Devyani International Limited Rolex Rings Limited

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Rolex Rings Limited

IPO Note 28th July 2021

Devyani International Limited

14th September 2021 Initiating Coverage

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KRChoksey Research is also available on Bloomberg KRCS<GO>

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ANALYST Vikrant Kashyap, [email protected], +91-22-6696 5423

India Equity Institutional Research II Sales Note II 14h September, 2021 Initiating Coverage

Devyani International Limited or “DIL" is the largest franchisee of Yum Brands in India and is among the largest operators of chain quick service restaurants (“QSR”) in India on a non-exclusive basis. DIL operates 696 stores across 166 cities in India, as of June 30, 2021. In addition, DIL is a franchisee of the Costa Coffee brand in India, which is owned by Costa, and operated 44 Costa Coffee stores as of June 30, 2021. DIL has other operations in the F&B industry, including stores of its own brands such as Vaango and Food Street. DIL also operates KFC and Pizza Hut stores in Nepal, and KFC stores in Nigeria, on a non-exclusive sole franchisee basis.

Market Data

Mkt Cap (INR Mn) 1,38,410

52 Wk H/L (INR) 141.05/107.7

Volume Avg (1m) 10,45,970

Shares outs (Mn) 1202

Face Value (INR) 1

Shareholding Pattern (%)

Particulars Pre-Issue Post

Issue

Promoters 75.79% 67.99% Others 24.21% 32.01% Total 100% 100%

Recommendation

Outlook

Company Snapshot

Key Financials

Given the prevailing opportunities in QSR industry, change in delivery mechanism and DIL’s focus on implementation of technology to increase footfall and improving operational efficiency, rightsizing stores, store expansion in new areas, resulting into improving unit metrics and reduction of debt, we expect DIL to be a key beneficiary of the same. Long term drivers such as rising per capita income, changing consumer preference and food habits, young population, business culture and influence of western lifestyle are expected to drive growth of QSRs. Digital and delivery penetration which was already gaining momentum before the pandemic, was projected to take years is happening in just months driving faster recovery. We Initiate Coverage on Devyani International Ltd. with a BUY rating for a target price of INR 151 per share valuing at 30x FY24E EV/EBIDTA giving 31% upside from current levels. DIL’s share price has corrected ~18% to its IPO listing price which provides a good opportunity to buy the stock.

Devyani International Limited

Source: KRChoksey Research

Particulars (INR Mn) FY19 FY20 FY21 FY22E FY23E FY24E

Net Sales 13,106 15,164 11,348 15,459 21,919 28,265

EBITDA 2,790 2,555 2,269 3,030 4,625 5,964

PAT -593 -788 -813 -99 1,046 2,203

EPS -0.75 -1.1 -0.5 -0.1 0.9 1.8

EBITDA Margin (%) 21.3% 16.8% 20.0% 19.6% 21.1% 21.1%

Best pick on platter, Bon appetit

CMP (INR) 115.1

Target Price (INR) 151

Upside 25%

Rating BUY

Sector QSR

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Investment Rationale

Presence across key consumption markets DIL operates 696 stores across all brands and are present in 26 states and three union territories across 166 cities in India, as of June 30, 2021. DIL has strong presence in key metro regions of Delhi NCR (comprising Faridabad, Ghaziabad, Gurgaon, Delhi and Noida), Bengaluru, Kolkata, Gurgaon, Mumbai and Hyderabad. Over the years, DIL been consistently increasing the number of stores both organically and inorganically. With its cluster-based expansion approach, DIL has been able to address demand in high-potential domestic markets.

Store expansion – key to drive growth DIL operates franchises of several highly recognized global QSR brands and is the largest franchise partner for Yum in India. DIL is the non-exclusive sole franchisee for KFC and Pizza Hut in Nepal, and for KFC in Nigeria and is also a franchisee for Costa Coffee in India. DIL continues to add stores in Core Brands (Pizza Hut – net addition 28 stores and KFC – net addition 92 stores in FY21). It continued to add stores in Q1FY22 in existing as well as new location despite several disturbances caused by second wave of Covid -19. DIL added 40 stores in Q1FY22 and increased its presence from 155 cities in March 2021 to 166 cities in June 2021.

Improving Same Store Sales Growth (SSSG) The SSSG has been impacted on account of COVID-19 but DIL has focused on improving the trend which is reflected in the performance of Core Brands Business in Q4FY21. The SSSG of Pizza Hut and KFC shown recovery in later half of FY21 largely driven by delivery and take-away but Costa Coffee is yet to fully recover from the impact of Covid-19 due to relative inconvenience of packaging liquid foods, consumption of these foods is restricted to dine-in and customer’s take-away.

Increase in delivery of foods driven by change in consumer preference QSRs are seeing good recovery especially because of their inherent strength in delivery. Delivery now represents a larger portion of sales compared to the pre-COVID-19 period. DIL carries out direct delivery and has also entered into tie-ups with delivery aggregators to accept delivery orders placed on their mobile applications. Majority of the deliveries are carried out by delivery aggregators that provide end-to-end delivery solutions. Revenue generated from delivery sales represented 51.15% of DIL’s revenue from operations in its Core Brands Business in FY2020 and increased to 70.20% of its revenue from operations in its Core Brands Business in FY2021 and the trend is expected to continue in near future.

