KFC, Pizza Hut Operator Devyani International's Shares Gain As CLSA Initiates Coverage With ‘Outperform’
CLSA set the target price on Yum! Brands’ largest India franchisee at Rs 207 apiece, an implied upside potential of 12%.
Shares of Devyani International Ltd. gained as CLSA expects the KFC, Pizza Hut operator in India to ‘outperform’ on the back of aggressive network expansion and operating leverage benefits, among others.
Devyani’s three business verticals—core brands of KFC, Pizza Hut and Costa Coffee stores in India (84% of FY21 revenue), international business of KFC, Pizza Hut and other brands operating in Nepal and Nigeria (10%), and other business of its own brands and other food and beverage operations (5%) make it a “multi-dimensional diversified quick-service restaurant”, the research house said in a Jan. 17 report as it initiated coverage.
The company is “positioned to ride its core brand business momentum with an aggressive 29% store network CAGR estimated for FY21-24”, CLSA said. “KFC has been a strong format in terms of operating metrics and store economics. Pizza Hut has a weak track record but is improving due to various turnaround measures.” That, coupled with a largely underpenetrated market, prompted the research house to peg the annualised sales growth rate at 50% in FY21-24.
Besides, the company’s shift in strategy to smaller, delivery-focused stores has resulted in a major capex savings of about 25% per KFC store and 40% per Pizza Hut outlet, the report said. “This has not hurt average daily sales for either brand. 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.”
CLSA set the target price on Yum! Brands’ largest India franchisee at Rs 207 apiece, implying an upside potential of 12%. “Our target price is based on 26x FY24 EV/Ebitda, at a 10% discount to our target multiples for Jubilant Foodworks.”
But, according to Ambit Capital—the only brokerage to rate ‘sell’ on Devyani—the company is “trading at a marginal discount to Jubilant and does not factor in low scalability/store expansion in its two key formats (KFC and Pizza Hut) and execution risk of turning around Pizza Hut and other business”.
Ambit, in its Nov. 2, note had said Devyani’s stock price more than adequately builds in the turnaround of Pizza Hut and store expansion across core brands.
Key Risks Highlighted By CLSA
Temporary and permanent store closures and reduced store-level operations, including reduced operating hours and dining-room closures as mandated by regional regulatory bodies.
There could be a significant decline in in-store dining due to Covid-19 lockdowns and other government measures.
There could be adverse impacts to sales, profitability and growth rates, particularly as operating expenses do not decrease at the same pace as revenue declines.
There could also be disruptions of services from third-party suppliers of ingredients, store equipment, food-delivery aggregators and logistics service providers.
There could be higher costs related to increased compliance with evolving government regulations, including with respect to social-distancing, food safety norms and sanitization practices.
Expansion plans remain challenging.
Of the six analysts tracking the company, five recommend a ‘buy’. The average of the 12-month price targets compiled by Bloomberg implies a downside of 9.7%.
Shares of Devyani rose as much as 5.6%, the most since Jan. 7, in early trade on Tuesday. The stock, however, pared all its gains to end 0.6% lower.