Devyani International Limited (DEVYANI) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to the Divyani International's Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the call, please signal an operator by pressing star, then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anup Pujari from CDR India. Thank you, and over to you, sir.

Yeah, thanks, Sreya. Good afternoon, everyone, and thank you for joining us on Devyani International's Q2 F527 earnings conference call. The chairman has excused himself from today's call due to personal reasons. We have with us Mr. Raj Gandhi, non-executive director, Mr. Manish Daur, president and CEO, and Mr. Anupam Kumar, CFO of the company. We'll initiate the call with opening remarks on behalf of Mr. Ravi Jaipuriya. Since the chairman couldn't join us today, Mr. Manish Daur will read the comments on his behalf. This will be followed by key business and financial highlights by him. Before we begin, I'd 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 will now request Mr. Manish Daur to read the Chairman's opening remarks.

Thanks, Anoop. Good afternoon, everyone. So I'm going to be reading the comments on behalf of Mr. Jaipuriya, and then I'll come to the detailed business and financial highlights. Good afternoon, everyone, and thank you for joining us. It gives me great pleasure to welcome you to Divyani International's Earnings Call for the second quarter of FY2627. Our growth momentum carried on firmly into the second quarter. We've had a good quarter with positive triple S's ranging from 4% to 9% across our brand portfolio in India. Except Pizza Hut, which saw sequentially better numbers. We added 70 net new stores during the quarter. KFC led the store additions with 50 net new units added in India. This takes our store footprint to 1923 stores in India and 2325 stores globally. We are on track to meet our full year guidance of 200 to 220 net new additions with the same discipline, the right locations, and a clear line of sight to profitability. Consistent performance across brands quarter after quarter tells us that the steps we've taken to sharpen our consumer proposition are taking hold. Building on the positive SSSG performance, we delivered consolidated sales of INR 1519 crores, growing 10.4% year-on-year. Despite steep inflation in raw materials and wages, the leverage from higher same-store sales and tight cost control helped us lift the EBITDA by nearly 18% to INR 229 crores. This is one of the best quarter 2 operating EBITDA numbers that we've seen, and the same helped us post profit before taxes of INR 5.7 crores for the quarter against a loss last year. Your company delivered a PBT of Rs. 29 crores in H1 versus a loss of Rs. 24 crores in the previous year. Equally encouraging is the quality of growth that we are observing. Across brands, we've witnessed transaction-led growth and growth in our on-premise channel. Both these trends are very heartening and are key to long-term sustainable growth trajectory. On a macro basis, India's food services industry remains one of the most exciting opportunities globally. Red Sea's latest report puts the market at about USD 90 billion, growing to USD 150 billion by FY31. Within this, the organized players are expected to grow at 17-18% per annum against just 3-4% for the unorganized market. A good tailwind for a company of our scale. The broader economy supports this trajectory. Real GDP grew 7.8% in the first quarter of this financial year, and Bain estimates that private consumption growth accelerated from 8% over 22-24 to 10.5% in 25. Indian consumers also remain amongst the most confident in the world with net optimism of 27% against a global average of minus 12% in the current scenario. Importantly, this growth is broad-based. Tier 2 and smaller cities now account for about 65% of India's online shoppers. And Gen Z for 40 to 45%, a clear sign that aspiration is spreading across and well beyond the metros. The headroom in emerging India is vast. India's 30 largest cities have about 20 branded QSR outlets per million people, while the national figure is closer to four. The brands that combine trust, value, and scale will lead this next phase of growth, and we are confident that DIL post-merger with Sapphire Foods will be at its forefront. While the India opportunity is real, the near-term challenges are also far from over. We have seen strong food and fuel inflation and job