Experienced Promoters and management team with strong domain expertise DIL benefits from an experienced and hands on promoter responsible for putting best-in-class processes, suitably supported by professional management team & specialized employees. Ravi Kant Jaipuria, one of the Promoters and Non-Executive Director on the Board, has over three decades of experience in conceptualizing, executing, developing and expanding food, beverages and dairy business in South Asia and Africa. DIL’s operations are conducted by a well-qualified and experienced management team that has significant experience in all aspects of its business. Each brand DIL operates has a dedicated team responsible for developing and delivering a superior brand experience. The management team is led by Whole-time Director (President & CEO), Virag Joshi, who has been a key strategist in expansion of Pizza Hut, KFC, Costa Coffee stores from a small base of five restaurants in 2002 to over 600 stores in the last 19 years.

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S. No. Particulars Page No.

1 Company Overview 5

2 Industry Overview 8

3 Investment Rationale

a) Presence across key consumption markets 11

b) Store expansion – key to drive growth 11

c) Improving Same Store Sales Growth (SSSG) 12

d) Increase in delivery of foods driven by change in consumer preference 12

e) Experienced Promoters and management team with strong domain expertise 13

f) Continue to improve unit-level performance 13

g) Investment in technology and focus on digital capabilities

13

4 Management 14

5 Financial Projections 15

6 Outlook and Valuation 16

7 Risk and Concerns 18

8 Consolidated Financials 19

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Company Overview Devyani International Limited or “DIL“ is the largest franchisee of Yum Brands in India and is among the largest operators of chain quick service restaurants in India, on a non-exclusive basis, and operates 696 stores across 166 cities in India, as of June 30, 2021. DIL began its relationship with Yum in 1997, when the company commenced operations of its first Pizza Hut store in Jaipur. DIL has subsequently continued to expand its operations with both KFC and Pizza Hut franchises, and as of June 30, 2021, operated 284 KFC stores and 317 Pizza Hut stores across India. In addition, DIL is a franchisee of the Costa Coffee brand in India, which is owned by Costa, and operated 44 Costa Coffee stores as of June 30, 2021. DIL has other operations in the F&B industry, including stores of their own brands such as Vaango and Food Street. DIL’s business is broadly classified into three verticals that includes stores of KFC, Pizza Hut and Costa Coffee operated in India (KFC, Pizza Hut and Costa Coffee referred to as “Core Brands”, and such business in India referred to as the “Core Brands Business”); stores operated outside India primarily comprising KFC and Pizza Hut stores operated in Nepal and Nigeria (“International Business”); and certain other operations in the F&B industry, including stores of their own brands such as Vaango and Food Street (“Other Business”).

In the Core Brands Business, DIL has extensive presence in 26 states and three union territories in India as of June 30, 2021. Yum! Brands Inc. operates brands such as KFC, Pizza Hut and Taco Bell brands and has presence globally with more than 50,000 restaurants in over 150 countries, as of December 31, 20201.

Pizza Hut: DIL is the franchise partner of Yum for Pizza Hut in India. DIL’s first Pizza Hut store in India opened in 1997 at Jaipur. It was the first international restaurant chain to develop a footprint in the region. As of June 30, 2021, DIL operated 317 Pizza Hut stores located in 20 states and three union territories, across 106 cities in India. Pizza Hut restaurants operate primarily in two formats, first being the Enhanced Dine-In for fine dine experience and second being Pizza Hut Delivery, which provides the options of dine-in, carry out and delivery. In addition to the original pan pizza offering, DIL’s Pizza Hut stores have an extensive menu featuring pizzas, pasta, beverages and desserts.

No of stores (Core Brands) FY19 FY20 FY21 Q1FY22

Pizza Hut 268 269 297 317

KFC 134 172 264 284

Costa Coffee 67 63 44 44

No of stores FY19 FY20 FY21 Q1FY22

Core Brands 469 504 605 645

International Business 33 35 37 NA

Other Business 67 71 50 NA

Source: KRChoksey Research Source: KRChoksey Research

Pizza Hut (Year ending March) FY19 FY20 FY21

Revenue 4,233 4,174 2,879

YoY growth (%) 8.6% -1.4% -31.0%

Gross margin 3,131 3,126 2,135

Gross margin (%) 74.0% 74.9% 74.1%



Brand Contribution (Store level Profit) 655.5 439.0 372.4

Brand Contribution (% of revenue) 15.5% 10.5% 12.9%

Average daily sales per store (in INR) 44,679.3 43,917.6 34,900.4

Average daily transaction per store 93.8 94.1 65.8

Average transaction size (in INR) 476.3 467.0 530.2

Same Store Sales Growth (SSSG) 4.7% -3.7% -30.3%


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Company Overview KFC: DIL is the franchise partner of Yum for KFC in India and is the only franchise partner for KFC in Nepal and Nigeria, through its subsidiaries. KFC is the world’s No.1 Chicken QSR restaurant and has industry leading stature across many countries like the UK, Australia, South Africa, China, USA, Malaysia and India. The first KFC store in India opened in 2005 at Kolkata. As of June 30, 2021, DIL operated 284 KFC stores located in 21 states and two union territories, across 107 cities in India. DIL’s KFC stores have an extensive menu featuring fried chicken buckets and allied chicken products, grilled chicken, burgers, rice bowls, and beverages.

