Devyani International Limited (DEVYANI) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Devyani International earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on Devyani International's Q1 FY '27 Earnings Conference Call. We have with us Mr. Ravi Jaipuria, Non-Executive Chairman of the company; Mr. Raj Gandhi, Non-Executive Director; Mr. Manish Dawar, President and Group CEO; and Mr. Anupam Kumar, CFO of the company. We will initiate the call with opening remarks from the Chairman, followed by key business and financial highlights from the CEO. Thereafter, we'll have the forum open for a question-and-answer session. Before we begin, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier. I would now request Mr. Ravi Jaipuria to make his opening remarks.

Good afternoon, everyone, and thank you for joining us today. It gives me great pleasure to welcome you to Devyani International's post results earnings conference call to discuss our performance for the quarter of FY '26, '27. We begin this new financial year on a strong note. The momentum we built through the second half of FY '26, anchored by KFC's strong same-store sales performance has continued into F1 -- quarter 1 full year '27. I'm pleased that most of our brand portfolio delivered positive SSSG during the quarter. KFC continues to post double-digit sales growth and delivered another positive SSSG of 3.3% during the quarter. Our brands in the portfolio like Biryani By Kilo, Costa and Vaango maintained a 7-plus SSSG growth trajectory. Pizza Hut also delivered sequentially better SSSG numbers. The business has improved profitability and posted its highest ever EBITDA of INR 255 crores at 16.1% of the revenues. This is testament to our capability and commitment to deliver sustainable profitable growth despite the cost inflation on LPG and wage hike. Let me briefly touch upon the broader economic backdrop. The quarter presented a mixed macro picture. The external environment became more challenging. The conflict in the Middle East pushed crude oil to elevated levels through April and May, feeding into LPG and fuel costs. While the rupee remained under pressure, the RBI in its June policy held the repo rate steady, but moderated its FY '27 growth outlook to 6.6% and raised its inflation projection to 5.1%, reflecting these very pressures. As a result of the macro, the operating environment has remained volatile along with the usual seasonal complexities. While the demand has remained stable so far, the forecast of a below normal season combined with El Nino risk is a reminder that consumption recovery in India rarely moves in a straight line. The merger process with Sapphire continues to progress along expected timelines. We received approvals from both NSE and the BSE in June, bringing us closer to the next phase of regulatory filing. The timelines are broadly on track with our stated target on completion by the end of FY 2027. I want to once again thank Yum! Brands and for their continued confidence in DIL and RJ Corp as their long-term partners. As an industry, India's QSR continues to mature and the interplay between aggregator platforms and the dine-in-led brands like us is an evolving dynamic that we are navigating thoroughly. Brand by brand, our own priority remains unchanged. Disciplined profitable growth, a sharper consumer proposition, both in-store and online and continued preparation for a stronger combined DIL Sapphire platform. I remain confident that the steps we have taken over the past several quarters position us well for the year ahead. Under Manish's leadership, we have continued to strengthen our management team. The new team is fully in place now and settling in well in their respective roles. I'm encouraged by the early cultural and operational shifts that I see across the organization as we build that team has called DIL 2.0. With this, I will hand over to Manish for the detailed business and financial highlights. Thank you very much.

