Devyani International jumps as CLSA India paints bullish outlook

Shares of Devyani International, operator of several franchises of Yum! Brands in India, rose over 3 percent on Tuesday to Rs 193 on the National Stock Exchange after brokerage firm CLSA India announced a bullish outlook.

The brokerage firm initiated coverage on shares of the company with an ‘outperform’ rating and a price target of Rs 207, implying gains of 10 percent from Monday’s closing price.

CLSA India expects the recently listed company’s operating profit to grow four times over the next three years aided by aggressive expansion of stores, operating leverage benefits and improving unit economics at Pizza Hut franchises.

“Based on a largely underpenetrated market, a robust business model for KFC, and a turnaround in the Pizza Hut business, we expect a 50% sales compound annual rate in FY21-24,” the brokerage firm said in a note.

The optimism for the company also stems from the fact that Devyani International has altered its store expansion strategy in recent times. The firm has switched focus to small, delivery-focused stores that have resulted in savings of 25 percent in KFC franchisees per store and 40 percent savings on Pizza Hut franchisees per store in terms of capital expenditure.

“Lower capex with improving store-level economics should yield quicker payback for new stores. Along with cost-saving initiatives, this has boosted profitability across formats,” CLSA India said.

The strong profitability, said CLSA, will result in free cash flow generation of nearly Rs 600 crore for Devyani International over the next two years that could fuel inorganic growth opportunities.

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