Devyani International bets on affordable options to save the day

Market


Devyani International Ltd, the largest franchisee partner for YUM! brand in India, is introducing pocket friendly options to protect volumes from faltering in a high inflation environment. One of its three core brands, Pizza Hut, has introduced the Flavour Fun range of pizzas starting at 79 to make their offering a value for money product. The other two core brands are KFC and Costa Coffee.

In August, India’s inflation measured via the consumer price index rose to 7%, mainly driven by dearer food items. In a sustained high inflationary environment, consumer spending on discretionary products and services could take a backseat. Expensive vegetables such as potatoes and onions would also mean increased input costs, in a double whammy of sorts for companies operating in the quick service restaurant space.

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“Risk for Devyani International emerges from a further rise in prices of raw materials (mainly milk), as this could hurt gross margins pushing the company to take further price hikes across product portfolios,” said Sachin Bobade, vice president, research, Dolat Capital Market.

Nonetheless, the latest pizza range addition helps Pizza Hut compete with value menu offerings of competitors. “With the introduction of the Flavour Fun range, Pizza Hut has bridged a key menu gap,” points out Edelweiss Securities Ltd. Prior to this launch, Pizza Hut’s cheapest offering was 200. “While this is a lower gross margin product, it should drive up average daily sales and help attract younger and more price-conscious customers,” said the Edelweiss report dated 15 September.

This mantra is being followed by other QSR companies as well. Mc Saver combo by McDonald’s and Stunner menu from Restaurant Brand Asia are some examples, analysts noted.

Meanwhile, in CY22 so far, Devyani’s shares have risen by 14%, but valuations are not exactly cheap. The stock is trading at an EV/Ebitda of 25.85x based on FY24 estimates, according to Bloomberg data.

“Devyani is better placed than many QSR competitors on account of diversified bouquet of brands, higher Ebitda margins and has a strong balance sheet. These factors support its FY24 valuation multiple,” said Kaustubh Pawaskar, deputy vice president, research, Sharekhan by BNP Paribas.

Store additions are a key monitorable for investors. In Q1FY23, both KFC and Pizza Hut saw robust improvement in their respective same-store sales growth with store counts rising sequentially and year-on-year.

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