Thank you, Mr. Jaipuria. Good evening, everyone, and thank you for your time today for our earnings call of FY '27. I am pleased to state that the new leadership team at DIL is fully in place and is settling in well. We are trying to build DIL with the ambition to build great brands and win markets with distinct customer experience and market-first regional operating structure without diluting any focus on the brands that we operate and win. The turnaround strategy at DIL has started to show results, and we are confident that as the new team settles down, we will gain momentum in our journey. The key priorities for the remainder part of the year for the new team are: #1, opening new stores as per the guidance given earlier. #2, maintain positive SSSG for our brand portfolio. #3, improve efficiency and margin structure by way of technology adoption and cost control. #4, build the next level of team and organization structure with right processes and get ready for the merged entity. Coming to Q1 results. Our business remains firmly on a turnaround and growth track. On a consolidated basis, we delivered a 16.5% year-on-year growth in revenues, reaching INR 1,581 crores. Gross margin at 69.1% saw an improvement of 0.9% Y-on-Y. Brand contribution expanded 1.1% to reach 14.2%, with consolidated brand contribution of INR 224 crores, being nearly 26% higher Y-on-Y. The improvement in brand contribution and effective management of G&A costs helped us post our highest ever operating EBITDA at INR 151 crores. Our consolidated operating EBITDA grew nearly 38% Y-on-Y and represents an EBITDA margin of 9.6%. I would like to thank my team for all their efforts in achieving this milestone. We have seen some food commodity inflation along with the hike in minimum wages and annual increments. LPG prices have significantly gone up in the last few months. Our teams have effectively managed the availability of LPG during this period. We have taken slight price increases in KFC and Pizza Hut to mitigate the cost impact, and we are monitoring the raw material and packaging prices as we go forward. Seasonal factors led to higher utility costs during the quarter and higher wage costs. On the marketing side, our brands were active and visible throughout the quarter. At KFC, our media investments focused on positioning the brand at the center of consumption and celebration moments, both in-store and on delivery. Importantly, our marketing spends at KFC have been deliberately rebalanced towards driving dine-in visits rather than deep online discounting. At Pizza Hut, marketing activity remained measured and purposeful as the brand works on its back to basics reset. The focus this quarter was on communicating improved product quality and everyday value, building the foundation for a stronger brand. Costa Coffee leaned into the peak summer season with its cold beverage and frappe range, which drove footfalls and trials through the April to June heat, while the brand continued to expand its presence in high visibility travel and transit locations. At Biryani By Kilo, our marketing efforts were centered on occasion-led demand. The brand saw strong traction around the festive and celebration occasions during the quarter. Across all of our brands, the common thread is discipline, spending where the consumer occasion is genuine, getting the return on spends and building the brand equity. As mentioned earlier by the Chairman, at KFC, building on previous quarter's momentum, our strategy of rebalancing investment towards dine-in channel shows some good results. SSSG came in at positive 3.3% with offline saliency improving to 57%, more than 3 percentage points higher than the corresponding quarter of the last year. Revenue grew nearly 12% year-on-year to INR 684 crores. Judicious use of discounting helped restore gross margins to 69.4%, broadly flat sequentially, and 2.3% higher than Q1 of last year. The brand contribution margin expanded by 1.4% and delivered brand contribution of INR 115 crores, nearly 22% higher year-on-year. At Pizza Hut, our efforts on building a sustainable growth foundation for the brand continues. SSSG came in at minus 2.2%, improving sequentially. With an uptick in ADS to INR [ 32,400 ] per store per day, revenues came in at INR 184 crores. Gross margin improved to 76.3% during the quarter, but higher costs and operating deleverage led to brand contribution margin eroding slightly. Accordingly, Pizza Hut posted a brand contribution loss of INR 4 crores. We ended the quarter with 626 stores as we continue to right-size the brand. Our own brands portfolio comprising Vaango and Biryani By Kilo continue to deliver healthy performance with Biryani By Kilo delivering plus 7.2% and Vaango delivering plus 7.1% SSSG, respectively, during the quarter. BBK continues to progress well on both top line as well as bottom line, and we are on track to realize the acquisition case turnaround of BBK. Led by BBK, our own brand portfolio posted revenues of INR 98 crores. Gross margins improved slightly on a sequential basis to 65.9%. Brand contribution came in at approximately INR 10 crores, representing a margin of 10.2%. Our own brand stores network reached 218 stores with 23 BBK Express stores. Post acquisition, we've been evaluating expanding BBK in newer formats. The BBK Express format is a small box, lower CapEx format, and we've seen initial good response by opening these formats in our food courts. Within our franchise brands portfolio, which includes Costa Coffee, revenue growth remained steady at nearly 6% year-on-year. However, higher input costs led to lower gross margin at 74.6%. Brand contribution margin came in at 15.1%, higher than last year on better cost management. Our international business maintains its impressive run of delivering strong and consistent growth by posting another quarter of 20% plus year-on-year and delivered INR 523 crores in quarterly revenues. Gross margins remained stable on a sequential basis. Effective cost management and operating leverage helped improve the brand contribution margin by 1.5% compared to last year and posted brand contribution of INR 18.2% for the quarter. As part of DIL 2.0, we have decided to consolidate the entire BD activity of DIL under one leader. This is unlike in the past where the individual brands used to focus on their own BD activity. This led to some rethinking on the store opening strategy and the way we approach the landlords. We opened 11 net new KFC stores in India and added 3 net new Biryani By Kilo stores in India. We have also begun testing BBK's performance in a dine-in format. We are confident that BBK's expansion into offline channel will provide DIL with a durable long-term growth vector. We ended the period with 1,855 stores in India and 2,255 stores globally as of June 30, 2026. Our plan for opening new units remains in line with the guidance given earlier. As Mr. Jaipuria mentioned, our proposed merger with Sapphire Foods remain on track, and we continue to expect completion of the merger by end of the current financial year. With this, I would like to request the moderator to open the forum for any questions or suggestions that you may have. Thank you so much.

