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Devyani International Ltd
Earnings Call Analysis
Q3-2024 Analysis
Devyani International Ltd
Investors got insight into the Indian QSR market's recent performance through the examination of Pizza Hut's and Costa Coffee's quarterly results. Pizza Hut added 30 new stores but saw a revenue rise of only 2.2% year-on-year with average daily sales (ADS) decreasing from INR 39,000 to INR 37,000. The deleverage impact from lower ADS led to a slight reduction in brand contribution margin by 1.6%. Despite the decrease in ADS and growth concerns, Pizza Hut remained a segment the company sees improving as the market picks up. On the other hand, Costa Coffee displayed more robust growth with a 14.6% quarter-on-quarter and 36.4% year-on-year increase in revenue. It added 8 new stores, reaching a total of 154, contributing to the network's ambitious growth aspirations. The gross margin of 77.2% marked an improvement and indicated a positive outlook for its stabilization and brand performance improvement.
Management expressed a steadfast commitment to expanding within the competitive Indian QSR landscape, setting a target of 2,000 stores by 2026. Pizza Hut's growth strategy was a point of discussion, acknowledging the need for enhanced brand visibility and in-store customer experiences to compete effectively. The discussion also touched on the challenge posed by food aggregators and local competitors, particularly in the pizza sector. The company plans to address this through adjustments in its offerings and premiumization to keep up with the changing market dynamics.
KFC experienced an ADS drop to INR 104,000, the lowest in over a dozen quarters. Even amidst macroeconomic and geopolitical pressures affecting consumer spending, management assured stakeholders of proactive measures. KFC is portrayed as a resilient brand, and despite the margin pressures, the company is strategically focused on consolidating and achieving growth. The overall sentiment from the discussion was that of cautious optimism, expecting improvements once external conditions better.
A significant development for the company was the acquisition in Thailand, an expansion seen as both a growth opportunity and a diversification strategy to hedge against Indian market volatility. Thailand's economy presents a promise due to its setup with high frequency of dining occasions, offering the potential for value appreciation and expansion of the company's brands. The Thai deal also carries debt, which will manifest in the company's books. This financing structure and operational strategy for Thailand depicted a balance between aggressive investment and prudent financial management.
The discussion highlighted operational leverage differences between Pizza Hut and KFC, with the former being more sensitive to top-line changes. The Q&A session also covered the impact of Nigerian currency devaluation, which seen in corporate costs showing an elevated level due to currency weakening. It was clarified that should the currency stabilization at the current level, no further significant impact is expected on the financial statements, with a currency decrease potentially leading to cost benefits while an increase would result in additional hits.
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Ladies and gentlemen, good day, and welcome to the Devyani International Earnings Conference Call.
[Operator Instructions]
Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Devyani International's Q3 FY '24 Earnings Conference Call. We have with us Mr. Ravi Jaipuria, Non-Executive Chairman of the company. Mr. Varun Jaipuria, Non-Executive Director; Mr. Raj Gandhi, Non-Executive Director; Mr. Virag Joshi, CEO and Whole Time Director; Mr. Manish Dawar, CFO and Whole Time Director; and Mr. Rahul Shinde, CEO, Yum Brands and Whole Time Director of the company.
We will initiate the call with opening remarks from the Chairman followed by key financial highlights from the CFO. Following this, we'll have the forum open for a question and answer session. Before we begin, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier. I will now request Mr. Ravi Jaipuria to make his opening remarks.
Good afternoon, everyone. A warm welcome to you all to our earnings conference call to discuss the business performance of DIL for the third quarter and 9 months of the financial year 2023, '24.
At the offset, I feel very excited to share with you all that we have successfully completed the acquisition of Restaurants Development Company Limited, RD, one of the franchise partners of KFC in Thailand. This has led to addition of 283 KFC stores as of December 31, and 274 stores as of September 30 to our overall store portfolio.
We have also maintained the store expansion free space for DIL. We opened 94 net new stores in quarter 3 across our brand portfolio. With this, we have added 209 net new stores in the 9-month period, taking the total store count to 1,452 as at December 31.
With the Thailand acquisition, our total store count now stands at 1,735. Please note that the Thailand deal was completed in January 2024. We are making steady progress in investing in our core brands and expanding our reach to cover our target consumers to capitalize on the growth potential in India. We are now present in more than 250 cities in India. The consolidated revenue for DIL stood at INR 843 crores for the quarter with a growth of 6.6% on a year-to-year basis.
Over the same period, our largest business, DIL India witnessed a growth of 9.2% from April to December, cumulative 9 months of the year. The consolidated revenue was INR 2,509 crores with a growth of 11.9% over the same period of the previous year.
Consumer sentiment remains subdued despite quarter 3 traditionally being a strong and festive quarter. We have also seen the impact of certain international geopolitical events on the American brands that we deal with. The Nigerian currency continues to weaken, post a significant devaluation a couple of quarters back again, impacting the current results of DIL.
Overall, we believe that we have the weak consumer sentiment and depressed summer spending is temporary and short lived. And we are optimistic about witnessing a recovery over the next few quarters. Amid these challenges, our operating and financial performances has remained stable, and we continue to invest in the business for long-term growth to successfully navigate the dynamic and evolving QSR landscape. We have implemented multiple initiatives this year, including optimizing menu pricing, reducing wastage, enhancing cost controls and improving operational efficiency.