Costa Coffee: DIL’s first Costa Coffee store in India opened in 2005 at Delhi. As of June 30, 2021, DIL operated 44 Costa Coffee stores located in eight states and one union territory, across 17 cities in India. DIL currently operate two formats of Costa Coffee stores - full retail stores at high-street locations and malls, and branded kiosks at airports, hospitals and food courts at highways. DIL’s Costa Coffee stores have an extensive menu featuring coffee, sandwiches, wraps, Indian snacks, desserts, and other beverages.

KFC (Year ending March) FY19 FY20 FY21

Revenue 4,641.1 6,091.3 6,442.6

YoY growth (%) 31.1% 31.2% 5.8%

Gross margin 3,064.3 3,949.7 4,360.2

Gross margin (%) 66.0% 64.8% 67.7%



Brand Contribution (Store level Profit) 853.7 972.7 1,181.7


Average daily sales per store (in INR) 1,13,851.6 1,16,740.4 1,00,269.9



SSSG 4.7% 3.2% -33.7%


Costa Coffee (Year ending March) FY19 FY20 FY21

Revenue 902.0 819.6 214.0

YoY growth (%) 3.6% -9.1% -73.9%

Gross margin 693.4 634.0 168.0

Gross margin (%) 76.9% 77.3% 78.5%


Costa Coffee (Year ending March) FY19 FY20 FY21

Brand Contribution (Store level Profit) 181.7 174.1 33.2


Average daily sales per store (in INR) 37,458.4 37,413.6 18,510.1



SSSG 2.7% -4.4% -61.6%


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Other Business: In addition to the Core Brands Business and International Business, DIL operates stores of other brands such as Vaango, The Food Street, Ile Bar, AMRELI, Ckrussh Juice Bar, among others. DIL typically operates these in the form of outlets within larger food courts in malls and airports. DIL launched its own brand ‘Vaango’, a south Indian QSR chain in 2011. The first Vaango outlet in India opened in 2011, at Noida. As of June 30, 2021, DIL operated 27 Vaango outlets located in eight states and one union territory, across 15 cities in India. In Fiscal 2019, 2020 and 2021, DIL opened 12, 11 and 2 new Vaango outlets in India. Vaango outlets are generally located in food courts in malls and shopping complexes. DIL also operate food courts, restaurants and bars for brands such as ‘The Food Street’, ‘Ckrushh’, ‘Ile Bar’, among others. DIL operates these outlets across food courts at airports, malls, highways, and hospitals. As of March 31, 2019, 2020 and 2021, DIL had 64, 71 and 50 stores, respectively, of other brands under Other Business. As of June 30, 2021, DIL had 51 stores of other brands under its Other Business.

Company Overview International Business: The international journey for DIL started in 2009 with opening of stores in Nepal and Nigeria. As of June 30, 2021, DIL has 37 stores of its Core Brands in Nepal and Nigeria, comprising 34 KFC stores and three Pizza Hut stores. DIL operates KFC and Pizza Hut stores in Nepal, and KFC stores in Nigeria, on a non-exclusive sole franchisee basis. In Nepal DIL operates both YUM brands i.e. KFC & Pizza Hut, whereas in Nigeria DIL only operate KFC.

International Business (Year ending March)

FY19 FY20 FY21

No of stores at the beginning of the period

32 33 35

Addition 1 2 3

Closed 0 0 1

No of stores at the end of the period 33 35 37


International Business (Year ending March)

FY19 FY20 FY21

Amount (INR Mn)

% of total Int

revenue

Amount (INR Mn)

% of total Int

revenue

Amount (INR Mn)

% of total Int

revenue

Nigeria 763.6 69.2% 1,131.5 75.9% 932.3 80.8%

Nepal 340.1 30.8% 359.5 24.1% 221.3 19.2%

Total 1,103.7 100.0% 1,491.1 100.0% 1,153.6 100.0%


Revenue from the Core Brands Business, together with the International Business, represented 83.01%, 82.94% and 94.19% of DIL’s revenue from operations in fiscals 2019, 2020 and 2021, respectively. DIL has been consistently expanding its store network over the years. Stores in its Core Brands Business grew at a CAGR of 13.58% from 469 stores as of March 31, 2019 to 605 stores as of March 31, 2021, and had 645 stores as of June 30, 2021. Despite the ongoing COVID-19 pandemic, DIL has continued to expand its store network and in the six months ended March 31, 2021, DIL opened 109 stores in the Core Brands Business.

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Industry Overview

The Indian food service industry witnessed multi-fold growth in the last decade largely due to changing consumer patterns, increase in eating out trends and growing market proliferation of brands in India. The Indian food services industry was estimated at INR 8,366 billion in FY 2019-20. The market is projected to grow at a CAGR of 15.5% over the next five years and is expected to reach INR 17,220 billion by FY 2024-25. Factors such as Rising per capita income, increasing internet penetration, urbanization, changing consumer preference and food habits, young population, business culture and western lifestyle are expected to play key role in growth of the industry. The rise in the number of transactions, which grew at a CAGR of 2.4% during the last five years, was one of the key reason for growth in the industry. The number of transactions is expected to grow by an even higher rate of 6.9% in the period between 2020 and 2025.

