This Small Cap Quick Service Restaurant Stock Can Jump 20% From Current Levels

Sharekhan has suggested buying the stock of Devyani International for gains of up to 20%. The brokerage sees a jump to Rs 231, from the current market price of Rs 190.

Strong set of global brands

Devyani International is multi-dimensional quick service restaurant (QSR) player with a strong portfolio of global brands (including KFC, Pizza Hut and Costa Coffee). "Its strong association with Yum Brands will help it create more opportunities in India's growing QSR market. The company plans to add 250-300 stores p.a (as against 60-70 stores added per annum in the earlier years) with a cluster-based approach in India," Sharekhan has said in its report.

Store count to double in 4-5 years

According to the Sharekhan report, Devyani International reached 1,008 stores in Q1FY2023 (opened 70 new stores during the quarter). With a cluster-based expansion approach, Devyani International has been able to address demand in high-potential domestic markets (non-metro contribution within core brands has gone up to 52%).

"The company plans to add 250-300 stores p.a (100 stores each of KFC/Pizza Hut). Further, new stores will be built with a greater emphasis on the delivery model and hence, the store size will be smaller involving a capex of Rs. 1.0-1.5 crore per store (lesser than Rs. 2.5-3.0 crore required earlier). This will also lower cost of operations per store and a cluster-based approach," the brokerage has said.

Balance sheet strengthens with robust cash generation ability

According to Sharekhan, the company repaid Rs. 305 crore debt on books through IPO proceeds and strengthen its balance sheet. Due to a cash-generating business, scale-up in revenues would help the company post strong cash flow generation. Further, with a reduction in store size, annual capex would be ~Rs. 300-350 crore, while EBIDTA is expected to grow by 4x to Rs. 1,025.9 crore in FY2024E from Rs. 226.9 crore in FY2021.

Reasons to buy the stock

According to Sharekhan, with aggressive store expansion plan, focus on increasing the delivery model and strong brands under kitty coupled with experienced parental background, Devyani International is well poised to exploit large opportunities in growing QSR space in India.

 

Revenues to grow sharply

"We expect Devyani international revenues and EBIDTA to grow at CAGR of 43% and 47%, respectively over FY2022-24 (and by 23% and 32% on normalised base of FY2020). Stock trades at 28.3x/20.6x its FY2023E and FY2024E EV/EBIDTA. We initiate coverage on the stock with a Buy recommendation assigning a target price of Rs. 231 (valuing at 28x its FY2024E EV/ EBIDTA)," the brokerage has said.

 

Better days for Pizza Hut

According to Sharekhan, Pizza Hut is expected to post strong and profitable growth after brand restructuring and reorganisation of its business model by adding value-for-money products in the menu, while focusing on increasing delivery business. DIL is aiming to make Pizza Hut brand as a daily consumption brand rather than an occasional dine-in brand

Key Risks

According to Sharekhan, any disruption caused by store closures due to pandemic, heightened competition due to entry of new brand or slowdown in expansion in key markets are some of the key risks to its earnings estimates.