To sum up our store addition strategy stands as a testament to our belief in the long-term potential of our Indian QSR industry. As we actively grow our presence, we are strategically positioned to tap into this vast opportunity, ensuring sustainable growth and value creation for our stakeholders.
We are on track to inaugurate 250 to 275 new outlets in the current fiscal year. This ambitious expansion coupled with our commitment to customer satisfaction and innovation positions us for success in the ever-changing QSR sector. We have previously set ourselves an ambitious goal of reaching 2,000 stores by 2026.
You will be happy to note that following the completion of the Thailand acquisition, we are confident of achieving this major milestone by the end of the calendar year 2024.
With this, I would like to conclude my address, and I now hand over to Manish for the financial highlights. Thank you very much.
Thank you, Mr. Jaipuria. Good evening, everyone. A very warm welcome, and thank you for your valuable time for attending DIL's Q3 FY '24 earnings conference call, our tenth call since the listing in August 2021. In quarter 3 FY '24, we opened 94 net new stores across our brand portfolio. We now have a footprint of 1,371 stores of our 4 brands, with a total store count of 1,452 stores across DIL. This consists of 647 stores for KFC, 570 stores for Pizza Hut and 154 stores for Costa Coffee in our portfolio as at the end of quarter 3 FY '24.
Our store distribution in India continues to remain marginally in favor of non-metro destinations at 52% of the total core store count. We have added 7 new cities in quarter 3. As Mr. Jaipuria alluded earlier, having completed the Thailand acquisition, our total store count now stands at 1,735 stores as at December end. As a result of this acquisition the total store count for KFC stands at 930 stores out of the total store portfolio that we have.
Having announced the transaction in December '23, we completed the Thailand acquisition as of 17th January '24, and we will start consolidating the Thailand numbers from quarter 4 of FY '23, '24. Therefore, next quarter, you will see Thailand getting consolidated for approximately 2.5 months.
We see Thailand as a great opportunity market for DIL. Apart from KFC, we do see the potential to introduce new brands from our existing portfolio over a period of time. The existing Thailand business and the team provides us with a strong foundation from that perspective.
Coming back, the operating revenues for quarter 3 FY '24 stood at INR 843 crores, representing a 6.6% year-on-year increase. This was supported by new store openings. The Indian business witnessed a growth of 9.2% over the same period of the previous financial year.
The October-December quarter saw subdued sentiment within the FMCG store masked discretionary consumer sector marked by a visible pullback in consumer spending. This period traditionally buoyed by festival spending saw some contraction in consumer enthusiasm reflecting broader economic concerns and a cautious approach to March discretionary spending.
The impact of this cautiousness extended beyond traditional retail and included the QSR sector as well. We have also seen a strong correlation of some of the international geopolitical events on our business because of some large American brands that we partner with.
Post a strong currency devaluation in quarter 1, the Nigerian Naira has seen further deterioration and further weakening. As you all know, Nigeria is highly food-dependent economy, and the currency impact has resulted in a contraction in the local spending power. As a result of this, we have seen an all-around impact on our Nigerian business performance as far as the revenue and the margins are concerned. The currency impact because of the restatement of dollar-denominated liabilities has been captured as part of Pre Ind AS EBITDA and the same has affected the DIL consolidated results.
As stated earlier we have to support Nigeria business financially, given the local situation for the next couple of years until the local situation stabilizes. The gross margin for the consolidated business is flat on a quarter-on-quarter basis, and improved by almost 130 basis points over the year-on-year quarter. However, the deleverage in top line as a result of lower ADS numbers across KFC and Pizza Hut has led to the impact on brand contribution. The brand contribution in quarter 3 stood at 15.4% flat versus the previous quarter.
Reported EBITDA, which is post Ind AS for quarter 3 for the current financial year was INR 146 crores with the margin at 17.4% versus INR 159 crores in the previous quarter. Consolidated operating EBITDA on a Pre Ind AS basis was INR 79 crores versus INR 95 crores in the previous quarter. Operating EBITDA margin at 9.3% for the quarter was lower by 2.2% on a quarter-on-quarter basis. This is mainly on account of the booking of ForEx loss as a result of the further weakening of Nigerian currency and the ADS deleverage impact.
Taking the discussion to our core brands. KFC in India added 15 new stores in quarter 1 FY '24, reaching a total store count of 590 stores as at the end of the quarter. Average daily sales for quarter 3 FY '24 was INR 104,000 versus INR 109,000 in the previous quarter. Revenues at INR 524 crores grew 14.1% on a year-on-year period. Gross margins for KFC at 69.4% improved by 40 basis points over the previous quarter. Brand contribution margins at 19% for the current quarter was lower by 0.4% on a quarter-on-quarter basis, mainly due to deleverage rising out of the lower ADS. On-premise consumption was 60% versus 61% in the previous quarter.
During the quarter, Pizza Hut added 30 new stores, revenue at INR 180 crores was over by 2.2% on a year-on-year basis. ADS was INR 37,000 versus INR 39,000 in the previous quarter. Gross margins for the quarter came in at 75.8%, flat versus the previous quarter. Brand contribution was INR 11 crores for the quarter, with margins at 6.1%, which was lower by 1.6% on a quarter-on-quarter basis, mainly due to ADS deleverage impact. Costa Coffee added 8 new stores during the quarter, reaching a cumulative store account of 154 stores as of 31st December '23.