Aggregators to play key role in the ecosystem: Food delivery applications, such as Zomato and Swiggy, have played vital role in the recent past and are expected to play an even more prominent role, as a large share of consumers will continue to prefer the convenience of home deliveries. The pandemic has amplified the role of food delivery providers in the ecosystem. DIL is among the single largest QSR companies in India that is listed on the Swiggy platform, and is among the largest QSR companies in India listed on the Zomato platform in CY 2019 and 2020. Historically, the quick-service restaurant (QSR) channel recorded the fastest growth among all foodservice channels, at a CAGR of 5.5% from 2015 to 2020. Their ability to provide affordable meals, with a quick service time, helped them register significant growth during this period. Global chains, such as KFC, McDonald’s, and Burger King, have invested in expanding their presence in the market. The quick-service restaurant channel has been rapidly growing in popularity in India, owing to factors such as rise in literacy, exposure to media, increase in disposable incomes, and easier and greater availability. Affordability has also been a key factor. In 2020, the QSR channel made the largest contribution to the foodservice industry, with a sales share of 34.1%. This was followed by pub, club, and bar, and full-service restaurants, with market shares of 27.1% and 15.5% respectively.

2,854.8 2,268.0

1,299.9 431.9 431.2 341.2 739.4

34.1%

27.1%

15.5% 5.2% 5.2% 4.1%

8.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

Sales Value (INR billion) Market Share (In %)

Source: Company, KRChoksey Research

Indian Food Service Sector - Value and Share by Channel (Year 2020)

5.5%

-0.8%

3.9% 2.5%

-1.9% -1.7%

12.4%

18.0% 16.0%

20.2% 17.7%

15.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

QSR Pub, Club & Bar FSR Leisure Accomodation Coffee & TeaShopHistoric growth Future growth


Indian Food Service Sector - Value Growth by Channel (Historic growth 2015-20 and Future growth 2020-25)

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Industry Overview

The QSR channel leads the industry in terms of the number of outlets in 2020, at an outlet count of 1,995,104. The total number of outlets in the channel grew by a CAGR of 2% between 2015 and 2020; the rate is the highest among all foodservice channels. The QSR channel is expected to lead the foodservice industry in terms of growth in the number of outlets between 2020 and 2025, at an expected CAGR of 6.5%.

Indian QSR channel grew by a CAGR of 5.5% to amount to INR 2,854.8 billion in 2020 from INR 2,189.2 billion in 2015. While the number of transactions grew by 3.8%, number of outlets grew by 2%. Home deliveries played a key role in pushing the number of transactions. Over the next five years, the value sales of quick-service restaurants is expected to grow at an even higher pace of 12.4%, indicating a steep rebound in these outlets post the pandemic. The year 2020 saw significant changes in the business operations of QSRs. Contactless dining experiences and takeaways were adopted by restaurants, with the help of technology. For instance, Pizza Hut, when it opened restaurants during the ‘unlock’ phase of the pandemic, enabled consumers to order using QR codes on their tables, through which they could order online. The channel is also focused on modifying their menus according to changing global trends and Indian eating habits. KFC also, in May 2020, introduced contactless takeaways from its restaurants. In response to COVID-19 pandemic, KFC and Pizza Hut were among the earliest brands in India to roll out contactless delivery and consumers have been able to place an order that is prepaid on the KFC application, mSite, and website and walk into a KFC outlet to pick up the order. As the pandemic is still ongoing, contactless dining and deliveries will be priorities into 2021 as well. Similar to 2020, the year is likely to see more fast-food outlets adopting QR code-enabled menus.

19,95,104

3,39,117 3,23,011 2,50,561 2,17,003 2,08,248

0

5,00,000

10,00,000

15,00,000

20,00,000

25,00,000

QSR MobileOperator

FSR Accomodation Coffee & TeaShop

Pub, Club & Bar


2.0%

0.7%

1.6%

0.7%

0.1%

0.5%

6.5%

1.4%

2.6%

2.1%

1.4%

1.9%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

QSR

Mobile Operator

FSR

Accomodation

Coffee & Tea Shop

Pub, Club & Bar

Future growth (CAGR 2020-25) Historic growth (CAGR 2015-20)


Indian Food Service Sector – Outlet by Channel (Year 2020) Indian Food Service Sector – Outlet growth by Channel

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Industry Overview Coffee and Tea Shops: The coffee tea shop channel was worth INR 341.2 billion in 2020 registering a negative CAGR of -1.7% between 2015 and 2020. The virus outbreak was one of the main reasons for the decline in the channel’s value during the review period. The channel represents only 4.1% of the Indian foodservice profit sector value. Indian coffee and tea shop market is expected to grow at a CAGR of 15.0% to reach a valuation of INR687.4 billion in 2025. Key players in this segment include Costa Coffee, Chai Point, Barista, Starbucks and Café Coffee Day. Increasing the average transaction price will drive future value growth as key operators compete for quality and innovation rather than price. With average transaction prices of the channel currently being the lowest of any foodservice channel, operators can look to add unique and indulgent food and drinks to the menu to gain premium positioning and increase average transaction prices. Demand for higher quality tea, coffee, and coffee beans has gained popularity in recent years. As consumers’ expectations of on-premises coffee continues to rise, operators are also offering capsules and roasted coffee products for home consumption. India has largely been a tea drinking country. At the turn of the twentieth century, however, coffee has become a more popular drink. It is now a refreshing and trendy beverage, rather than a traditional drink. The high price point associated with coffee compared to tea has driven the channel's sales. Despite its still small size, the channel is expected to have a noticeable impact on foodservice. Coffee chains, both local and foreign, are likely to grow their footprint significantly in coming years. The rising demand from the young population, rapid urbanization, business culture, and western lifestyle can be attributed to the coffee and tea shop's future growth. Further, an increase in the number of dual-income families, increasing global exposure, growing media penetration would all lead to the growth of coffee and tea shops in India.

