Expansion To Over 2,000 Stores And Partnerships Like With PVR INOX Will Strengthen QSR Market Position

Key Takeaways

• Aggressive store expansion and strategic partnerships are expected to increase market presence, drive revenue, and enhance market penetration.
  
• Cost optimization and international expansion aim to improve margins, profitability, and offer new growth opportunities.
  
• Rising food costs, weakened consumer sentiment, currency issues, and aggressive expansion could pressure margins, profitability, and financial stability for Devyani International.

Catalysts

Develops, manages, and operates quick service restaurants and food courts in India, Nepal, Nigeria, Thailand, and internationally.

• The recently presented Union Budget 2025, with its new personal tax regime, is expected to enhance purchasing power, potentially boosting consumer spending and positively impacting revenue growth for the QSR industry, including Devyani International.
  
• Devyani International has aggressively expanded its store network, crossing the milestone of 2,000 stores, which is likely to improve market presence and drive revenue growth as more customers gain access to the brands.
  
• The company is focusing on strategic partnerships, such as the joint venture with PVR INOX to open new food courts, which could enhance revenue and market penetration.
  
• Devyani International is implementing cost optimization measures to improve margins, particularly at the store level, which should enhance net margins and overall profitability.
  
• International expansion, particularly in Thailand with new store openings, provides growth opportunities, contributing to revenue and earnings growth.

Devyani International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Devyani International's revenue will grow by 13.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 3.3% in 3 years time.
• Analysts expect earnings to reach ₹2.3 billion (and earnings per share of ₹3.45) by about April 2028, up from ₹164.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹3.4 billion in earnings, and the most bearish expecting ₹1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 146.9x on those 2028 earnings, down from 1289.8x today. This future PE is greater than the current PE for the IN Hospitality industry at 35.5x.
• Analysts expect the number of shares outstanding to decline by 0.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.29%, as per the Simply Wall St company report.

Devyani International Future Earnings Per Share Growth

Risks

• The impact of food inflation, particularly in core brands due to rising costs of oil, chicken, cheese, and coffee beans, could affect gross margins and overall profitability.
  
• The slowdown in consumer sentiment and spending, especially in regions like Kerala, Assam, and West Bengal, could hinder same-store sales growth (SSSG) and revenue.
  
• Profitability challenges in international markets, notably from currency fluctuations in Nigeria and Thailand, may affect consolidated earnings and financial stability.
  
• Margin pressure in Pizza Hut due to weaker brand performance and higher marketing costs could affect overall EBITDA margins if not mitigated by improved efficiencies.
  
• The accelerated store expansion strategy amidst a subdued consumer environment poses execution risks and may lead to short-term financial strain impacting net margins and earnings stability.

Valuation

• The analysts have a consensus price target of ₹189.52 for Devyani International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹226.0, and the most bearish reporting a price target of just ₹135.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹69.7 billion, earnings will come to ₹2.3 billion, and it would be trading on a PE ratio of 146.9x, assuming you use a discount rate of 15.3%.
• Given the current share price of ₹175.59, the analyst price target of ₹189.52 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.