Devyani International Ltd

NSE:DEVYANI

Earnings Call Transcript 2023-Q4

[Operator]

[Audio Gap]gentlemen, good day, and welcome to Devyani International Earnings Conference Call. 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.

[Anoop Poojari]

Thank you. Good afternoon, everyone, and thank you for joining us on Devyani International's Q4 and FY '23 Earnings Conference Call. We have with us Mr. Ravi Jaipuria, Non-Executive Chairman of the company; 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 management, following which we 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.

[Ravi Kant Jaipuria, executive]

Good afternoon, everyone. I warmly welcome you all to our earnings conference call to discuss the business performance for the fourth quarter and the year ended March 31, 2023. In our first full year of performance post listing, DIN demonstrated small growth momentum and we have crossed some very -- very significant milestones.Our consolidated revenues have reached close to INR 3,000 crores, backed by store additions across brands and continued healthy performance from existing stores. We now operate 1,243 stores across our portfolio of countries and brands. We have managed to more than double our store count over the last 3 years.Despite this being a largely pandemic-impacted period, both KFC and Pizza Hut crossed important store milestones of 500 stores each and Costa Coffee has crossed 100 stores as of March 31, 2023. This phenomenal growth performance by DIL India was acknowledged and facilitated by Yum at the International Franchise Conference held in Singapore earlier this year, where DIL India was awarded the exclusive restaurant growth award.Innovative product development through our Yum partnership along with execution, rigor has been a major factor in helping us grow. As we continue to expand our [Technical Difficulty] across the breadth of the country, we believe our foray into the value offerings should lead to long-term benefits. The launch of KFC lunch and the roles that provide great value to our esteemed customers have seen a strong initial traction.Premium products like the Chizza and the Peri Peri chicken at KFC were equally well-received. In Pizza Hut, we have seen enthusiastic response to the fun flavor range, our value layer. We have also recently launched a refresh of the PH menu consisting of 10 new pizzas and new sites, which is being welcomed by our patrons.High inflation across industries and categories led to a short-term impact on consumer sentiment and demand in the second half of the current financial year. Despite this, our performance has been resilient and we have continued to invest in the business to ensure long-term growth.I'm pleased to share that we opened 305 net new stores across our portfolio in FY '23 with 66 of the net new stores getting added in quarter 4 full year '23 itself. We continue to actively pursue new trade areas in metro cities and upcoming locations. This will help us take our brand closure to the -- to our customers and give them better experience, thus solidifying our presence in the domestic markets.Looking ahead, the confidence in our brands and the Indian market remains strong. We are seeing initial signs of inflation stabilizing. This gives us hope that a rebound in consumer spending in second half of the coming fiscal. By maintaining the financial discipline and operational excellence, we are well-positioned to emerge stronger and capture growth opportunities in the future.We remain firmly committed to our objective of creating sustainable long-term value for all our stakeholders. With this, I would like to conclude my address and now hand over to Manish for his comments. Thank you.

[Manish Dawar, executive]