Impact of Pandemic and way forward: The pandemic has devastating effect on food service industry , the footfall fell precipitously but QSR segment was first to recover. Increase take away, drive through and delivery helped the industry to recover faster. The prevalence of home delivery in the Indian QSR industry is expected to continue to grow due to changing lifestyles and changing consumer eating patterns in the post-COVID atmosphere. Digital and delivery penetration was already gaining momentum before the pandemic. Now, a transformation that was projected to take years is happening in just months. Most key brands have seen increased online orders, higher deliveries and take away which seems to be a new normal. The pandemic accelerated the growth of online food ordering through food delivery apps, as consumers turned to online platforms to avoid spreading or being infected by the virus in public places. Increasing internet and mobile penetration in India and the advent of food delivery apps are also key factors leading consumers away from traditional dine-in experiences and towards convenience-driven options. Most of the QSRs have large number of stores in malls where footfalls are low and there are uncertainties around recovery in footfalls. With increased vaccination and gradual opening up of economy, brands are hopeful of increase in footfalls at malls and recovery in dine-ins. QSRs will see a better recovery compared to other channels, owing to their better suitability for take-away. Going forward, the investments in expansion of stores and technology will also drive the growth. Apart from it, recovery of income levels of consumers, rise in work from anywhere culture, menu innovation and demand from urban consumer will help recovery in near future.

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Investment Rationale Presence across key consumption markets

DIL operates 696 stores across all brands and are present in 26 states and three union territories across 166 cities in India, as of June 30, 2021. DIL has strong presence in key metro regions of Delhi NCR (comprising Faridabad, Ghaziabad, Gurgaon, Delhi and Noida), Bengaluru, Kolkata, Gurgaon Mumbai and Hyderabad. Over the years, DIL been consistently increasing the number of stores both organically and inorganically. With its cluster-based expansion approach, DIL has been able to address demand in high-potential domestic markets.

No of stores FY19 FY20 FY21

Bengaluru 23 30 80

New Delhi 67 70 54

Kolkata 39 39 42

Gurgaon 35 34 34

Noida 30 29 28

Total 194 202 238


Presence – Top 5 cities (Core Brands)

254

116 47

188

North East

West South

Region-wise no of outlets (Core Brands)

Store expansion – key to drive growth DIL operates franchises of several highly recognized global QSR brands and is the largest franchise partner for Yum in India. DIL is the non-exclusive sole franchisee for KFC and Pizza Hut in Nepal, and for KFC in Nigeria and is also a franchisee for Costa Coffee in India. DIL continues to add stores in Core Brands (Pizza Hut – net addition 28 stores and KFC – net addition 92 stores in FY21). It continued to add stores in Q1FY22 in existing as well as new location despite several disturbances caused by second wave of Covid -19. DIL added 40 stores in Q1FY22 and increased its presence from 155 cities in March 2021 to 166 cities in June 2021.


Stores at the beginning of the year 244 268 269

Addition 35 15 57

Acquired 0 0 0

Closed 11 14 29

Stores at the end of the year 268 269 297


Stores at the beginning of the year 99 134 172

Addition 25 31 50

Acquired 13 9 51

Closed 3 2 9

Stores at the end of the year 134 172 264


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Investment Rationale Improving Same Store Sales Growth (SSSG): The SSSG has been impacted on account of COVID-19 but DIL has focused on improving the trend which is reflected in the performance of Core Brands Business in Q4FY21. The SSSG of Pizza Hut and KFC shown recovery in later half of FY21 largely driven by delivery and take-away but Costa Coffee is yet to fully recover from the impact of Covid-19 due to relative inconvenience of packaging liquid foods, consumption of these foods is restricted to dine-in and customer’s take-away.

Increase in delivery of foods driven by change in consumer preference QSRs are seeing good recovery especially because of their inherent strength in delivery. Delivery now represents a larger portion of sales compared to the pre-COVID-19 period. DIL carries out direct delivery and has also entered into tie-ups with delivery aggregators to accept delivery orders placed on their mobile applications. Majority of the deliveries are carried out by delivery aggregators that provide end-to-end delivery solutions. Revenue generated from delivery sales represented 51.15% of DIL’s revenue from operations in its Core Brands Business in FY2020 and increased to 70.20% of its revenue from operations in its Core Brands Business in FY2021 and the trend is expected to continue in near future.

SSSG for Core Brands Business

Same Store Sales Growth

SSSG(%) SSSG(%)

2018-19 2019-20 2020-21 Q4 2020-

21

KFC 4.7% 3.2% -33.7% 19.6%

Pizza Hut 4.7% -3.7% -30.3% 13.4%

Costa Coffee 2.7% -4.4% -61.6% -24.9%

Brand Contribution (INR in Mn) 2018-19 2019-20 2020-21 Q4

2020-21

KFC 854 973 1182 575

Pizza Hut 655 439 372 157

Costa Coffee 182 174 33 26

Brand Contribution - Core Brands Business 1,691 1,586 1,587 758


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Investment Rationale Experienced Promoters and management team with strong domain expertise DIL benefits from an experienced and hands on promoter responsible for putting best-in-class processes, suitably supported by professional management team & specialized employees. Ravi Kant Jaipuria, one of the Promoters and Non-Executive Director on the Board, has over three decades of experience in conceptualizing, executing, developing and expanding food, beverages and dairy business in South Asia and Africa. DIL’s operations are conducted by a well-qualified and experienced management team that has significant experience in all aspects of its business. Each brand DIL operates has a dedicated team responsible for developing and delivering a superior brand experience. The management team is led by Whole-time Director (President & CEO), Virag Joshi, who has been a key strategist in expansion of Pizza Hut, KFC, Costa Coffee stores from a small base of five restaurants in 2002 to over 600 stores in the last 19 years.

