Stock Fundamentals

Should you subscribe to the Devyani International IPO?

Parvatha Vardhini C | Updated on August 04, 2021

While valuations are reasonable, the financials need a close watch

The robust retail subscriptions garnered by Devyani International on day one should not tempt retail investors waiting on the sidelines into applying. Investors can safely skip the IPO of this company which operates KFC, Pizza Hut and Costa Coffee outlets as a non-exclusive franchisee of the Yum! brand across several states in India. It also operates in Nepal and Nigeria through subsidiaries.

While Devyani’s valuation is reasonable compared to peers, the financials don’t inspire confidence. The company is valued at a market cap to FY21 sales of 9.5 times at the upper end of the price band. While Westlife Development (Mc Donald’s) trades at 8.5 times its market cap to sales, Burger King and Jubilant FoodWorks (Domino’s) trade at 14-15 times.

Though recovering now, the QSR (Quick Service Restaurant) space has been badly hit by the first two waves of Covid. With the pandemic not completely out of the picture, the risk of an encore is here to stay for these businesses.


The company was loss-making in FY19 even before Covid - high debt being among the chief reasons. With a debt-to-equity ratio at 6.5 times as of March 31, Devyani is raising ₹440 crore from the IPO (fresh issue portion) to predominantly repay borrowings. However, capex may be needed every year to set up new stores, and it cannot be long before an aggressive debt-funded expansion plan could spike interest costs, eating into profits once again. Hence, apart from a growth in sales revenue through expansion what will make the business more promising is strong same store sales growth (SSSG) and efforts to control costs.

Investors can wait to see how the business fares over the next few quarters on these factors before entering the stock.

Lags on financial metrics

Of the three listed peers, only Jubilant has been making profits continuously in the last three fiscals. Devyani’s revenues have dropped from ₹1,310 crore in the year ended March 2019 to ₹1,134 crore for FY21. While losses widened from ₹94 crore in FY19 to ₹121 crore in FY20, it narrowed in FY21 to ₹63 crore. The FY21 loss would have been higher, but for the profit from slump sale of a loss-making tea trading business run by the company to its corporate promoter. Impairments too have affected profits over these years. It is noteworthy that accumulated losses as of March 2019 resulted in erosion of net worth, prompting an audit qualification related to the company’s ability to continue as a going concern. An equity infusion by Yum India and promoters after that saved the day.

At the operational level, the company has better margins than Burger King and Westlife. EBITDA margin stands at 20 per cent for FY21, vs 16 per cent in FY20 and 21 per cent in FY19.

There is an agreement with Yum to open a certain number of KFC and Pizza Hut outlets over the years. Accordingly, while the company rapidly added to its KFC outlets (134 in FY2019 to 264 outlets as of FY21), SSSG has come down from 4.65 per cent in 2019 to – (minus) 33.9 in 2021. This trend of falling SSSG is true of the KFC brand and also of Pizza Hut and Costa Coffee. While part of this drop can be attributed to the pandemic, the point to note is that Devyani had displayed weak SSSG vs peers even in FY19. Burger King, Westlife and Jubilant showed SSSG of 29.2 per cent, 17.4 per cent and 16.4 per cent respectively, compared with 2.7 – 4.7 per cent clocked by Devyani’s three core brands in FY19.

Intending to cut costs, the company plans to explore smaller store formats focussing on delivery for both Pizza Hut and Costa Coffee. These two brands brought in 25 and 2 per cent of the FY21 revenues, respectively. In terms of channel, while half the revenues in FY20 came from delivery sales for the company as a whole, this number moved up to 70 per cent in FY21 and hence, the focus. It is worth watching if this format shores up the margins for these two segments. While Pizza Hut has the highest number of stores, its store-level margins are lower than KFC. KFC brings 57 per cent of the revenues.

Published on August 04, 2021

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