How Devyani Int. of Pizza Hut dodges high inflation

Devyani International Ltd, the largest franchise partner of YUM! brand in India, introduces pocket-friendly options to protect volumes against declines in a high inflation environment. One of its three core brands, Pizza Hut, launched the Flavor Fun line of pizzas from 79 to make their offering a value for money product. The other two main brands are KFC and Costa Coffee.

In August, Indian inflation measured by the consumer price index rose to 7%, mainly driven by more expensive foodstuffs. In a high and sustained inflationary environment, consumer spending on discretionary goods and services could take a back seat. Expensive vegetables such as potatoes and onions would also drive up input costs, which would be a double whammy for companies operating in the fast food sector.

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“The risk for Devyani International stems from a further rise in commodity prices (primarily milk) as this could hurt gross margins, pushing the company to further increase prices across its product portfolios,” Sachin said. Bobade, Vice President, Research, Dolat Capital. Market.

Nonetheless, the latest addition to the pizza lineup helps Pizza Hut compete with competitors’ value menu offerings. “With the introduction of the Flavor Fun range, Pizza Hut has filled a key gap in the menu,” Edelweiss Securities Ltd. Prior to this launch, Pizza Hut’s cheapest deal was 200. “Although a lower gross margin product, it should boost average daily sales and help attract younger, more price-conscious customers,” said the Edelweiss report dated September 15.

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

Meanwhile, in CY22 so far, Devyani shares are up 14%, but valuations aren’t exactly cheap. The stock trades at an EV/Ebitda of 25.85x based on FY24 estimates, according to Bloomberg data.

“Devyani is better positioned than many QSR competitors due to a diverse brand mix, higher Ebitda margins and strong balance sheet. These factors support its FY24 valuation multiple,” said said Kaustubh Pawaskar, Assistant Vice President, Research, Sharekhan of BNP Paribas.

Store additions are a controllable key for investors. In the first quarter of FY23, KFC and Pizza Hut saw strong improvement in their respective same-store sales growth, with store counts increasing sequentially and year-over-year.

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