Thank you, Mr. Jaipuria. Good evening, everyone. A warm welcome, and thanks to all of you for your valuable time for attending our quarter 4 and FY '23 earnings conference call, our seventh such call since the listing of DIL back in August '21. We closed the year with 1,243 restaurants, more than double the 610 restaurants that we had 3 years ago.In FY '23, we opened 305 new stores across our brand portfolio with 66 of these coming in quarter 4. With this, globally, we now have 543 stores for KFC, 510 stores for Pizza Hut and 112 stores for Costa Coffee in our portfolio as at the end of FY '23. Our metro and non-metro distribution of stores in India continue to shift in favor of non-metro destinations with 53% of the core brand stores in India now in non-metro locations.The potential for QSR sector lies in [ Bharat ]. While metros currently account for a significant share of consumer spending, we firmly believe that the upcoming towns will be the engine of growth in the coming decade. This will really help QSR in gaining real momentum in the country and playing to its potential of being a mass market play.Operating revenue for FY '23 stood at INR 2,998 crores, representing a 44% year-on-year increase. This was supported by a 33% increase in store footprint. All around inflation and input costs led to a slightly lower gross margins at 70% versus 71.2% in the previous year.Despite the combination of changes in product mix and investments made in our businesses, brand contribution margins moved in line with the gross margins, but still at healthy 18.7%. Judicious cost control limited the impact on operating EBITDA, which on a pre-IND-AS basis was INR 435 crores versus INR 299 crores for the full year last year.Operating EBITDA margin at 14.5% was 10 basis points up on a year-on-year basis. Reported EBITDA, which is post IND-AS was INR 655 crores for the year with margins at 21.9% versus INR 476 crores a year ago, almost a 38% growth. Profit before tax stood at INR 242 crores versus INR 123 crores last year, which is almost a 97% jump on a year-on-year basis.For the quarter, operating revenue stood at INR 755 crores, growing 28% on a year-on-year basis. Gross margins came in at 69.6% due to stable costs during the quarter. Brand contribution at INR 124 crores and margins of 16.4% were lower due to deleverage and the higher store operating costs.These include the recognition of full year statutory bonus and higher spending on local store promotions in the second half to drive the consumer sentiment in our favor across all our brands. Operating EBITDA was INR 91 crores, representing a 12.1% margin.Coming to our core brands, KFC in India added 126 net new stores in FY '23, reaching a total count of 490 stores as at the end of the year. Average daily sales for FY '23 was 117,000 versus 113,000 for the previous year on an expanded footprint of stores. Annual [indiscernible] was healthy at 16%. GFC India revenue was INR 1,771 crores, which grew 45% on a year-on-year basis.Gross margins at 68.3% were lower by 100 basis points compared to previous year due to sustained inflation in raw chicken prices and some of the other raw materials. This has impacted the brand contribution margins, which at 20.2% is slightly lower on a year-on-year basis. On-premise consumption remains steady at 62% during the current year.For the quarter, KFC India added 29 net new stores. Revenue at INR 440 crores are higher by 26% on a year-on-year basis. The sequential impact is due to weak consumer demand as a result of shift in the timings of key festivals and fewer number of operating days in the quarter. ADS came in at 106,000 with SSSG at 1.9%. Gross margins for the quarter stood at 68.6%, deleverage due to lower ADS and the higher store operating costs led to brand contribution margin of 17.5% in the quarter.Pizza Hut in India added 93 net new stores this year to surpass the 500 store mark as pointed out by Mr. Jaipuria earlier. And it reached account of 506 stores. ADS for the year was 42,000. Revenues came in at INR 700 crores, growing 32% Y-on-Y and SSSG was 4.4% for the year.Cheese prices continue to trend higher. As a result of this and the product mix changes, gross margins came in at slightly lower at 74.4% in FY '23 versus 75.6% during the previous year. Brand contribution margin saw a small dip to 14.5% versus 16.3% last year because we saw that the mid prices continue to escalate during the year and we did not pass that on by way of price increase during the back end of the year.Product mix changes because of introduction of value layer and investments in the brand helped with the on-premise consumption, keeping it steady at 42%. During the quarter, Pizza Hut India added 23 net new stores. Revenue was at INR 170 crores versus -- which was 16% up year-on-year. ADS was marginally lower at 39,000 with a negative SSSG of minus 3.2%.Gross margin was steady at 73.3%. Brand contribution margin during the quarter was 9.2%. We believe that the introduction of the value layer is good initiative to drive organic volume growth in the medium to long term. However, in the short term, it has led to a little dilution in sales and ADS. We are proactively working on improving the performance of the brand, including the margins on the value layer brand.One of the recent initiatives have been to refresh the menu and the launch of 10 new pizzas recently in the month of April, the new pizza focus on contemporary palate and are designed to appeal to the youth. In conjunction with the launch of your mood, your pizza campaign, we have also brought [indiscernible] to the whole pizza ordering experience by offering personalized pizza recommendations based on customer moods.To support all such initiatives, we have marginally increased the marketing spends as well. Costa Coffee crossed the 100 store milestone in FY '23. We have added 57 stores during the year to double our footprint and to reach a total of 112 stores. Revenue also crossed INR 100 crore mark with ADS for the brand improving to 35,000 versus 29,000 for the previous year. Gross margin was slightly lower at 79% because we saw the inflation in coffee and milk prices in Costa also.Due to investments required in the rapid expansion and sustained input inflation, FY '23 brand contribution was a little lower at 23% for the full year. We believe that the input inflation should bottom out over the next few quarters and hence, we expect the consumer sentiment to improve. The food services market is evolving rapidly with new technologies and platforms like ONDC. While still early days, we believe that these have the potential to benefit all the stakeholders in the industry.We have already onboarded Pizza Hut on the ONDC platform and we are working on integrating all of our other brands on these new platforms to ensure that we are available wherever our customers desire. On that note, I would like to request the moderator to open the forum for any questions or suggestions that you may have. Thank you very much.