Continue to improve unit-level performance The management believes that with further cost efficiencies DIL will be able to expand its store level profitability and Brand Contribution Margins. The growth of its stores will allow DIL to apportion fixed overheads costs such as brand building and administrative expenses across its store network which will improve the Brand Contribution Margins. DIL has been able to rationalize certain stores that were loss-making to improve its overall store level profitability. Store rationalization will also help improve the margins going forward. The continued food innovation and value proposition will help enhance its unit level performance by driving order frequency and order ticket size. Going forward, DIL intends to work with Yum to re-engineer its menus and introduce high margin offerings aligned to target groups for home consumption.

Investment in technology and focus on digital capabilities DIL will continue to invest in technology to maintain its competitive advantage. The company will focus on improving its overall technology infrastructure including digital and delivery capabilities. DIL plans to increase its investment in end-to-end digitalization, automation, artificial intelligence and machine learning, to connect online traffic with its offline assets effectively. DIL is working with Yum to improve its technology platform and further integrate its systems with Yum’s platform to ensure greater operational efficiency.

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Management

Ravi Kant Jaipuria, Chairman and Non-Executive Director Ravi Kant is a promoter of the Company and has over three decades of experience in conceptualizing, executing, developing and expanding food, beverages and dairy business in South Asia and Africa. He has an established reputation as an entrepreneur and a business leader and has received PepsiCo’s award for International Bottler of the Year, awarded in 1997.

Varun Jaipuria, Non-Executive Director Varun attended Millfield School, Somerset, England and attended a degree course in international business from the Regent’s University, London. He has 12 years of experience in the soft drinks industry and has also completed a program for leadership development at the Harvard Business School. He has been a Director on the Board since November 13, 2009.

Raj Pal Gandhi, Non-Executive Director Raj Pal has over 28 years of experience with one of the group companies (Varun Beverages Limited) and has been instrumental in strategizing the company’s diversification, expansion, mergers and acquisitions, capex funding and institutional relationship.

Virag Joshi , Whole-time Director (President & CEO) Virag has been a key strategist in expansion of Pizza Hut, KFC, Costa Coffee outlets from a small base of five restaurants in 2002 to 600 plus outlets in last 19 years. He has been earlier associated with Indian Hotels Company Limited, Domino’s Pizza India Limited, Milkfood Limited, and Priya Village Roadshow Limited.

Manish Dawar, Whole-time Director and Chief Financial Officer Manish is a Chartered Accountant and a member of the Institute of Company Secretaries of India. He has wide experience in various industry domains and across various geographies in the world. He has worked in various corporate setups including Reebok India, Reckitt Benckiser, Vedanta, DEN Networks Limited, and Vodafone India Limited.

Naresh Trehan, Independent Director Naresh holds a bachelor’s degree in medicine and surgery from the University of Lucknow and has been certified as a thoracic and cardiac surgeon by the American Board of Thoracic Surgery. He has received the Padma Bhushan Award in 2001, presented by the Government of India. Naresh has been a Director on the Board since April 21, 2021.

15 Page






Financial Projections

Revenue

We expect DIL to clock a healthy 16.6% revenue CAGR over FY19-FY24E, and expect revenue to touch INR 28,265 Mn. in FY24E from INR 13,106 Mn. in FY19. We expect revenue to see sharp jump from later half of FY22E as increased efforts toward vaccination and safety will restore confidence in consumers. We expect growth to come from focus on implementation of technology to increase footfall, new store expansion, improvement in same store sales growth, increased footfall in malls, increased delivery and take-away and recovery in dine-in.

EBITDA and EBITDA margin

We expect DIL to report 16.4% EBITDA CAGR over FY19-FY24E and EBIDTA margins to remain at the 21%. EBITDA in absolute terms is expected to reach INR 5,964 Mn. in FY24E from INR 2,790 Mn. in FY19. The improvement in margin is largely driven by improving operational efficiency, rightsizing stores, store expansion in new areas, focus on improving unit metrics and reduction of debt.

13,106 1516,4 1134,8 15,459

21,919 28,265

18% 16%

-25%

36% 42% 29%

-40%

-20%

0%

20%

40%

60%

0

10000

20000

30000

2019 2020 2021 2022E 2023E 2024ERevenue % growth YoY


2,790 2,555 2,269 3,030 4,625

5,964

21%

17% 20% 20% 21% 21%

0%

5%

10%

15%

20%

25%

0

2000

4000

6000

8000

2019 2020 2021 2022E 2023E 2024EEBIDTA Margin (%)Source: KRChoksey Research

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We expect favourable economic scenario for businesses and economy after the pandemic recedes. Factors such as Rising per capita income, increasing internet penetration, urbanization, changing consumer preference and food habits, young population, business culture and western lifestyle are expected to play key role in growth of the industry. Digital and delivery penetration was already gaining momentum before the pandemic. Now, a transformation that was projected to take years is happening in just months driving faster recovery.