Quarter 3 FY '24 revenue was at INR 40 crores with a growth of 14.6% on a quarter-on-quarter basis and 36.4% on a year-on-year basis, driven by expansion of new stores. Gross margin was 77.2%, an improvement of 0.9% versus the previous quarter. Quarter 3 FY '24 brand contribution stood at 14.9%. As you all know, the new stores take some time to stabilize and reach their maturity level. Hence, the rapid expansion of Costa stores has impacted the overall brand performance. We expect this to stabilize as we go on.
To conclude, we want to reiterate our commitment to our ambitious growth within the Indian QSR market. We have set a target of reaching 2,000 stores by 2026, a milestone that signifies the tremendous potential and demand for our brands, with high acquisition, we will be able to meet this target by end of calendar year 2024. The Thailand acquisition will result in external debt in the books of DIL.
On a consolidated level, the Thailand debt will also get consolidated once we start to consolidate the balance sheet as we consolidate the numbers from next quarter. The gearing ratio remains in a comfortable zone despite Thailand acquisition and consolidation. As we continue to expand, we remain committed to improving our financial performance, reflecting our emphasis on prudent financial management and creating long-term value for our shareholders.
On that note, I would like to request the moderator to open the forum for any questions or suggestions that you may have.
We will now begin the question-and-answer session.
[Operator Instructions]
The first question is from the line of Vivek Maheshwari from Jefferies.
Hi, good evening, team. First question is on Pizza Hut. Given where the brand is in its journey, Y-o-Y or a quarter-on-quarter decline in ADS to a level that it has come to and the fact that you have added stores at an overall level, unlike, let's say, KFC where you have added stores and revenues are increasing despite decline in ADS. In case of Pizza Hut, that has not happened. What are your medium-term aspirations or ambitions over here with this brand?
So Pizza Hut while we've added 30 stores in the quarter, but you would have seen that overall our additions are much lower compared to what we have guided and what we've added to the cost. So we are cautious about what is happening on the Pizza Hut. We also recognize that there's a strong competition, which is emerging.
However, we've taken steps in terms of the visibility for Pizza Hut as a brand. We've taken steps in terms of the in-store experience as far as the consumers are concerned. And therefore, we are confident that Pizza Hut top line and the ADS numbers will come back once the overall macro sentiment improves, and we will start to kind of trend in line with the overall category growth.
Okay. Manish, there is also concern for your competition that the aggregators have actually innovate, democratize, and the pizza offerings have gone up quite a bit. In such a setup, I would have thought that you would have better chance because of whatever product fatigue or brand fatigue or you are a challenger brand, so you could have also participated in that. Where are you on this issue versus the competition and the fact that the market is probably getting a bit fragmented?
So if you see, Vivek typically, for example, post the COVID time, the local competition virtually got eliminated because of the various constraints that the overall business was under whereas now we are seeing that is coming back, and therefore, the food aggregators have a good opportunity from that point of view. Overall, from our strategy point of view, as we said earlier that, for example, during the hyperinflation time, we introduced fun flavor pizza, and we saw a down trading happening within our portfolio.
We've compensated that through the premium end side, we've also compensated by reducing the number of offerings that we've had on the fun flavor side. And that's how that gives us the comfort that we will be able to kind of come back on Pizza Hut.
Okay. Got it. That's useful. And on the KFC side, Manish, likewise, the ADS at, let's say, 104,000, which is, I think, lowest patty's in the last 12, 13 quarters. Do you think that third quarter captures the worst and from -- and ADS should not go down any further? Or do you still think that things are tough and -- sorry, yes.
See Vivek, the overall macro environment continues to be challenging. One obviously, from the consumer spending part. And then on top of that, as we've discussed in our comments, we've seen some bit of impact on the American brands as well because of the overall global geopolitical situation. And we've analyzed our numbers.
We've seen a very strong correlation between what is happening outside to what is happening with the brand. So therefore, we are more in the process of consolidating and kind of making sure that we kind of grow from here. But we will need to kind of see when the macro environment improves, and it will take a couple of quarters by the time it stabilizes.
Got it. Got it. And last one, Manish and Mr. Jaipuria, big picture on Thailand. How you are thinking about what is the aspiration over here? What are -- what will be the medium-term thought process in terms of growth and profitability? Anything that you can talk about now that the merger is -- now that the acquisition is done?
So from our perspective, Thailand gives us a good opportunity. One, obviously, it is a nation economy. It is still not a developed economy as the Western world or Singapore or example some of the Middle East countries. So there is a great scope for growth in Thailand.
Second, if you look at from the economy perspective, the way the exchange rates and the interest rate environment is, it is a lot more benign versus what we've seen in India.
At the same time, if you look at the local consumption from a perspective of outside home food consumption, the incidence in Thailand is sitting at almost about 8 to 9x in a week. And this I'm talking about Thailand as an overall country versus, let's say, if you were to compare that to India, given our target population, which is roughly about 12%, 15% of teens in population, and that incidence sits at once in 35 to 40 days.