[Operator]

[Operator Instructions] We have the first question from the line of Vivek M. from Jefferies.

[Vivek Maheshwari, analyst]

A few questions. First, Manish, on SSS, what is the outlook as we head into, let's say, first half or first quarter this year? I mean the exit has been, let's say, minus 3% to plus 1%. So what are your thoughts? How are you seeing macro on the ground right now?

[Manish Dawar, executive]

Vivek, the way we look at it from a SSSG perspective, I mean, our medium- to long-term outlook on both the main brands has not changed. If you remember, we talked about KFC at being 5% to 6%. And for Pizza Hut, we talked about 7% to 8%. So we are not changing any outlook from a medium-term perspective. But as you know, I mean, from a quarter-to-quarter perspective, there could be some headwinds. There could be some tailwinds. So therefore, we don't comment on a quarter-on-quarter basis. But otherwise, we are not changing any of the guidance.

[Vivek Maheshwari, analyst]

I understand that, Manish. But given how quarter has trended in the second half, do you think we are closer to the bottom right now or things you expect can get worse before it start improving in the second half? Because the real base gets -- the lower base starts to impact only from December quarter.

[Manish Dawar, executive]

Sure. Vivek, we believe that we are towards the bottom end of the cycle because we started -- if you see -- I mean, on a macro basis, this sector typically follows consumer staples. And let's say, when there was a downside coming, we saw the similar trend. We started seeing some recovery on the consumer staples and therefore, that gives us the confidence that this sector also will follow from a recovery perspective.Second, if you were to look at the input prices, the chicken prices have started to fall, we've seen and you will see that in the numbers in the next quarter. Oil prices have already kind of tapered off from the peaks they were at. Similarly, if you were to look at the wheat flour prices, they are slightly lower. Even on the packaging materials side, also, we are seeing that the paper prices have started to kind of come down a little bit.The only piece which remains a concern is, therefore, the milk prices and the cheese prices. And we've all seen the commentary with it because there are multiple commentaries in public domain. So we are hoping that also should start to stabilize in about 6 months' time. So with this, therefore, we do feel that we are towards the bottom end of the cycle and things should start to recover from here.

[Vivek Maheshwari, analyst]

Okay. That's quite interesting. Manish, secondly, any update on how we are thinking about F '24 store addition in both the key brands?

[Manish Dawar, executive]

So in the past, we've talked about 250 to 300 stores. If you look at our actual performance, it's close to 305. So we are maintaining the same for next year also. So we will be on an overall basis, close to 300 store addition for FY '24 as well with a broad split of, you can say, 100-plus for KFC, 100 minus for Pizza Hut, another 60, 70 stores for Costa and the rest will be some of our smaller brands.