[Operator Instructions] The first question is from Percy Panthaki from IIFL Securities.

Just wanted to understand the margin drivers for KFC for the coming couple of years. So you've already increased margins on a Y-o-Y basis by, let's say, 130, 140 basis points, now stands at about 17%, was the same in Q4 also. So there is one step-up which has happened. Wanted to understand what would be the drivers for increase from this current 17% level into the future? Two sub-questions to this. One is in terms of drivers, what is it apart from SSSG? Assuming that SSSG remains at a 3%, 4% level, I'm assuming that you might not get much of a leverage from that. So are there any drivers apart from the SSSG in case that doesn't kick in over and above what we are seeing right now? And second is, what kind of sort of basis points can you shave off through these other initiatives over the next couple of years?

Thanks, Percy. So Percy, as I've mentioned in the past, the key driver for improving the brand contribution margin remains the ADS number, right? So -- and I've also indicated in the past that, let's say, once we cross a threshold of 105,000 ADS to 110,000 ADS, we will be able to cross 20% brand contribution margins in KFC as we've demonstrated that in the past. So the key lever for ADS, as you know, is a combination of SSSG in the existing stores and as well as the quality of new stores that we are opening so that we are able to start the new stores at a higher ADS number. So that's a combination that can give you the higher ADS and therefore the better margins. At the same time, we are also focusing that our dine-in channel needs to be pushed much more strongly versus a delivery channel. And therefore, we've taken steps. We've experimented in the quarter that we've declared the results. And we've seen some positive results on the dine-in channel. So that will be another channel -- that will be another lever that will push the margins up. So these are a few of the margins. And then obviously, as the ADS goes up, you get the leverage benefit because of the higher fixed cost of expenses in the business, and therefore, that automatically helps with the margins as well.

Understood. So this 105 to 110 ADS, that might also be a moving target, right? Right now, if you reach that number, you will make 20% margin. But supposing if you take a few more quarters to reach that, in the meanwhile, your cost structure will also inflate at the same time. So maybe if this is delayed beyond a few quarters, then even at that ADS, which you are talking about, the 20% margins may not come through. So how are you looking at that time frame in that sense, what I'm asking is?

So Percy, you're right because all of our discussions is basis the current environment. What happens tomorrow by way of inflation, who knows. But you're right. And your observation is right that this is in the current context. And again, it's not that we've not seen inflation in the past. It's not that we've not seen the, whatever the wage increases or the reset in the past, but we've managed to bring in the efficiency in the business. And that's a continuous process. And therefore, I mean, we have to be at it. So therefore, I mean, it's not that the ideas are finished. The ideas are always there, and we continue to improve business and manage the business much more efficiently. So the other leverage point that we've just started is this whole technology adoption, which is where we've been weak. And that will take a few quarters by the time we start to realize the benefits. And when I say a few quarters, I'm saying a few quarters after the merger because right now, we are building the technology platforms.

Understood. And sorry to belabor this point, but just because this is the biggest part of your business, just wanted to understand this better. This 105 to 110 kind of ADS, I mean, how many quarters down the line or how soon do you think you can achieve that given the macroeconomic construct? Assuming that everything -- I mean, not assuming that, let's say, crude goes haywire and consumer demand falls or anything, just in the current context, how long do you think you can achieve that?

Percy, as I said, I mean, we are looking at a SSSG of about 5% to 6% for KFC. And therefore, if I were to take that, obviously, it will be almost like 1.5, 2 years kind of scenario. But again, I mean, as you are saying, I mean, the macros also play a very important role. And we've also seen in this business that there could be some cycles where, let's say, on an average, you get better SSSGs and then there are some quarters where it is kind of depressed. So that's -- but in general, we look at about 5% to 6%.

Understood. And on Pizza Hut, before the merger happens, is there anything else that can be done to sort of accelerate the ADS on Pizza Hut further?

See, Pizza Hut, as I said earlier and even in my commentary today, Pizza Hut is all about going back to basics. And therefore, we are working on the product. We are working on the ingredients. We are working on some innovative ideas and so on and so forth. So that will take some time. And obviously, that will help us to stand in good stead over the long-term.

[Operator Instructions] The next question is from Vivek from Jefferies.