So from that point of view, economically, it's in a good zone. The growth potential is still available. Poultry is a dominant consumption medium as far as the meat consumption is concerned, and that is true with some of the Asian markets. KFC is a market leader in that country with close to almost 1,000-plus stores. McDonald's, which is #2 is a distant #2 at about 25%, 30% of the store count. So we saw Thailand as a great opportunity. We also see that within that, there is an opportunity to introduce our own brands in Thai portfolio.
And that's the reason we are bullish and we did the deal. And on an overall basis, despite all of that, it was a great valuation. I mean you've seen the multiples that we've acquired the business. So that is where our confidence stems from as far as the Thailand deal.
Got it. And just one small follow-up. In terms of margins, I think -- that business is about 15%, give or take, whereas India margins are about 20% at brand contribution level. So what is the thought process on the margin bit?
So over a period of time, Vivek, we are very confident we'll be able to get to the India levels. And please remember that Thailand as an economy is highly tourism-dependent, and if you look at the data, the COVID impact is still there. They have still not fully recovered from a tourism perspective as well.
So as the kind of overall tourism recovers, the brand numbers start to improve, the leverage would also come in. The positive leverage would also come in for the brand. Therefore, in our view, the margin levels should improve from where the numbers are. And again, that is what gives us the opportunity to acquire the business, have the multiples that we've managed. So I mean, you have to balance it out and take a holistic view from that perspective.
Got it. Just a feedback from some investors who have this worry that the Thailand foray doesn't in any way represent your concern or whatever the slowing QSR and Devyani's position in India. So that's just one thing that some investors have expressed concerns about. I don't know if you can address it here or not, but yes, that's about it.
Sure. So we are not slowing down on India. And also obviously, India is an independent strategy. And it's not that the Thailand acquisition will impact whatever plans or the growth aspirations we have for the Indian business. So that will continue. But at the same time, given the current environment, it's a good hedging bet as well.
[Operator Instructions]
The next question is from the line of Devanshu Bansal from Emkay Global.
Sir, wanted to check as in this calendar year also we are targeting aggressive store expansion. So our formats like Pizza Hut, Costa Coffee sort of generating enough free cash flow to sort of support this expansion that we are planning to?
Devanshu, they are. Obviously, KFC has not changed compared to our model, whereas Pizza Hut has got impacted more than KFC. But please remember, our view is if we are bullish as far as the Indian overall potential is concerned, then we have to continuously invest because this business is a store-by-store business. You have to build brick-by-brick store by store. So it is not that once let's say the India potential kind of emerges we'll be able to kind of say that we can add now 3,000 stores in a year together. So we have to be at it. At the same time, as we've kind of alluded in the past that we follow a dynamic store addition strategy. So we've kind of tapered down Pizza Hut a little bit. We've increased KFC a little bit.
So if the current situation continues, we will kind of adjust some bit of numbers here and there. But overall, I mean, our investment is more from a long-term point of view, and we still believe that as far as Indian market is concerned, the long-term potential is huge and QSR is underpenetrated, and therefore, we need to invest.
Got it, Manish. And from margin perspective, while there was an SSD decline for both formats, KFC Pizza Hut, but in KFC, we have been sort of able to deliver a relatively better margin performance compared to Pizza Hut. So I wanted to check, is there any kind of a difference in operating models for the 2 brands where costs are more variable for KFC vis-a-vis Pizza Hut?
See the leverage impact or the deleverage impact whatever you may call it, is much stronger on Pizza Hut. Because if you look at the KFC ADS numbers, we are much stronger, whereas Pizza Hut are a lower number and therefore, a small change as far as the top line is concerned, impacts the margin more dramatically.
So let's say, once we are able to cross those threshold levels, even Pizza Hut also will kind of get into that zone. But to that extent, KFC is insulated, KFC is a better business, obviously. And that is one of the considerations that we factored when we acquired -- when we got the Thailand opportunity that it was a good KFC opportunity. And therefore, that was the other decision-making element that we had in our mind.
Got it. Manish, can you also talk about the funding of capital required for Thailand as in how -- where is the capital going to be raised and what is the interest rate associated with that?
So the total value of the business was about INR 1,060 crores. And we've disclosed that in the Thailand presentation that we did, out of that, DIL is investing INR 340 crores roughly, and that is what we borrowed locally from the banks in India. Temasek represented by Camas is investing another about INR 325 crores and INR 330 crores. And therefore, they are participating with us at Dubai level. And then there was a local debt which are sitting in Thailand. That is what we've replaced with the lower cost debt now as part of the deal, and therefore, that gives the advantage to the local books.
The next question is from the line of Saurabh Kundan from Goldman Sachs.
So to quantify the...
Sorry to interrupt, Mr. Kundan, your voice is not that audible.
[Operator Instructions]
My question was whether if you can quantify the geopolitical impact you were talking about on KFC and on Pizza Hut?
Saurabh, see in the middle of the macro environment that we have in terms of what is happening on the inflation, what is happening on the consumer spending and so on and so forth, now obviously, it is difficult to quantify and therefore, we can draw correlations and we've seen a very strong correlation between the two. So maybe we can talk about this more in detail in one-on-one sessions, but there is a strong correlation.
Sir, second question is on Pizza Hut. Just wanted to know, is there a minimum target committed to Yum, which is -- is that why the expansion can't be completely paused? I'm not suggesting completely paused, but just theoretically, can it be completely paused?