losses because of AI adoption. The household budgets are under pressure. With this, we also need to reorient ourselves more in favor of value, Given the macroeconomic reality in the country and a strong K-shaped economy that India is turning into. The regulatory environment also continues to evolve rapidly. A heightened inspection drive from the food authorities across the country disrupted store operations during the inspection. While we strongly believe that a strong focus on hygiene and operational control is needed and will help formalization journey for the industry, there needs to be consistent application of the same. With food inflation firming and interest rates beginning to rise, we expect discreetly spending to stay under pressure, as our peers have also already indicated. By providing sharper value at entry price points, consistent marketing, and a concerted effort on bringing guests back into our restaurants, we feel we are well positioned to perform in the coming quarters. Our new management team is settling in, and we are confident that our plans with respect to pre-merger preparations are progressing well. We are expecting that the merger should get approvals in line with our initial plans. You will be pleased to know that we have received CCI approval for the merger from the authorities. I will now go to the detailed business and financial highlights. In the current macroeconomic environment, India presents a complex and highly polarized economic landscape. Coupled with this, the uncertain regulatory environment also poses additional complexity. If we analyze the data, we see a stark divergence between current micro-realities and macro-expectations. Based on the above, we've already started work on some specific initiatives on our key brands. At KFC, we have taken concerted steps to up our recruitment engine through the 99 rupees and 149 rupees meal combos. While we continue with our abundant value proposition on Wednesday, the same has been supplemented by targeted BOGO offer in the relevant markets. We have taken similar initiatives on Pizza Hut and will be rolling out the same in the next couple of quarters. At Biryani by Kilo, we are experimenting with better value proposition for the brand at our food courts through the BVK Express outlets. As the brands go deeper into emerging cities, a strong customer recruitment engine is a critical investment for the long-term growth of the brand. We need to make sure that we can achieve the above with a minimal impact on our margins, and hence we are approaching it in a very calibrated manner. We have also seen strong inflation coming in at multiple levels in the business over the last couple of quarters. Raw materials like chicken, edible oils, dairy, etc. are trending higher year on year. There has been some mitigation on account of carryover effect of old inventories. LPG availability has normalized, but the prices are nearly double as compared to the previous year. Several states have announced steep minimum wage hike further compounding the margin pressure. We have taken a very small and calibrated 1-2% price hike on a YTD basis, and we continue to monitor the movement of key raw materials. Our endeavor is to take price hikes on a staggered basis to protect the already muted consumer sentiment. We have tried to mitigate the impact of the above by way of sharper execution on promotions and optimization of deals coupled with cost-saving measures that have helped us to protect our overall margins. The consolidated DIL revenue for Q2 grew 10.4% year-on-year to INR 1519 crores, and operating EBITDA pre-IN-DAS basis came in at INR 125 crores with a growth of almost 34% year-on-year. The gross margin at 68.5% was an improvement of 70 basis points over the previous year, and we saw the improvement in both our Indian as well as in financial business. The consolidated brand contribution margin expanded to 13%, with a brand contribution of INR 198 flows up 23% year-on-year. Together with effective management of G&A costs, this helped us post-operating EBITDA margin of 8.2% versus 6.8% in the previous year. Delivering this performance in a seasonally soft quarter and amid strong inflation is a testament to the execution skills of the DIL team. Moving on to the brands now, at KFC, SSSG came in at 4.4%, with an on-premise saliency of 56%, revenue grew 12.3% year-on-year to INR 642 crores, gross margin was 68.2%, broadly flat