Devyani International IPO: All about the Pizza Hut, KFC franchisee

The company plans to use the money raised through the IPO to pay most of its debt, while its expansion will be funded through internal accruals.

Here’s what you need to know about the company’s operations and plans:

KFC: the crown jewel

Devyani International runs 284 KFC India stores in 107 cities, which contribute more than half of its revenue.

“KFC has been a star performer within DIL’s portfolio on all fronts – store expansion, revenue growth as well as profitability. DIL’s KFC store network has grown at 40 percent CAGR over the last three years (25 percent CAGR on an organic basis) and it now accounts for more than 50 percent of Yum’s India KFC store network vs. less than 30 percent three years ago,” brokerage Jefferies India said in a recent note.

According to Jefferies, the format generated 57 percent of Devyani International’s revenue in FY21 and 73 percent of its brand contribution profit.

The company has the right to open KFC stores in the southern and eastern states, Rajasthan, Jammu & Kashmir and Himachal Pradesh in the north, and in Bengaluru and a few cities in the National Capital Region and Uttar Pradesh.

Pizza wars

Devyani International’s Pizza Hut faces stiff competition from Jubilant FoodWorks, which runs Domino’s Pizza in India. Pizza Hut has 500 stores in India, of which 317 are run by Devyani International. Jubilant FoodWorks has 1,335 outlets in India.

Sapphire Foods India and Burman Hospitality are other the franchisees of Yum! Brands in India.

“Pizza Hut (including delivery) has strong competition in Domino’s Pizza and will take a fair amount of investments on brand recall along with aggressive rollouts. Conversely, KFC enjoys a strong brand position and Jubilant FoodWorks’ Popeyes will need to make similar investments and, hence, is not a serious threat, in our view,” Jefferies said.

Both companies have aggressive expansion plans in the pizza space. Jubilant FoodWorks, while reporting its first-quarter results for FY22, said it plans to add 150-175 Domino’s Pizza stores this year.

“DIL’s Pizza Hut network has expanded at a mere 7 percent CAGR vs. 39 percent CAGR for KFC (25 percent organic). While 107 stores were opened on a gross basis over FY18-21, 54 stores have also been shut down, resulting in a much lower net addition,” Jefferies said.

The two companies, however, have different approaches to the delivery business. Domino’s Pizza focusses on its own platform, while Pizza Hut relies on food aggregators, a model it plans to continue.

“We are one of the largest business partners for Swiggy and Zomato,” said Jaipuria. “Though we have our delivery infrastructure, the sales are relatively low as compared to the food aggregators.”

According to Jaipuria, the model works because it is a variable and in a fixed model, the company would have to develop its delivery infrastructure. He added that this speeds up the rollout to new cities and towns.

The coffee challenge

Devyani International runs 44 Costa Coffee stores across 17 cities in India. According to the company, its Costa Coffee outlets reported a revenue of Rs 90 crore in the pre-pandemic period of FY19 and Rs 21 crore in FY21. Jaipuria said Costa Coffee has had some international management changes and Devyani International is in negotiations with the company.

“We are currently going through the legalities of the agreement,” he said.

Costa Coffee, analysts said, is the weak link in Devyani International’s portfolio.

“Devyani International has closed several stores in FY21 and store count has reduced by ~30 percent. While format profitability is modest with double-digit Ebitda margin in FY20 (pre-Ind AS 116), revenue growth has been sub-par,” said Jefferies.

Costa Coffee contributed 5 percent of the company’s revenue in FY20 and 10 percent of brand contribution profit during the period.