Statically, you can completely pause it. And obviously, let's say, when we work with Yum!, there are targets defined and we've been kind of working with these targets for the last 25, 26 years, and we've never ever defaulted on those targets. So therefore, I mean that is not such a big worry. It's the fact that we believe in the business. It's the fact that we believe in the brand, and that's the reason we are expanding.
Sir, just one last question. Where in the reported P&L is the Nigerian currency impact recorded. It's about 2% of sales is it?
Yes, it's a good point that you've raised. So if you look at, let's say, a few quarters back, we used to report -- I mean, when the devaluation has set in, we have reported this as discussed with the auditors, as I said whereas now because it is business as usual and the -- and although not official devaluation, but the currency is still weakening, we've actually merged this with our overall operational numbers.
So let's say, when you look at our presentation of the numbers, it sits as part of the overall G&A, which is the brand and corporate G&A, which is the difference between the brand contribution, and the Pre Ind AS EBITDA, and that's the reason you're seeing the expenses at an elevated level because it has an element of a number coming out of Nigerian currency.
The next question is from the line of Percy Panthaki from IIFL.
One quick accounting-related question. If I basically derive your corporate or common costs by deducting the restaurant EBITDA margin from the total company's EBITDA margin, that number around INR 50 crore is much higher than your usual run rate of around INR 30 crores. So can you explain that?
So firstly, as I said, this number accounts for the Nigerian currency devaluation impact also. So therefore, that's an exceptional item, which earlier used to be below EBITDA whereas now...
How long will this continue Manish? How many more quarters we will see this unallocated or corporate costs at this inflated level?
See, I will not be able to predict as to how the currency behaves going forward.
Assuming that the currency is remaining where it is today, then will you see the -- is this a permanent rebasing upwards or it will anniversarize and the cost will come down at some point of time?
No, it is. So because -- let me just give you some numbers so that you're able to understand it better. So pre the devaluation, the Nigerian Naira to a dollar was roughly around 450, 460, somewhere in that range. Post the devaluation, it got at about 660, 670, whereas currently, it is sitting at almost close to 900 plus.
So it's a very significant devaluation which has happened, but just to give you a broad guidance in terms of what is the normalized number as far as the G&A is concerned, you can take roughly at about 5% on the current top line basis.
And this would include whatever currency impact is there?
No, no. This is without the currency impact.
Okay. Now my question was that supposing if this remains around 900. Do you see this extra INR 20-odd crore continuing into perpetuity? Or does this anniversarize and come down? I just wanted to understand the accounting of this.
Sure. So if it remains at a 900 level, you will not see a further impact. And therefore, as far as the currency impact it will revert to the original level and same is the balance sheet, because we've taken the impact of 900 at all line levels and already factored that.
So this will come down by which quarter immediately in Q4 or it will take a couple of quarters for it to come down?
You're talking about the currency?
Yes, this extra INR 20 crore in the corporate cost is what I'm talking about.
So let me just elaborate it better. So let's say, next quarter, if the currency remains at 900, then you will not see further impact in the books.
Okay. So then it will come back to the original INR 30 crores, INR 35 crores kind of a number?
Exactly. If, let's say, the currency comes down to say 700 level, you will see the benefit coming in. If the currency goes to, let's say, a 1000 level, you will see the hit coming.
Understood. Very clear. Secondly, I just wanted to ask on Thailand. See, it's a good acquisition in terms of the valuation and the good part is that it's a decent margin business already. You don't have to do any major surgery on it, but just wanted to understand from a growth point of view, see KFC is a very, very strong brand, already very high market share in the QSR space, from here on increasing market share, even if it does, is not going to be a major delta.
Secondly, as you mentioned, the eating out frequency is also decently high. So I don't know how much upside there is on that also. And there are many stores also. So in terms of increasing number of stores, I don't know if that is a big lever. So would I be right in assuming that Thailand will not be a very high-growth geography for you?
[Operator Instructions] Ladies and gentlemen, thank you for holding the line, the management line is connected.
Sorry, gentlemen, we got dropped, so we are back. So Percy, should I continue?
Sorry, I didn't know, Manish, if you heard my question. Were you able to hear it?
So yes, so maybe you can repeat, no issues.
So I just wanted to understand on Thailand. One is that the brand already has a pretty high market share. Secondly, the number of KFC restaurants are also sort of decently high. And thirdly, the number of eating out occasions are also much higher than what they are in India. So in light of all this, would I be right in assuming that this franchise will not be a fast-growing franchise for you?
So let me explain you the dynamics of Thailand firstly. So as part of the overall diligence and acquisition, we had got an independent market study done in terms of what is the potential for KFC in Thailand. And that study indicated that we can actually double the store count. I'm talking about KFC as a brand, and not DIL as a company. So if let's say, there are total about 1,000 KFC outlets in Thailand, over the next 7 to 8 years, we can actually double that count, so this is what the market study indicates. So therefore, that is one potential.
Second, if you look at, let's say, when we talk about outside home consumption, which I said is almost sitting at 10 times. This is not the consumer that is coming to QSR readily. So let's say, for example, when we talk about outside home food consumption, this would include the street food. This would include the fine dining. This would also include, let's say, if you were to pick up a sandwich from a 7-Eleven or let's say Marks & Spencer, for that matter. So over a period of time, as the income levels grow, the consumers will keep on graduating and will keep on uptrending to the premium brands and to the KFC because it already is a very strong brand there.
