New Brand Additions Tealive, New York Fries, And SANOOK KITCHEN Will Expand Customer Choices

Key Takeaways

• Aggressive brand and store expansion aims to boost market presence, increase revenues, and drive future earnings growth.
  
• Strategic innovations and acquisitions focus on enhancing sales, optimizing costs, and improving margin stability.
  
• Expansion and new acquisitions present high risks that may strain financial performance without ensuring revenue growth or profitability improvements.

Catalysts

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

• Expansion of Devyani International's brand portfolio with three new lifestyle QSR brands—Tealive, New York Fries, and SANOOK KITCHEN—aims to offer a wider variety of options, likely driving future revenue growth through increased market presence.
  
• Aggressive store expansion strategy, with 139 new stores added in the first half of the fiscal year, is expected to enhance brand visibility and scale, potentially increasing total revenues and driving future earnings growth.
  
• Innovations and menu adaptations in core brands like KFC and Pizza Hut for festive seasons and evolving tastes are expected to attract more customers and improve sales, thereby enhancing revenues.
  
• Strategic entry into smaller city formats with new global brands and experimentation with small format, capital-efficient outlets aim to optimize operational costs and drive higher net margins.
  
• The acquisition of the Thailand KFC business and optimization of international operations, including mitigating currency devaluation impacts, is targeted to improve margin stability and contribute positively to consolidated earnings.

Devyani International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Devyani International's revenue will grow by 18.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 5.2% in 3 years time.
• Analysts expect earnings to reach ₹3.8 billion (and earnings per share of ₹2.23) by about January 2028, up from ₹322.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹4.2 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 130.5x on those 2028 earnings, down from 626.6x 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 grow by 11.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.09%, as per the Simply Wall St company report.

Devyani International Future Earnings Per Share Growth

Risks

• The QSR industry in India faces challenges during certain periods, such as the Shravan/Sawan month, reducing overall revenue and impacting net margins due to temporary shifts to vegetarian consumption.
  
• Macroeconomic factors, like international conflicts and currency depreciation, particularly in Nigeria, continue to impact earnings, as seen with the weakening of the Nigerian naira contributing to reduced profits.
  
• The newly acquired Thailand business operates at lower gross margins than the Indian KFC operations, impacting consolidated financials adversely by reducing overall gross margin percentages.
  
• With a negative PBT reported for the quarter, the overall financial performance is under strain, influenced by new store openings and increased marketing expenses, which could affect net earnings if not managed effectively.
  
• The company's strategy includes expanding its brand portfolio, which could entail high initial investment and execution risks without guaranteed returns, potentially affecting future revenue growth and net profitability.

Valuation

• The analysts have a consensus price target of ₹190.64 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 ₹230.0, and the most bearish reporting a price target of just ₹147.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹72.4 billion, earnings will come to ₹3.8 billion, and it would be trading on a PE ratio of 130.5x, assuming you use a discount rate of 15.1%.
• Given the current share price of ₹167.66, the analyst's price target of ₹190.64 is 12.1% higher.
• 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.