Kotak Institutional Equities has initiated its coverage on Devyani International, the largest franchisee of Yum! Brands in India, with an ‘add’ rating and target price of Rs 151. It also initiated coverage on Sapphire Foods India, another big franchisee of Yum! Brands, with a ‘buy’ call and target price of Rs 1,425.
“Yum franchisees Devyani International (DIL) and Sapphire Foods (SF) have emerged as the fastest-growing quick-service restaurants (QSRs) in India,” said the domestic brokerage firm in a note.
Reduction of cost structure and shutdown of loss-making stores have helped both the companies to accelerate store additions. Lower discounting by aggregators and reduced competition from cloud kitchens also worked for quick-service restaurants.
Devyani International and Sapphire Foods India operate outlets of KFC and Pizza Hut restaurants in India.
Devyani International and Sapphire Foods have rights to operate KFC outlets in specific markets as shown in the table (Source: Kotak Institutional Equities)The brokerage firm expects Sapphire Foods to be one of the fastest-growing QSRs in India over the next 2-3 years with margin expansion and an improving return profile.
It believes that the company is well placed to rise on the industry tailwinds and capitalise on the under-penetration of KFC and Pizza Hut in India. Plus, valuations appear attractive which provides comfort to the brokerage firm.
Devyani International has also shown an impressive turnaround in profitability, as per the firm. The brokerage firm expects the growth momentum to continue on the back of sharper execution, incentives from Yum, and KFC and Pizza Hut’s under-penetration.
On the valuation front, Kotak Institutional Equities said, “Valuations are stretched but can sustain in view of strong earnings growth and optionality”.
Devyani International merits valuation premium over Sapphire Foods in view of the larger market opportunity, it said.
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“Our bottom-up analysis indicates 58:42 split of KFC India market opportunity and 67:33 split of PH (Pizza Hut) India market opportunity between DIL:SF,” as per the brokerage firm's analysis.
“On a blended basis, DIL:SF have 61:39 share of Yum India market opportunity,” Kotak Institutional Equities added.
Pizza Hut which is the second-largest Pizza quick-service restaurant in India can unlock meaningful value for both Devyani International and Sapphire Foods, as per the brokerage firm.
Additionally, the brokerage firm likes the growth focus of Devyani International’s Promoters and their track record of unlocking optionality.
“We expect the execution gap between the two players to continue to narrow as they compete and emulate each other’s best practices,” it said.
Shares of Devyani International rose 3.7 percent on the BSE while those of Sapphire Foods were up 2.2 percent.
Devyani International operates 777 outlets in India, including 364 outlets of KFC and 413 outlets of Pizza Hut, across 204 cities in India as of March 2022.
Sapphire Foods operates 482 restaurants in India as of March 2022, including 263 outlets of KFC India and 219 outlets of Pizza Hut India.
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