Citing strong festive demand to drive up sales, brokerage firm Motilal Oswal repeated its buy rating on Devyani International with a target price of Rs 220, which shows an upside potential of nearly 16% from the current market price of Rs 190.1 per share.

“Festive season (Diwali) sales have been good. Although the demand environment continues to look good, volumes in some pockets are getting affected due to high CPI inflation. However, the overall sales growth is healthy, led by price increases,” the brokerage firm said

Devyani International reported sales growth of 45% YoY to Rs 7,47.4 crore in Q2FY23. While the adjusted profit after tax (PAT) came in at Rs 67.2 crore in 2QFY23 against Rs 42.5 crore in 2QFY22.

However, the consolidated gross margin of the company was down 80 bp YoY to 70.2%. The sequential gross margin was down 110 bp for KFC and 170 bp for Pizza Hut. EBITDA (post-IND AS) grew 34% YoY to Rs 1,65.5 crore. EBITDA margin contracted 180 bp YoY to 22.1%.

“2QFY23 sales and gross profit were broadly in line, while higher staff costs led to an EBITDA miss. However, 2Q is seasonally the weakest quarter and a healthy festive season sales outlook in 3Q (seasonally the strongest quarter) remains positive,”

said.

Material cost pressures (chicken, edible oil, and gas) are gradually receding and with a healthy sales growth outlook, EBITDA growth in 2HFY23 is likely to be strong, the brokerage said.

“With an increasing focus on hygiene, convenience, and innovation, QSRs, with their strong brands, present a great investment case, given their low penetration levels in India. Its strong pricing power helps combat input cost inflation,” it added.

“We remain bullish on Devyani’s prospects on account of KFC’s strong brand equity and its growth opportunity, a gradual turnaround in Pizza Hut, driven by the management’s focus on delivery and improved store metrics, network expansion across the portfolio and healthy operating profitability in the midteens (on a pre-Ind AS basis),” Motilal Oswal said while reiterating buy target at Rs 220 per share.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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By Dipak

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