After a sharp correction in the last six months, Devyani International stock's valuation has come to a level where one can add it to the portfolio for long-term gains.
The stock is trading near its trailing-twelve-month price-to-earnings ratio (PE) of 61.
Brokerage firm Kotak Institutional Equities has upgraded the stock of Devyani International to an 'add' from a 'reduce', but cut the target price to ₹160 from ₹170, still implying a 13 percent upside from the stock's March 21 closing price of ₹142 on the BSE.
The brokerage firm is positive about the stock even though it trimmed the FY2023-25E EBITDA estimate for the company by 4-6 percent.
"Devyani, the largest franchisee of Yum! brands in India, has emerged as one of the fastest growing QSRs in India, with an impressive turnaround in profitability. We expect Devyani to deliver 17 percent, 20 percent and 21 percent CAGR in stores, revenues and EBITDA, respectively, over FY2023-25E, ahead of other QSRs," said Kotak.
The stock has been under pressure for the last six months. It hit its 52-week high of ₹215 on August 18, 2022, on BSE. As of March 21, the stock is down 34 percent from its one-year peak.
Kotak observed that the slowdown in demand across the QSR (quick service restaurant) space, which began in November 2022, is attributable to the broad-based inflationary pressure and easing of some pent-up demand.
Kotak believes although the third quarter did not witness a seasonal sequential uptick in ADS (average daily sales), the fourth quarter would witness a seasonal sequential dip in ADS and EBITDA.
"We expect KFC to continue delivering a resilient performance of 2-4 percent SSSG (same-store sales growth) and stable EBITDA margin, in line with stable raw material prices. Encouraged by KFC’s resilience and decent ADS trends (though a tad lower than expected), Devyani plans to add 120-125 stores (100 earlier) in FY2024E," said Kotak.
Kotak pointed out that Pizza Hut India is struggling due to category issues and it expects a sharp decline in SSSG and margin for it due to persistent dairy inflationary and adverse operating leverage.
"Devyani is moderating Pizza Hut store additions to 75-80 (100 earlier). We expect a gradual recovery in QSR consumption over the next two-to-four quarters as and when inflationary pressures ease," said Kotak.
"We expect Devyani to have a good run over the next two-three years due to: (1) external tailwinds (rise in ordering-in/eating-out habits, rational competition in the delivery ecosystem), (2) sharper execution (optimised cost structure/operating model), and (3) capitalizing on KFC’s legacy under-penetration in India," said Kotak.
The brokerage firm highlighted that Devyani’s KFC and Pizza Hut store growth has been 107 percent and 80 percent, respectively, over the past 33 months and revenue run-rate is up 94 percent and 70 percent, respectively.
"We expect Devyani to be the fastest-growing QSR over the next two-three years. The supernormal success of Popeyes or McDonald’s in the fried chicken is the key risk," Kotak said.
Is it a bet for the short term?
The Devyani International stock can be added to the portfolio for a long-term horizon. However, for short-term traders, analysts do not think the stock is a ‘buy’.
Jigar S. Patel, Senior Manager of Equity Research at Anand Rathi Share and Stock Brokers, pointed out that at the current juncture, the stock is trading near a crucial support level of ₹140. Also, it is trading below all key daily exponential moving averages which is a matter of concern.
"Fresh buy is not advised at the current market price. On the flip side, the buy will only trigger once we get a weekly close above ₹150 and an upside target would be ₹165 and the stop loss would be ₹143," said Patel.
Akhilesh Jat, Category Manager of Equity Research at CapitalVia Global Research, underscored that the stock is trading in lower-low and lower-high formation.
Jat said two consecutive closes below the level of ₹141 may lead to further drag-down in the prices. On the downside, ₹138-135 may act as a major support level while on the upside, ₹153-155 may react as a key hurdle.
"It is a bearish trend rally so one should consider selling the rip instead of buying the dip," said Jat.
According to a MintGenie poll, 13 analysts on an average have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
