Devyani International Shares Gain As Motilal Oswal Initiates Coverage With 'Buy'
Shares of Devyani International Ltd. gained the most in nearly a month after Motilal Oswal initiated coverage on the operator of KFC, Pizza Hut stores in India with a 'buy'.
That, according to the brokerage's Dec. 8 report, was because of:
KFC's strong brand equity and operating metrics.
Rising focus on delivery by Pizza Hut driving its turnaround.
Robust growth in both these brands led by network expansion.
Motilal Oswal kept the target price on the largest franchisee of Yum! Brands in India at Rs 190 apiece, an implied return of 4.60%.
According to the brokerage, the unique offerings of KFC lend it a strong brand equity, driving robust average daily sales and profitability. The KFC business, it said, is pegged to deliver a 41% annualised growth rate over FY20-24E, with stores estimated to rise to 574 from 264 during the period.
The rapid addition of delivery-focused small format stores is expected to aid Pizza Hut's business as well, Motilal Oswal said. The small-format stores are aimed at reducing the distance to consumers and cutting delivery time.
Devyani's pan-India rights for small-format stores of Pizza Hut (except in Tamil Nadu) provides it with an advantage over Sapphire Foods India Ltd. (the other Indian partner of Yum! Brands). That's because it gives access to Devyani in Sapphire's territories and helps in faster addition of such stores due to lower capex required, the note said.
Besides KFC and Pizza Hut, Devyani and Sapphire operate Taco Bell stores in India. Devyani also runs Costa Coffee outlets in the country.
Motilal Oswal expects Devyani's sales growth and margin expansion to be aggressive. It sees the company's sales to grow at an annualised rate of 28% to Rs 4,080 crore, and Ebitda margin to expand 690 basis points to 23.8% over FY20-24E.
Shares of Devyani jumped as much as 14.37% in intra-day trade on Wednesday and closed more than 9.3% higher.
Food Service Industry
India's Rs 4.2-lakh-crore food service industry is expected to grow at 9% annualised rate over FY20-25E, Motilal Oswal said.
Its drivers include:
Rising income levels, urbanisation and nuclear families.
Innovative offerings that appeal to the youth.
The changing dynamics of the space, with the growth of online food delivery and food tech.
Besides, increased technology adoption by consumers, preference for trusted brands, accelerated store expansion by organised firms, and favourable cost outlook augur well for the sector as the impact of Covid-19 recedes.
Motilal Oswal listed Jubilant FoodWorks Ltd. as its preferred large-cap pick in this segment.
Maintains 'buy' but cuts target price to Rs 4,840 from Rs 4,870 apiece, still an implied return of 26.30%.
The company has the best business model for quick service restaurants in India.
Addition of technology and 'value' moats in recent years have aided the strength of the business.
Sales per square foot likely to remain the best among food and beverage retail peers in India, despite the competition from aggregators and other QSRs intensifying.
Return on capital employed of more than 20% over many years (except for the fall in FY21 due to the lockdown impact) helps the company fund profitable store expansion.
Maintains 'neutral', hikes price target to Rs 575 from Rs 560, a downside of 0.10%.
Longer-term opportunity in the company remains exciting.
Strong value platform to aid market share gains in the food service industry.
Execution of innovations and brand extensions to lead to improvement in long-term profitability.
Company on track to achieve its FY23 goal of all-round growth and improving unit economics with a slight lag.
Rising competition in the space.
Faster store expansion by peers.
Limited success of McDonald's in India in the premium burgers segment.
Initiates coverage with 'neutral' and target price at Rs 1,560, an implied return of 7.47%.
Company's 'all you can eat' concept with live grills in a unique offering in the casual dining restaurant space.
Focus on experience, value for money and service leading to strong turnover and operating margin metrics.
Same-store sales growth has the potential to improve if delivery sustains as the impact of the pandemic recedes gradually.
Strong store operating metrics augur well for the growth prospects of the company.
Current valuations seem fair and the target price has been estimated based on 22x FY24 enterprise value/Ebitda.