Launch of 5G to boost online orders across geographies: The launch of 5G technology will boost the internet penetration in urban as well as rural India which will lead to higher online ordering which augurs well for QSR players like Devyani International given their increased focus on delivery which has already reached to 70% in FY21 and it is further expected to increase despite recovery in dine-in.

Recovery in footfall at malls to improve SSSG: QSRs have sizeable presence in malls which has severely impacted due to outbreak of Covid-19. The footfall at malls were initially tepid but it is gradually improving across geography which is good sign for players like DIL. The same store sales growth of DIL is expected to improve as the restrictions around dine-in further eases.

Store rollout in new areas will improve revenue visibility: DIL intends to increase the store network by implementing its defined new-store roll out process and its cluster approach and penetration strategy with respect to store location, while aiming to achieve an optimal mix across different types of restaurant formats in order to drive footfalls and compete effectively. As DIL expands its store network, the company also intends to expand in new areas and markets where there is strong potential for growth.

Focus on digitization to improve traffic: DIL plans to increase its investment in end-to-end digitalization, automation, artificial intelligence and machine learning, to connect online traffic with its offline assets effectively. The company is working with Yum to improve its technology platform and further integrate its systems with Yum’s platform to ensure greater operational efficiency. DIL’s topline in FY21 has been impacted, in-line with the industry, largely due to Covid-19 as QSRs are either closed entirely or operating on a limited basis, offering only takeout, pickup, delivery, drive-through, or some combination of those options. Revenues from operations for FY 21 have come in at INR 11348 Mn, compared to INR 15164 Mn and INR 13106 Mn for FY20 and FY19 respectively. EBITDA margin were also lower at 15.8% in FY21 compared to 16.6% and 19.4% respectively for the corresponding periods. DIL, however, managed to reduce losses last year by taking cost rationalization initiatives. DIL is taking various initiatives to improve company’s performance including rightsizing stores, paying off debt from IPO proceedings, focusing on delivery which is a structural change in the industry, negotiating lease rental costs and continued focus on store expansion.

Outlook and Valuation

17 Page






Peer Comparison DIL is one of the key player in the QSR industry and reasonably valued compared to its peers and industry average. The growth potential in the industry is immense and DIL is adequately placed to take advantage of the prevailing trend in the industry. DIL’s margin profile is better than most of the key players and expected to improve further. If we compare these companies on price to sales (on FY21 sales) Devyani International (price to sales 12.8x) is available at a discount to Jubilant Foodworks (price to sales 14.2x). In last one year the stock price of Jubilant Foodworks has given return of more than 80%, Westlife Development has given return of more than 40% and Burger King India has given more than 160% return from its IPO price. In comparison, DIL has given 30% return since its listing.

Valuation We believe multiple growth drivers are in place for QSR industry for next 5-10 years and DIL is in sweet spot to take advantage of them. Given the prevailing opportunities in QSR industry and DIL’s focus on implementation of technology to increase footfall and improving operational efficiency, rightsizing stores, store expansion in new areas, focus on improving unit metrics and reduction of debt, we expect DIL to be a key beneficiary of the prevailing trend in the industry. We Initiate Coverage on Devyani International Ltd. with BUY rating and target price of INR 151 per share, 30x FY24E EV/EBIDTA and 31% upside from current levels. The share price of DIL is trading at ~18% discount to its IPO listing price which provides good opportunity to buy the stock. Recent initiatives taken by DIL will help in increasing revenue however the economic recovery post Covid-19 is key for the QSR industry. Reports suggest organised restaurant business will take at least a year after the lockdown is lifted to recover from the Covid-19 pandemic as recovery would be gradual. We have considered moderated impact of third wave of Covid-19 on the performance of the company in FY22. However, we will relook at our valuation considering sever impact of third wave of Covid-19 on the economy and performance of the company.

Outlook and Valuation

Company Name CMP (INR)

Mkt Cap

EV/EBIDTA EV/Sales Price/Sales RoE (INR Mn) RoCE

Devyani International 115.1 1,38,410 54.8 12.5 12.8 -113% 9%

Jubilant FoodWorks Limited

4,099 5,40,954 53.0 12.4 14.2 18% 16%

Westlife Development Limited

518 80,797 134.4 8.3 7.03 -17% -2

Burger King India Limited 160 61,375 86.7 4.4 10.1 -35 -7

Company Name Revenue EBIDTA EBIDTA Margin PAT

Devyani International 11,348 2,269 20% -813

Jubilant FoodWorks Limited 33,120 7,800 24% 2,320

Westlife Development Limited 9,860 610 6% -990

Burger King India Limited 4,940 150 3% -1,740


18 Page






Risks and Concerns:

• The outbreak of the COVID-19 pandemic and its continuing impact on the business and operations has been significant. The impact of the pandemic on company’s operations in the future, including its effect on the ability or desire of customers to dine in stores, is uncertain and may be significant and continue to have an adverse effect on company’s business prospects, strategies, business, operations, company’s future financial performance, and the price of their Equity Shares.

• The company relies on arrangements with Yum for its KFC and Pizza Hut stores that comprise a significant majority of company’s business, and a termination of or inability to renew these arrangements, will have a material adverse effect on company’s business, results of operations and financial condition.

