of 5 restaurants in 2002 to 600 plus outlets in last 19 years. The management
team has extensive experience in various sectors including FMCG, F&B and hospitality.
The strength and quality of their management team and their understanding of the
F&B industry enables them to identify and take advantage of strategic market opportunities.
Each brand, whether owned or otherwise, has a dedicated team responsible for developing
and delivering a superior brand experience.
Yr End March (Rs Cr) | FY19 | FY20 | FY21 |
---|---|---|---|
Net Sales | 1311.00 | 1516.00 | 1135.00 |
Material Cost | 389.00 | 460.00 | 345.00 |
Employee Cost | 192.00 | 226.00 | 154.00 |
Other Expenses | 476.00 | 579.00 | 457.00 |
EBITDA | 254.00 | 251.00 | 179.00 |
EBITDA Margin | 19.00% | 17.00% | 16.00% |
Depreciation & Amortization | 203.00 | 224.00 | 229.00 |
EBIT | 51.00 | 27.00 | -50.00 |
Other Income | 13.00 | 19.00 | 64.00 |
Interest & Finance Charges | 135.00 | 158.00 | 153.00 |
Profit Before Tax - Before Exceptional | (71) | (112) | (139) |
Exceptional items | (13) | (35) | (57) |
Tax Expense | 1.00 | 2.00 | (1) |
Net Profit from continuing operations | (59) | (79) | (81) |
Net Profit Margin | - | - | - |
Profit/(loss) before tax from discontinued operations | (35) | (43) | 18.00 |
Tax expense of discontinued operations | - | - | - |
Net profit for the year | (94) | (122) | (63) |