year-on-year, accounting for the high food inflation. Brand contribution margin came in at 13.9% virtually flat versus the previous year, despite steep minimum wage increases, especially in states like Karnataka, Kerala, Andhra, and Telangana, and elevated LPG prices. We added 50 net new stores, taking the KFC network to 844 stores. Alongside the value combos, KFC also hosted the fried chicken month in July, with a buy-one-get-one bucket offer every Friday for dine-in and takeaway. We continue to see customer response to our offerings and campaigns, strengthening our belief that the brand can sustainably deliver mid-single SSSG growth in the long term. At Pizza Hut, SSSG decline narrowed versus the previous quarter at minus 1.4%, with ADS at INR 32,000 per store per day. Revenue was INR 184 crores, nearly flat, Y&Y. Gross margin improved to 76.7% on better targeted promotions, but higher LPG and wage costs took brand contribution margin to minus 1.8%, a loss of final 3.3 crores like the previous quarter. We ended the quarter with 632 stores, adding six net new stores to replace underperforming stores that we've closed. We tested a new spicy range of pizzas and sites. Customer response to the 3-in-1 range of spicy pizzas has been encouraging. We are working on new product ideas and laying the groundwork for the long-term revival of the brand. Our own brand portfolio of Vango and Biryani by Kelo delivered healthy performance. BBK continues to show strong traction with a SSG of 8.1%, while Vango delivered a SSG of 6.9% positive. We have seen a strong turnaround in BBK, and the brand has improved on both top-line growth and margins. The brand contribution margin is now close to double digits. As a result, our own brand's portfolio posted a revenue of INR 95 crores, nearly 11% higher year-on-year. Gross margins improved to 65.4% from 62.6% last year, and brand contribution came in at INR 9 crores, a margin of 9.4%. Our own brand's network reached 225 stores, including 26 BBK Express stores. Our franchise brand's portfolio revenue growth remains steady at 7% year-on-year. Costa delivered an impressive 9.9% SSG, maintaining its strong growth rate. Gross margin at 74.2% was better than 73.6% last year. Brand contribution margin came in at 15.5%. The total store count stood at 202 stores as of the end of the quarter. Our international business maintained its impressive run in delivering strong and consistent growth and posted INR 509 flows in quarterly revenues. This is despite Thailand facing severe flooding in September, which resulted in business disruption and overall softer consumer environment due to a higher fuel cost. Gross margins were better on a Y-on-Y basis but declined slightly sequentially. Brand contribution margin was up by 1.2% compared to last year at 17.9% and came in at INR 91 close for the quarter. On store expansion, our revamped BD structure is now in place and is executing well. Of the 70 net new stores, 68 were added in India, taking us to 1923 stores in India and 2325 globally as of September 30, 2026. Our new store openings remain in line with the guidance given earlier. As regards our proposed merger with Sapphire Foods, we are pleased to mention that we have received the CCI approval on the merger last week. We are awaiting no objection from SEBI now. Once we have received the SEBI no objection, we can proceed with the NCLT application. In summary, we continue to remain optimistic about closing the merger process by the end of the current financial year. The SkyGate merger is also moving as per the plan, and we are expecting the merger approval from NCLT very shortly. As a summary, our results for the quarter demonstrate that we continue to execute five key priorities that we have laid for ourselves. Number one, expand the store footprint. Number two, maintain positive SSHG. Number three, improve efficiency and margin structure, vicious cost controls. Number four, build the next level of team organization structure with high processes, and number five, readiness for the merged entity. Request the moderator to open the forum for any questions or suggestions that you may have. Thank you very much.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask questions may press star and one on your touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask questions, please press star and one. The first question is from Saurabh Kundan from Goldman Sachs. Please go ahead.