Continuing with what Percy asked, first on the KFC bit, you did mention about dine-in salience going up. So in the last few quarters, we have seen this number like creeping up a bit. We are at about -- we have seen you at about 57. Do you think you go back to like 60, 65? Is that what your target is in coming quarters?

Vivek, see, it is difficult to fight the consumer point of view on convenience. And we've seen that, let's say, for example, by regions, I mean, North typically is a market where convenience plays a very important role and consumers prefer delivery. So I don't think that we'll be able to get to 65 in near future, but our target remains to get to a number of 59, 60.

Interesting. And Manish, just maybe a very basic or a naive question. But see, a lot of your dishes are pre-prepared, and I know there is some activity at the store level. So even if, let's say, delivery margins are low -- and delivery margins are lower for 2 reasons, right? One is the coupons and the discounts and the other is the delivery cost. But as long as at an outlet level, it is adding incremental rupee or dollar to store, you should try to maximize on both. Is that understanding correct? Or there are capacity constraints, which is why you have to choose one over the other?

So Vivek, this hypothesis used to play when delivery was new, and I'm talking about, let's say, post-COVID because that was giving us net addition in terms of top line. So even though, let's say, on an incremental basis, it made sense it was. Whereas today, delivery as it stands today, it is actually eating into the dine-in sales. And that's the reason we are making concerted effort to make sure that the consumers come back to dine-in because that is where you can have the best customer experience. That is where your food tastes the best. That is where you can get the full flavors and everything. And therefore, our endeavor is that people should come back to dine-in stores and enjoy food better there.

The next question is from Avi Mehta from Macquarie Capital.

I just wanted to check with you on the stable demand trends and better understand that. Does that -- do we have -- does that mean that the basis will also be factored when we look at same-store sales growth? Or you're implying that same-store sales should -- growth should remain at current levels for the formats? So just if you could explain that first? And the second bit, just on the delivery versus dine-in. Now -- we've now done this focus on dine-in and getting as the key driver of growth. I wanted to just get your thoughts on, in your opinion, say, a couple of years down the line, does this entail that we should be able to see this salience across dine-out or does -- in terms of dine-in salience across formats? Or is this more a KFC specific phenomenon because pizza is a lot more dine-in? So any format related nuances that one should be aware of? These are 2 questions.

Avi, let me address your second question first. See, the point is, as I said, I mean, convenience is very important for a consumer. And hence, that is where delivery comes in. Now at the same time, as brand owners, as operators, we have to give good reasons to consumers for them to come to the store. And if, for example, as I've mentioned in the past, if, let's say, the consumer is getting the same offering sitting at home at times at a cheaper price, why would they want to come to the stores, right? And whereas you've kind of -- you've invested and you're operating a complete infrastructure. And hence, we need to kind of make sure that our offerings are available for dine-in customers in a different manner versus our delivery customers. Our pricing proposition remains in sync that a dine-in customer gets the best deal. And obviously, along with the best deal, they get a better experience. So that is how we've kind of focused on, and that is how we are repositioning the entire piece. And we've seen that as long as you give a good reason to the consumer to come into the stores, they do come into the stores. Obviously, every region, every state, every city, we've seen behaves differently. But in general, we've seen consumers responding to it.

This is not then -- then this is not format-specific. It's a broader principle that we encourage the consumer to come in and get a better deal. That's how...

Absolutely.

...or it is -- there is -- okay. Got it. Got it.

Yes. That's the fundamental hypothesis.

Got it. Clear. And the first bit, Manish, how should I look at that? Just a clarification on when you say stable demand trends, do you mean that the basis have to be factored in when we look at the environment, just basically, and this it reflecting in the 2Q till date performance?

Yes, it does. So I'll tell you what we mean by fundamental stable demand trends. One, obviously, you would have seen in the past, let's say, when we were undergoing the negative SSSG trends, there used to be big days which were becoming bigger. And therefore -- and then suddenly after those big days, the demand would suddenly drop very significantly. Whereas from that point of view, we've seen the drop is not happening so significantly or the big days are becoming bigger. So that is one thing. Obviously, the other indicator is SSSG. Third, as I said, we've taken initiatives, and we've seen customers respond to that. So that is another indicator. At the same time, we are also measuring in terms of how the new stores in the new geographies are performing. So that's the other vector which is available to measure whether how the trend is kind of moving. So these are some of the levers that we use to kind of figure out whether the demand is fine or not.

Sorry, Manish. So does it mean SSSG is similar-ish in 2Q till date to what we are witnessing or has seen an improvement? That's where I'm just trying to better understand this.