At the same time, if you see the dominant contributor to the street food also in Thailand is fried chicken. And as the consumers upgrade, they would come to KFC. And therefore, all of that kind of gives us the confidence that from a growth perspective, the opportunity is still there.
The next question is from the line of Jay Doshi from Kotak.
My question is on Thailand acquisition and broader framework. So with this acquisition, international contribution to EBITDA will be over 25% or so. I know India business EBITDA is depressed at this point of time. But do you have a sort of framework in mind where -- or would you consider or evaluate more opportunities in the Yum ecosystem outside of India? Is there a threshold that international may not cross 30%, 35% in the medium term in terms of future investments?
Jay as a strategy, as we said earlier, we are not diluting as far as India strategy is concerned. And there's no change as far as the India growth aspirations is concerned, and you would have noticed that there are multiple questions that even in a subdued macro environment why is that we continue to invest because we believe in the long-term potential of this country.
Having said that, I mean Thailand came up. It was a great deal. We managed to structure it well. It was addition to where India sits. It has an opportunity from other brands perspective also. So therefore, we've not laid a framework. Our focus continues to be India. So we, as of now, we are not evaluating anything else. There is nothing else on the table to kind of evaluate. So that is where we stand as far as the overall piece is concerned.
That's clear. Second is, I mean, there is a lot of noise in numbers, geopolitical type of headwinds as well as weakness, but when we look at your January numbers, SSSG or December that the base was weak. By any chance, can you give us some color if you were to adjust it for geopolitical headwinds that you probably may have? Is there a sort of further deterioration in SSSG trends on a -- even on a week base? Or is it similar to what it was in September -- August, September? Or is there any optically improvement in SSSG?
So Jay, obviously, it is kind of too early to talk about the January numbers. But overall, as you know, I mean, the geopolitical events that you're talking about...
[Operator Instructions] Ladies and gentlemen, thank you for patiently holding. We have the management line connected back.
Sorry Jay, we got disconnected.
Okay. So that was -- all my questions have been answered.
The next question is from the line of Nihal Mahesh Jham from Nuvama.
My first question was that if I look at KFC last quarter, we had the impact of sick mass where we still delivered a decent performance. And maybe the expectation was that despite the base being favorable and the fact you don't have the impact, the performance would have improved. So is it just in your experience, the worsening of the macro situation? Or any other specific factors which has led to, say, the worsening of the SLG performance for KFC specifically?
I think it's a combination of macro elements also, obviously, in terms of the spending power in terms of what is happening on the lending side, if you look at the overall consumer debt, it is sitting at almost all-time high. So there are multiple macro events which are kind of there. And then as we talked about, I mean, there's this whole geopolitical event which is there. So I mean, it's a combination of various macro situations, which is kind of impacting the overall performance.
Understood. Related question on Pizza Hut. Now clearly finding the base, you did highlight that some of the initiatives that we are taking in terms of maybe increasing the visibility of the brand. What else in your understanding, at least if you look at the competitor data and the performance are the missing points which you can improve, which can get Pizza Hut say back to the trajectory which we've seen a few quarters back?
So in terms of missing points, Nihal, as such, there are no missing points. But as you know, I mean, the local competition also is kind of getting very significant, and with Zomato and Swiggy obviously kind of extending their reach and helping the local competition. To some extent, that is also impacting the overall brand. And then, of course, the macro elements that we talked about, KFC, they get applied to Pizza Hut also equally. So it is not that the pizza category is isolated category, and therefore, the macros are not impacting, if at all, I mean, I would say this action is more on non-pizza category than the pizza category.
Just one final question, if I may. When we look at the dynamics you mentioned about why you went ahead and acquired the KFC operations in Thailand. This kind of a framework maybe even applies to some of the other Southeast Asian countries and North Africa because you don't have say a currency issue here also. So if you apply the very framework, are you been wanting to explore some of the other opportunities available? Or would it be that once the Thailand acquisition in a way fructifies when we see the results, we will go ahead and look at the next leg of international acquisitions for us.
Nihal, see every country is different, every business is different. Every brand is different, how they are positioned in the local market is different. And overall, let's say, for example, obviously, we will not be able to compare what some of the other acquisitions or some of the other players have kind of resulted in what their experience is.
So our -- I mean, we are bullish for the reasons that I've explained on the call earlier. And let's see how it pans out. As I said earlier, I mean, as of now, we are not evaluating anything else. And our focus, obviously, is India and the focus is to kind of understand and learn the Thailand business, integrate it with the Indian business and make sure that we are able to kind of leverage on the opportunities which are there in Thai market both from margin as well as the top line and the new brands that I talked about. So there is an agenda for Thailand as well. So we are focused right now on that only.
The next question is from the line of Tejash Shah from Avendus Spark.
Manish, you spoke about consumer sentiment being one of the reasons for the challenging ADS's for KFC and Pizza Hut. But surprisingly and positively, we are not seeing the same trend playing out in Costa. So would you say that the competitive landscape has a higher weightage, further drag down there versus, let's say, in something like Costa where perhaps it is -- I'm just assuming it is relatively better.