Thank you. So, sir, there's a sequential improvement in KFC, surely. But when we look at it in the context of some years, it has lagged. Anything you want to point out that might have impacted us in this quarter And any initial sense on how you are doing in October?

Saurabh, if you look at, it's more one strong contributor is the seasonality. Because if you look at the Navratra's effect, that's predominantly in the northern markets and western markets. And therefore, because the Navratra's in the current year came in the current quarter, which is in October, And obviously, there were some tailwinds for the numbers that had been reported. Whereas in our case, for example, we have a strong KFC contribution coming in from south and east, where Durga Puja is a good positive for us, and Durga Puja fell again in the current quarter, which is October, November, December, versus the previous quarter in the last year. So, therefore, you will see that on a QM two, three quarter basis, it will be very similar to each other. We don't expect any big deviation as far as the peer group reporting that we've seen. To your other question in terms of how the numbers are panning out now, we've always said that we are building business for future. We are not building for near future, and therefore, we are taking all the right steps. It could take a little longer, more from a structural point of view, and hence our numbers will be there on a sustainable basis. So, even in the current quarter, we are hopeful that the SSSG numbers will be sustained to whatever we've reported, while let's say we are targeting for slight improvement on whatever you've seen now.

Sure. Thank you very much. Second question is, in your remarks, sir, you mentioned that you are going to launch similar transactions-focused strategies in Pizza Hut going forward, like you did in KFC. Can we take that as a first indication from you on how you are thinking about the future of this brand post-merger? Will it become more sharply focused on value Pizza Hut category?

So, Saurabh, I've indicated two things in the past, if you remember, and then I'll try and link to whatever we've said now. One, we said that the innovation engine in Pizza Hut has to work in a much more stronger way, and that has been a weakness in the past, given what competition was doing. And as you know, I mean, to develop the entire pipeline, to develop the portfolio of innovation takes time. That is what we are currently working on. So that is work in progress. The other thing that I had mentioned in the past was all about the right pricing levels and the price ladling. And while, let's say, at the premium end, we have a good assortment of products available, but at the entry levels, the consumer feedback has been that the assortment of products is weak, and that's the reason Pizza Hut is perceived to be an expensive brand or a premium brand. So that is something that we are trying to correct by way of innovation. Our other focus area will obviously be dine-in. That, again, I have indicated in the past. So these are some of the legs that we are working on. And therefore, what I said today in terms of the value offering was all about linked to the right price points and the assortment of products at multiple price points and multiple pricing layers. So that is what we are. And we've seen that with other portfolio of brands, that this is something which is working very well in the current environment. And by way of, let's say, controlling in terms of where the offering is, whether it is a dine-in channel or a delivery channel, versus the promotions, you can balance out the margins. So that's how we are operating. We are progressing on Pizza Hut as well.

Thank you very much, sir.

Thank you. The next question is from Devanshu Bansal from MK Global. Please go ahead.

Hi, sir. Thanks for the opportunity. Manish, I wanted to check there is inflation across multiple line items, right, raw material, utility, and manpower. So, I wanted to check, is this completely in the current P&L, or we may see some incremental advance in the coming quarters?

Thank you. The second big increase is because of the minimum wages, and the minimum wage, as you know, gets notified by state governments, and there is no fixed time period. We've seen some big minimum wage hikes coming from some of the states that I mentioned in my opening comments. Obviously, that is fully baked in. But let's say if there is some other state which were to come and announce a minimum wage increase, although we are not expecting much now, but that will be the additional one. So that could be a small increase. The third big element is about the utilities, where we've seen the gas prices double versus what they were last year, which again seems to be stable now. But depending on geopolitical situation, what happens globally on oil and gas prices, obviously this all is dependent on that. But right now, the availability is not an issue. Pricing is the only variable. In the current quarter, it is again fully baked in in terms of whatever the current numbers are.

Just small follow-up. Our gross margin in KFC at least has been flattish, right? So, on a buy-away basis. But sequentially, it has been down, right? So, from an RM and packaging perspective, as you said, it is work in progress. So, you meant a further increase in prices is still to be factored in the gross margin or the current levels also can sort of have an impact?

Sorry, Devanshu, as I mentioned earlier, that we've decided to take pricing only on a staggered basis because of the consumer sentiment. And we've taken a very small price hike, which does not kind of cover the inflation that we are seeing across multiple lines. But at the same time, as of now, it is baked in in terms of whatever price increase that we've taken. We are not expecting that the gross margins will deteriorate further, obviously depending on where the future goes, because we still have some price increase agenda on the table. It's not gone. Plus, you also have the lever available in terms of promotions and deals and so. So, therefore, you need to balance that out in terms of where the focus is from a channel perspective and where the focus is from a deal and promotions perspective also. So, you have to balance out the entire portfolio to be able to deliver the right numbers.

Got it, Manish. Very clear. Secondly, sir, in Viryani by Kilo, the turnaround has been very strong, right? So, you mentioned double-digit band contribution. So, what are the key changes that we have done, if you could highlight from gross margin perspective, from revenue throughput perspective? And can this format actually deliver us 20% plus band margin, as there is no loyalty cost there for this format over, say, next year?