See, obviously, Q2, it's too early to say because we are in the month of July. And Q2 also, there is a different lag effect from a Shravan perspective also. So because last year, the Shravan was at a different timing. This time, it is kind of starting, I think, tomorrow or day after. So obviously, that lag effect is also there. But otherwise, broadly, in terms of trends, we've seen a positive trend in the month of July, and we are on track.

The next question is from Vivek from Jefferies.

Sorry, Manish, I think some issue with my line. I hope I'm audible. My question on KFC also on the SSS bit is, if you leave aside this quarter and the previous quarter, your SSS number has been negative for a long time. What is holding you back in giving a very positive outlook on SSS in terms of, let's say, even above mid-single digit? Is it the macro that you worry -- still worry about? Or is it the aggregator concern? Or what -- why shouldn't with such a low base for almost 13 quarters that you were in negative, the commentary should be -- why is it not more positive than what it is?

Vivek, yes, you're audible. So Vivek, fundamentally, as you know, macro seems to be tough. You know what is happening on the rupee dollar. You know what is happening on the oil pricing. And we've seen the result of all of that in LPG. LPG availability was a big constraint, although we've kind of managed to mitigate. But we've seen huge availability issues as we kind of went through the cycle. And even now also, it's not that macros are behind us. There is some news or the other, which kind of keeps coming in. So it's very important for a very, very bullish kind of view that it should be a stable situation, which we are not seeing. And therefore, in the middle of all of this, whatever efforts we are making, we are seeing the results. And hence, I would say a little bit of kind of the approach that we've taken.

Perfect. That helps. And second and last, on the Pizza Hut bit, what do you think is the issue, whatever, let's say, Yum!, the action that they have taken? Is it the brand issue or the execution issue probably at your end or it's the market context? I mean when I look at your margins, for example, are at 76%, I know Pizza has far higher margins than, let's say, Burgers and KFC. But is there a case to offer more value to the customers? So while your entry price points are very attractive, as we go up, the prices actually go up. And if you look at aggregators, there are options available at lower prices or better prices. What exactly, so is it execution, market context, higher margins, competition? What do you think on Pizza Hut? And is it like really worth putting energy behind this brand?

Vivek, the way we look at Pizza Hut as a brand, and to be honest, I've maintained this for the last many years, there is nothing wrong with Pizza Hut as a brand. When I say nothing wrong, means that despite whatever has happened or whatever has not happened, I mean, Pizza Hut has continued to remain the #2 pizza brand in the country on a national basis, right? Domino's is #1 and Pizza Hut is #2. We've seen multiple brands coming in, scaling up and then kind of dying down quietly. Pizza Hut, the biggest issue was the structure, which is what we've discussed in the past, the entire 3-way structure between us, Sapphire and Yum! in terms of decision-making, in terms of the initiatives, in terms of innovation and so on and so forth. So obviously, that will get corrected as the structure kind of eases out when we get the merger approval. But at the same time, because of that, there were issues on decision-making, there were issues on innovation. So we've started to correct the innovation piece. We've started to correct the basics by the time the merger takes place, at least we are in that readiness position to push Pizza Hut. But having said that, to your other challenge in terms of the margins are high and therefore, why not? Pizza Hut, the fundamental problem remains the ADS. The ADS is very low versus the competition. And the ADS cannot be improved unless we give a differentiated offering in terms of innovation and at every price point. So entry price point is just not the only means. You need to be available at all the price points. You need to have the right price laddering and so on and so forth. And that is something that we are already working on.

So basically, FY '28 is when you will put all your energy behind the Pizza Hut once the 2 entities come together?

That's right.

The next question is from Devanshu Bansal from Emkay Global.

Congratulations on strong performance. Sir, I had one question related to...

Actually your voice is very feeble. Can you come closer to your mic?

Yes. Is it better now?

Slightly. Yes.

Yes. So Manish, I wanted to check there is renewed global trust for KFC brand. So there is a lot of new strategy around boneless snacking, sauces, beverages as well as store refurbishment, right? So I wanted to check if some of it is due to happen in India? Are we already working on some of these initiatives?

So all of that will happen in India also, Devanshu. So broadly, they've taken 3 initiatives globally. One is on the beverages, which is there's a sub-brand called Kwench, and we are already discussing in India to experiment with Kwench. And if that experiment is successful, we will roll it out nationally. The second one is around sauces. And the third one, as you said, is around the boneless piece. So one after the other, all of those initiatives will come to India. India is part of the pipeline. So therefore, I mean -- so that is the...