See coffee penetration versus a pizza penetration versus the chicken penetration is sitting at a very different level, right? And we are highly underpenetrated as far as Costa is concerned. And at the same time, for example, if you look at Costa has a good presence at the airports and high footfall locations. And from a travel perspective, the airports are doing well. So therefore, to that extent, Costa is kind of less impacted versus the other categories.
Sure. But how would ADS penetration -- so is this that after, let's say, INR 200 crores, INR 300 crore, INR 500 crore benchmark as we go along, the ADS potential for the incremental store actually drags down the average?
No, let me explain you what I -- so let's say, for example, if you look at the presence of Costa Coffee at the airports, for example, right? So if you look at our airport performance versus a high-street performance for Costa is very different. So the high-street performance of Costa would mirror what is happening in KFC and Pizza Hut, whereas the airport performance for Costa is very different. And the airport presence for KFC and Pizza Hut is much lower compared to what Costa presence is. So that is what I meant.
Okay. And second, in this quarter, have we closed any -- closed down any store across different formats?
We have closed some stores of Pizza Hut as we've kind of guided in the past that our store closure target is always under about 6%, 7% of the new stores that we open. So we are well within that.
And the vintage of the stores that we have shut down where they opened after the COVID or before COVID?
It's a combination of both.
And lastly, despite the subdued consumer sentiment that you called out, our store expansion is getting accelerated. So -- and it also kind of, as you said, that it qualifies your belief in that turnaround is imminent. Any quantitative data that you look at to get that confidence? Or is it just a cycle that we're hoping that it will turn around at some stage?
See, I agree with you that we are bullish on the store expansion, but we have kind of tapered it down as far as Pizza Hut is concerned because we are seeing a higher impact on Pizza Hut. So if you remember, around the IPO time we used to talk about, even IPO and post that almost for whatever, more than a year, we were targeting Pizza Hut to open almost 100 plus stores every year, whereas now we are talking about opening maybe 60, 70 Pizza Hut stores.
So we have tapered it down and therefore, to that extent, we have adjusted the opening numbers. On an overall basis, if you look at, let's say, Costa, we've upped the numbers, which kind of compensate for that. On KFC, we've upped the numbers a little bit. So therefore from a portfolio perspective, what you're saying is right. But within that, we are kind of adjusting the numbers to whatever is required to be done.
The next question is from the line of Dhiraj Mistry from Antique.
My question is again back to Thailand. So you have already mentioned what kind of growth and all you would be envisaging from Thailand, it's an immense growth opportunity. So my question is related to the funding of that growth. Whether the Thailand businesses, enough cash flow generating business where there would be no additional capital requirement would be required or whether it will be self-funded from Thailand business itself?
It will be self-funded from Thailand. And again, as I said, we have to kind of get into greater details of the business. But the models that we worked out, one, as far as the store expansion strategy is concerned for Thailand, they'll be able to self-fund it. At the same time, whatever debt also is sitting in the books of Thailand, they will be able to repay that also from the cash flows that they are generating.
So let's see, we have to because it's just been about a couple of weeks when we've completed the transaction. So we have to do some more work. But as of now, it appears that we will be able to kind of put Thailand in a self-funding zone.
Okay. And for other geography, like Nigeria is facing right now a headwind, but in future down the line for other international business, let's say, for Nepal or Nigeria, whether that would require the future funding from the India's cash flow? Or it would be, again, if there is no enough cash flow generation from that business, we will take a pause on that deal expansion.
See, even Nigeria and Nepal also, we've talked about in the past that they are kind of self-funding in terms of whatever expansion they are doing. So Nigeria, we got into this situation because of the unforeseen and very, very significant currency devaluation and that's the reason we are talking about some funding. Otherwise, let's say, once the situation stabilizes, even Nigeria also will be self-funding only. And that is how it was in the past as well.
Okay. Sir, last question on Pizza Hut, like despite -- if I look at competitors data, their SSSG decline as well as ADS decline is much lower than what we have witnessed. So despite fun flavor pizza, we have been kind of losing market share to the market leader. What kind of strategy you are trying to play apart from fun flavor pizza to increase footfall or gain market share in that Pizza Hut segment?
See overall, Dhiraj, as you know, I mean, despite the fact that pizza is the largest category in the Indian QSR space, it is still a growth category, right? And relative to each other, what you're saying is right, but there is a strong emergence of local players, and they are also kind of fueling the entire growth in the category.
So our strategy is mainly around innovation and value. As far as pizza market is concerned, and that is what I have alluded to earlier. The brand still remains a strong brand as far as the consumer recall is concerned. The customer experience is great from a dine in perspective. So therefore, that's what gives us the confidence that we should continue to kind of expand Pizza Hut.
Okay. Sorry, but one last question from my side. Like KFC, in this quarter, we have added 50 stores. So we have witnessed gross margin expansion on a quarter-on-quarter as well as on a Y-o-Y basis, but EBITDA margin has contracted a bit. Is this EBITDA margin contraction is purely because of the store addition, what we have done during the quarter? Or is there any other factor as well?
It's mainly coming out of deleverage Dhiraj, because, for example, as you know, and you've seen the ADS has come down and the SSSG has come down, while we managed to maintain the margins. But overall, because of these 2 reasons, the deleverage also sets in, and that is what then kind of gets impacted for the fixed expenses, and that's how it is.