Devanchu, in the short to medium term, our objective is to get Biryani by Kilo brand contribution to about 14-15% level. That is what we are working on. It will take some time because there are a lot of line items that need to be optimized. So the benefits that you are seeing right now obviously comes in from the procurement initiatives that we have taken Because, obviously, we have the scale, and we are able to extract some procurement benefits. At the same time, we've managed to bring in the efficiencies at the store level through labor deployment and so on and so forth. And the efficiencies also come in at the overall supervisory layer as well. So, therefore, that is how Biryani by Kilo is kind of moving. And with positive SSSC, also, it gives you some bit of leverage impact as well.

Thank you.

Before we take the next question, a request to participants to please limit your questions to one and one follow-up only, so that the management is able to address questions from all participants. We request you to rejoin the queue for more questions. We take the next question from Mr. Percy Pantaki from IIFL Capital. Please go ahead.

Hi, Manish. Since there is a seasonality impact, it is better to look at Q2 and Q3 put together in terms of SSSG. On the call, Sapphire had said that basically Q2, Q3 sort of combined SSSG would be somewhere in the 8% to 9% kind of a region for KFC. Is that a fair assumption to take for Devyani as well?

Parsi, see, I will not be able to comment on Sapphire, and I will not be able to comment on future. So, therefore, those are the two variables that you've put me into. Obviously, as I said, there was another question that I said that whether this is sustainable or not. In our view, the SSSG numbers that we are talking about are sustainable, and if at all, we are targeting that Q3 should be slightly better than Q2.

Sir, another way to sort of ask this question, which will not put you in this dilemma, is if you can just call out this quarter, how much is the impact of the shift in seasonality?

See, the impact is significant. And let me just give you an idea so that, I mean, you are able to understand. Maybe I'm trying to answer you differently. If I were to look at my North numbers, although North business is very small for us, but our North numbers on a triple AC perspective for KFC were plus 20%. That kind of gives you the indication on where we are. So, therefore, I mean, if I were to compare that versus, let's say, because the anxiety is peer group versus our numbers, and that's the reason for the first time I've quoted what we've done on a regional basis, if I were to compare on that basis, we are in line, or if at all, we are doing a little better. But then, I mean, let's not kind of take that as normal, because normally we don't report the breakups and so on and so forth.

What two most important points would you attribute the acceleration in the underlying sort of momentum of the business in KFC? What are the couple of, I know you have done a lot of initiatives, but if you have to name just a couple of the most highest contributing factors, what would they be?

See, one is this whole initiative that we've taken on Dynem on a selective basis. So that is bringing the consumers back and it's working. And at the same time, from a recruitment point of view, a 99 rupees price point is a great price point for consumers. And obviously, that comes at a higher cost of sales, but that's working well. Similarly, a 149 price point, which we are kind of in the process of rolling out, is another attraction for consumers. So, these two put together along with Wednesdays continues to be strong. The dine-in offer is working well. So, a combination of all of this is what is bringing the consumers back in.

Okay, got it. And that's all from me. Thanks and all the best.

Okay, thanks.

The next question is from Jiganshugur from Bernstein. Please go ahead.

Hi, thank you for the opportunity. Manish, I just had one question on KFC. We noticed that this quarter and even if you look at the calendar year, then the first nine months of the calendar year, our KFC store addition has been faster than that of last year by a meaningful number. And on the other hand, we are also talking of near-term headwinds, plus we have the merger to think of. So do you expect some calibration on store openings going forward? What's our thinking here? Are we worried about expanding too early, too fast? I just want to get your perspectives.

