Devyani International, the operator of QSR (quick-service restaurants) such as Pizza Hut, KFC, and Costa Coffee, has seen its share price surge following CLSA India’s announcement of a bullish outlook. Following this, shares of Devyani International surged 3% to Rs. 193 on the NSE on 19 January 2022.
CLSA India initiated coverage on CLSA shares with a target price of Rs. 207 and an ‘outperform’ rating. The brokerage firm expects further gains of 10% from Monday’s closing price of Rs. 186.80.
Now let us take a more detailed look at Devyani International shares.
About Devyani International
It is the largest franchisee of Yum Brands in India and a reputable operator of chain QSR restaurants. Popular outlets such as KFC, Pizza Hut, and Costa Coffee operate under Yum Brands Inc, which has more than 50,000 restaurants across 150+ countries.
In India, Devyani International Limited (DIL) has around 655 stores in 155 cities as of 31 March 2021. It also operates food outlets of KFC, Pizza Hut, and other brands in Nepal and Nigeria. Besides its core brands, DIL also operates its own brands, including The Food Street and Vaango.
In addition, it operates brands such as Taco Bell, Amreli, Ile Bar, Ckrushh Juice Bar, and Masala Twist.
Devyani International’s IPO and Stock Market Debut
Devyani International opened its Initial Public Offering (IPO) on 4 August 2021. It consisted of a fresh issue of equity shares worth Rs. 440 crores and an OFS (offer for sale) by RJ Corp and Dunearn worth Rs. 1398 crores. The IPO was seeking to raise Rs. 10,823 crores at an upper price band of Rs. 90 per share.
Before the opening of its IPO, DIL finalized the allocation of 9.16 crores shares as anchor investment. It would raise funds of Rs. 824.87 crores from various anchor investors at Rs. 90 per share.
The company wanted to use the proceeds to pay off loans worth Rs. 324 crores and for general corporate purposes. It would be successful in doing so, becoming the eighth-most subscribed issue of the year. The IPO was subscribed 116.7 times, receiving 1313.79 crores bids against its 11.25 crores equity shares put on offer.
The shares of Devyani International were listed on both NSE and BSE on 16 August 2021. It would witness a bumper listing, opening at Rs. 140.90 on NSE and Rs. 141 on the BSE, a premium of around 56% over its IPO price. The stock would close at Rs. 122.6, a higher price than its upper price band by 36.2% on its first day.
Share Price History and Ratings by CLSA
Since 17 August 2021, the stock has increased in value by 45.95%, with an all-time high of Rs. 198.90. As of 12:52 PM 19 January 2022, DIL shares were trading at Rs. 180.20 on NSE with a total volume of 22,48,217 and a market cap of Rs. 223.19 billion.
The stock had more than doubled in value over its IPO price and appreciated by 56-57% in just the last three months alone. An investor who invested Rs. 1 lakhs in Devyani International three months ago would have his/her investment grow to Rs. 1.5 lakhs today.
The brokerage firm CLSA has rated its shares with an ‘outperform’ rating with the expectation that its operating leverage benefits will kick in at some point. CLSA expects DIL to have its EBITDA (as of FY21) quadruple over the next three years. This would be aided by several factors like aggressive store expansion and improved unit economics of Pizza Hut outlets.
CLSA has valued Devyani International at 26 times its FY24 EBITDA levels provided that it quadruples in value. Its analysts have made this value at a 10% discount to Jubilant FoodWorks despite better earnings growth. This is because Jubilant has superior technology, unit economics, and a presence all over the country.
CLSA India expects Devyani International Limited to generate around Rs. 5.8 billion in cumulative Free Cash Flow (FCF) between FY22 and FY24.
Expectations for the Future
Optimism for DIL comes from various factors like a severely underpenetrated market, turnover in its Pizza Hut business, and a robust business model for KFC. The company has a multi-dimensional and diversified portfolio of QSR brands.
According to CLSA, DIL’s aggressive plans for expansion of its store network make it well-positioned to ride the momentum of its core business. Devyani International has also altered its store expansion strategy in recent times to improve its savings.
The company has switched to smaller stores focused on delivery resulting in boosted profitability across formats. Lower capital expenditure and improved store economics have delivered around 40% savings per store for Pizza Hut franchisees and 25% per store for KFC franchisees. Moreover, a severe underpenetrated market for popular QSR stores in India presents a lot of opportunities.
Frequently Asked Questions
- What is the state of DIL’s finances as of its annual report?
According to its last annual financial report, the company reported net sales of Rs. 1134.84 crores and a net loss of Rs. 55.21 crores in FY21.
- How much revenue does each business segment of Devyani International produce?
Core brands, including stores of Costa Coffee, KFC, and Pizza Hut, contributed 81.95% of DIL’s revenue. International businesses generated 12.23% of this company’s total revenue, while other operations in the F&B industry contributed to 5.81% of the same.
- What is the future scope of QSR restaurants in India?
India currently has a severely underpenetrated fast-food market. For example, it is ranked 12th for the number of KFC stores, which is way behind China and emerging economies like Malaysia, Indonesia, and Thailand. As such, it is expected to flourish in the future with an increase in urbanization and the working-class populace.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.