The next question is from the line of Majed Ahmad from Smart Sync Investment Advisory Services.
So my first question is, what's your view on Nepal market? I am seeing there is a slow growth there in the market? And what's your plan there as well?
So Nepal, Majed, as you know, is a small country and has a very limited opportunity, we operate both KFC and Pizza Hut in the Nepal market. We've got about 25 stores across our brand portfolio. And from an opportunity standpoint, that presents -- that market presents about 2, 3 stores a year. So it's not a huge opportunity versus India, and it gets managed largely out of the Eastern region from India. So there are no big overheads that we incur. But on its own, it's a great market. KFC is a very strong brand. So therefore, it kind of works very well for us.
One more question I have is, what's the view on Vaango, like there's no any store addition and anything is not happening there really. Any thoughts you can give on Vaango?
So Vaango is a good medium to long-term bet. And as you know, I mean, the Indian food brands are difficult to scale up because of highly regionalized flavors and high domesticated flavors. And therefore, Vaango we are building cautiously. So there is a value proposition that we are creating the Vaango and we are kind of optimizing all of that.
In the long term, we believe that as the overall dynamics for QSR play out, there is a strong potential for Indian brands also, and that is how we are building Vaango.
The next question is from the line of Shirish Pardeshi from Centrum Broking.
Just a quick question. I think we have been in the business for many years, and we understand the consumer psyche, how it is moving, and what is -- so we could do a lot of things around Pizza Hut, but I was a bit surprised on the KFC part of the business with the negative SSG. So what is it that -- I mean though the external factors are important, but in terms of value layer, what we have introduced, but this time, it has not responded?
So my therefore straight question is that, is it that the niche consumer is not attractive finding a solution for moving to KFC. I mean I understand Pizza Hut will have a problem. But [indiscernible] these all factors are not working. So what is it more needs to be done?
Shirish, see you come from consumer background. And you know that the consumer brands take a number of years to kind of get built with a particular proposition, right? So to your question in terms of what is happening, obviously, there is a macro level environment, which is kind of affecting KFC as well, and that is the reason the numbers are where they are. But to your other point, from a lunch perspective, we introduced the lunch, but it will not happen overnight.
We are bullish that there is a space available and therefore, we will be able to capitalize on that space over a period of time, but it will get built, we are very confident about it. If you were to look at our Wednesday proposition, we've been at our Wednesday proposition for a number of years now, and that is today how Wednesday has become a very, very sizable contributor to our weekly sales.
So therefore, I mean, from a consumer perspective, you have to introduce, you have to optimize, you have to be at it and that's how we are approaching KFC.
The next question is from the line of Latika Chopra from JPMorgan.
I missed a part of this conversation, got dropped off, I'm not sure if it was considered. But I had a question on Pizza Hut, it seems the off-premise sales actually were under pressure in the quarter versus on-premise sales, anything specific that drove this kind of trend?
If you look at our overall off-premise has remained at the same level as a percentage to the overall brand sales. So I think the off-premise has gone up by about 1 percentage point versus, let's say, the previous quarter. And therefore, there is nothing. It's overall, directionally, the ADS is lower, and it is getting contributed from both channels, which is off-premise and on-premise.
Okay. I was comparing with probably to any other go trend on a Y-o-Y basis. So that's why I was just trying to understand why the share has moderated by a percentage point.
Because as far as Pizza Hut portfolio is concerned, our trends, if you were to look at, I mean, it's part of our presentation also, they have pretty much remained the same between off and on premise.
Okay. The second thing was, could you give us, maybe I missed this earlier, any fixed opening targets that you have in mind for FY '25 and the split across the core format, I know this number could be dynamic depending on the demand situation. But at this point, how are you thinking about FY '25 store openings?
So as we've said in the past, Latika, we are looking at overall about close to 275 to -- or maybe 250 to 300 stores. That's a little larger bracket for '25 also. And the broad constituent will be about 120 to 130 for KFC, another 70, 80 for Pizza Hut, 50, 60 stores for Costa coffee. So that's the broad constituent that we are looking at.
So at this point, we are maintaining that plan, and we keep reviewing it every quarter.
Yes, that is correct, yes.
Okay. And the last bit, if I may. I understand there was an impact due to some of those external factors that you alluded to for KFC and Pizza Hut. But in your assessment, if you adjust for them, and you look at the underlying SSG, what impacted that more? Was it a reduction in average ticket size? Or was that reduction in footfalls, are you adjusting for those external factors to the best possible assessment for KFC and Pizza Hut. And also, if you could also talk a little bit about the product mix that would be useful.
So for the external factors that we've talked about, it's largely we are seeing very clear correlation with the transactions because the transactions have dipped to that extent. So there is a trend and a correlation available. And that is what has resulted in the overall impact as well. So as far as ATS is concerned, obviously, it is kind of trending better versus the transactions in this quarter.
Ladies and gentlemen, that was our last question for today. I would now like to hand the conference over to the management for closing comments.
Thank you, Mr. Chairman and all the investors, analysts, who had been on the call. I do hope that we have been able to respond to your questions satisfactorily. Should you need any further clarifications or would like to know more about our company, please feel free to contact our Investor Relations team. Thank you once again for your time today to join us on this call and participate in our growth journey. Thank you very much.
Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you so much.