Sure. So, Jaganshu, let me just kind of step back in terms of what is the rationale behind expansion of KFC and why we would not like to slow it down. One, if you look at the wedge and the non-wedge market distribution in the country, remains strongly in favor of non-wedge. Obviously, we have issues in terms of the vegetarian days. We have the issues in terms of the regional festivals becoming national festivals. But nonetheless, despite all of that, the demand for chicken remains very, very strong. And if I were to compare, let's say, to this market versus, let's say, competition in chicken market and competition in, let's say, pizza category, which is the largest USR category in the country, we still are highly underpenetrated versus the competition. And hence, it's very important for us to continue to kind of scale up and establish KFC as a dominant market leader. And that's the reason behind the store expansion. Whatever we guided initially for the year, we are still on the same guidance. We talked about 100 to 110 stores for Divyani for KFC for the current year. We will be able to deliver on that. On the merge company basis, I mean, we've got the CCI approvals, we will engage, we will talk, we will come back on the guidance of the merge company numbers, but then our objective is to continue to expand on KFC because the brand is doing well, the chicken demand in the country is growing, and therefore there's no reason why we should slow down the KFC.

Sure, very clear, Manish, helpful. My second and last question, Manish, keeps a heart. I think a few quarters ago, we discussed about a sort of a strategic reset for how we want to position the brand within the context of the competitive landscape. Are we at a position where we are able to share with the investors what our plan is, or should we expect that in the future?

It will be more in future because, to be honest, we need to understand the entire landscape from Sapphire's perspective as well on how they are doing on Pizza Hut on a granular basis because if you have to form a future strategy of turnaround, we need to understand things on a much, much granular basis. We've got the CCI approval now. Obviously, we will continue to engage, but we'll be able to give you some color and details by the time the merger gets consummated. Right.

So, that's helpful, Manish. Thank you so much. All the best. Okay, Jayant.

Thank you. Before we take the next question, a reminder to participants that you may press star and one to join the question queue. The next question is from Tejas Shah from Aventis Park. Please go ahead.

Hi, Manish. Thanks for the opportunity. I'm very sure there's a visible divergence, if I have to be slightly nuisance here, that it seems like that your optimism looking at demand is not as high as what we have picked up so far from the other QSRs. Perhaps we are over-eating, but just wanted to get your sense that are we seeing any structural or at least sustainable turnaround that we are picking up from other calls, or is it too early to say you're promoting?

I would not like to comment on what the others are saying. But as I said earlier, the overall opportunity size is big. Within that, we know what the current macro level situation is. We know what the consumer sentiment is. We know that consumers are moving towards premiumization on a very selective basis. And hence, we need to kind of position our brands accordingly. We are, KFC and Pizza Hut eventually are not a fine dining brands or let's say casual dining brands. These are QSR and hence it needs to be at the right price point, the way the world is operating with QSR. So it will take some time. Obviously, we will be in line, but the opportunity remains very high. And we are not at all pessimistic. Otherwise, we would not be expanding on the stores. We are very optimistic on the current state of things as well as where our brands stand. But again, as I said, we are building the company for 2030. We have to take steps. We are able to sustain things on a lot.

Sure, very clear. There's one follow-up. On KFC, usually our acceleration of store expansion happens in TQ. So this quarter, TQ itself has seen a very robust number. So I just wanted to understand any change in calendar here or acceleration will again pick up as usual in C2-4 present?

Two things, Tejas, and I'm glad that you raised that question. One is, as I mentioned in my comments also, we've tried to change the BD structure within the company, and that's now kind of settled and therefore it's fighting now. At the same time, we are trying to kind of change phasing a little bit without changing the overall numbers because we know that post-merger, there will be some reset. The new management teams will take time to settle and so on and so forth. And I do expect that post-merger, there could be some slowdown. And therefore, we are trying to internally make sure that we don't lose out on the numbers and we are trying to kind of change the cycles a little bit. So, let's see how it pans out, but that's the fundamental objective.

Got it. I have something to do on the team.

Okay. Thanks, Nthio.

Thank you very much. That was the last question. I would now like to hand the conference over to the management team for closing comments.

Thank you very much. We hope we have been able to answer all your questions satisfactorily. Should you need any further clarifications or would like to know more about the company, please feel free to contact our investor relations team. Thank you once again for your interest and support and for taking the time out to join us for this call. Thank you very much once again.

Thank you very much. With that, we conclude today's conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.