• The company has incurred losses in Fiscals 2019, 2020 and 2021, resulting in erosion of our net worth. In the event company’s net loss continues to increase, it may adversely affect company’s business and financial condition.

• The company’s Statutory Auditors have included certain adverse remarks/ qualifications/ matters of emphasis in the Audited Consolidated Financial Statements.

• There are outstanding litigation proceedings against the Company, Subsidiaries, Directors, and Promoters. Any adverse outcome in such proceedings may have an adverse impact on company’s reputation, business, financial condition, results of operations and cash flows.

• Changes in consumer preferences and food habits as well as negative perception of the QSR industry could decrease the demand for company’s products and have a material adverse effect on company’s business, results of operations and financial condition.

• Increasing cost of raw materials and other costs could adversely affect company’s profitability.

• Failure to obtain or maintain or renew licenses, registrations, permits and approvals in a timely manner or at all may adversely affect company’s business and results of operations.

• The company has certain contingent liabilities that have not been provided for in company’s financial statements, which if they materialize, may adversely affect company’s financial condition.

• Any failure or disruption or breaches of company’s information technology systems or an inability to adapt to newer systems could adversely impact company’s business and operations.

• If the company is unable to comply with health, safety and environmental regulations, and any other regulations, company’s business, results of operations and reputation could be adversely affected.

19 Page






Financials

Income Statement Balance Sheet

INR Mn FY20 FY21 FY22E FY23E FY24E Share capital 1,062 1,154 1,203 1,203 1,203 Reserves and surplus -1,891 1,138 4,236 5,282 7,485 Shareholders' funds -2,282 719 5,019 6,065 8,268 Long-term borrowings 3402 3594 354 354 354 Short term borrowings 904.6 211.1 211.1 211.1 211.1 Total debt 4,307 3,805 565 565 565 Other Financial liabilities 11,812 7,986 7,986 7,986 7,986

Other Liabilities 126 179 179 179 179

SOURCES OF FUNDS 13,963 12,688 13,749 14,795 16,998 PPE 4,787 4,307 5,031 5,759 5,984 Other Intangible Assets 577 1,855 1,855 1,855 1,855 Capital WIP 135 143 143 143 143 Non-current investments 11,498 7,922 7,922 7,922 7,922 Goodwill 224 644 644 644 644

Other financial assets 182 167 167 167 167 Non-current assets 17,404 15,039 15,763 16,491 16,716

Inventories 721 622 847 1,201 1,549 Trade receivables 173 169 212 300 387

Cash and Bank Balance 160 405 329 818 2,974 Other current & financial assets 378 449 450 451 452

Current assets 1,432 1,645 1,838 2,771 5,362 less: current liabilities and provisions

4,873 3,996 4,033 4,726 5,406

Trade payables 1,632 1,619 1,655 2,347 3,027 Other current liabilities 170 193 193 193 193

Other financial liabilities 3,027 2,100 2,100 2,100 2,100

Short-term provisions 44 83 84 85 86 Net current assets -3,441 -2,350 -2,195 -1,955 -44 APPLICATION OF FUNDS 13,963 12,688 13,568 14,536 17,203

INR Mn FY20 FY21 FY22E FY23E FY24E

Revenues 15,164 11,348 15,459 21,919 28,265

COGS 4,604 3,447 4,684 6,641 8,564

Gross profit 10,560 7,902 10,775 15,278 19,701

Employee cost 2,255 1,543 2,102 2,981 3,844

Other expenses 5,750 4,089 5,643 7,672 9,893

EBITDA 2,555 2,269 3,030 4,625 5,964

EBITDA Margin 17% 20% 20% 21% 21%

Depreciation & amortization 2,233 2,295 2,164 2,630 2,827

EBIT 283 -505 819 1,929 3,053

Interest expense 1,584 1,528 1,076 1,076 1,076

Other income 187 641 155 219 283

PBT -769 -824 -102 1,072 2,260

Tax 18 -11 -3 27 56

Share of Profit/(Loss) of Associates/Minority

0 0 0 0 0

Net profit -788 -813 -99 1,046 2,203

EPS (INR) -1.14 -0.50 -0.08 0.87 1.83

No. of Shares (Mn) - Diluted 1,062 1,154 1,203 1,203 1,203

20 Page






Cash Flow Statement

Ratio Analysis

Key Ratio FY20 FY21 FY22E FY23E FY24E

EBITDA Margin (%) 17% 20% 20% 21% 21%

RoE (%) - -113% -2% 17% 27%

RoCE (%) 14% -11% 15% 29% 35%

EV/EBITDA 51.6 62.7 47.8 31.2 23.9

EV/Sales 8.7 12.5 9.4 6.6 5.0

EPS (INR) -1.14 -0.50 -0.08 0.87 1.83

INR Mn FY20 FY21 FY22E FY23E FY24E

Net Cash Generated From Operations 3,015 2,391 1,754 3,849 5,249

Net Cash Flow from/(used in) Investing Activities -974 -3,586 -3,000 -3,000 -3,000

Net Cash Flow from Financing Activities -2,226 1,420 1,178 -387 -149

Net Inc/Dec in cash equivalents -133 267 -70 489 2,156

Opening Balance 266 132 400 329 818

Closing Balance Cash and Cash Equivalents 132 400 329 818 2,974

21 Page






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Buy More than 15%

Accumulate 5% – 15%

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