[Vivek Maheshwari, analyst]

Okay. Got it. Second, on gross margins in case of KFC, there is a 100 basis point expansion quarter-on-quarter. Is this entirely led by lower chicken price or there has been product price hikes as well?

[Manish Dawar, executive]

In the quarter 4, there was no product pricing. It was primarily led by the chicken and then there were some other benefits from oil and all. Chicken also the full benefit has not flown because we are sitting on the inventory and that will take another couple of months to kind of taper off. So therefore -- but we are seeing that all the new contracting, new POs that we are raising is at a lower price, so.

[Vivek Maheshwari, analyst]

Okay. Got it. And in case -- and hopefully, so input prices stay benign or cool off even further. What are your thoughts on product pricing strategy at that point of time because your gross margins still are lower than, let's say, where the peaks were? But the consumer sentiments are also weak. So how do you intend to manage the equilibrium in terms of sales versus margins?

[Manish Dawar, executive]

Vivekji, if you look at the product pricing or the consumer pricing, it is not just related to the input pricing. There are multiple other factors also. So as you know, on KFC, we've taken a slight price increase in the month of April, which is just the last month. And that is to take into account what is the outlook we have for the year. We also kind of need to balance our overall portfolio from a top line and the margin perspective.You would have also noticed that in KFC, we introduced a value layer by way of the rolls and the KFC lunch. So therefore, there are a lot of other inputs also that go into the pricing decisions. So -- but just to kind of give you the reassurance, I mean, KFC, if you remember, our peak margin performance was 69%, 69.5%. We should see that coming back over the next few quarters.

[Vivek Maheshwari, analyst]

Sure. And just a follow-up, Manish. Isn't it a bit given how consumer sentiments are and I understand, I hear you in terms of we probably closing to the bottom now, but do you not think taking the product prices at this point of time can be a bit counterproductive?

[Manish Dawar, executive]

So on -- so I mean, we are cognizant of the category and the brand. So for example, if you were to ask me the same question for Pizza Hut, my answer will be different because Pizza Hut despite the fact that the milk and cheese prices continue to go up throughout the year, we did not take a price increase during the back quarter. So therefore, we have taken a hit on the margins. Even now also, we've not taken any pricing on Pizza Hut.So therefore, pizza as a category is a different category. KFC is a different category. And we try and compensate the consumers by way of deals, by way of offerings, by way of new value layer to just kind of compensate from a consumer perspective.

[Vivek Maheshwari, analyst]

Perfect. And last question, if I may. Manish, you mentioned about ONDC. There's a fair amount of debate going on everywhere in terms of the promise that ONDC has versus the incumbent, the discovery part and so many other aspects, can you just elaborate a bit on your take on this ONDC phenomenon?

[Manish Dawar, executive]

So Vivek, we've also seen the same thing as you have and that's the reason we've kind of participated in ONDC. It's yet to gain traction, yet to gain momentum. So we're already there. We are working on KFC to come on ONDC, but that is still under evaluation. Pizza Hut is already there. So we would like to participate if it kind of gains traction and that's how we've started testing orders with Pizza Hut.

[Operator]

The next question is from the line of Percy Panthaki from IIFL Securities.

[Percy Panthaki, analyst]

My first question is on Costa Coffee. So basically if I just compare the size of Costa Coffee revenues versus the market leader here, it's around 1/10 of the market leader. And I see a significant sort of growth opportunity and a catch-up possible here. So just wanted to understand like Starbucks has reached this journey of INR 1,000 crores plus over the last decade. What are your ambitions? And what are your thoughts on Costa as a brand and cafes as a format? And looking slightly medium term, what kind of growth aspirations and what kind of sort of turnover aspirations do you have from this category?

[Manish Dawar, executive]

Percy, it's a great category because coffee is a very, very aspirational category from a youth perspective. And that's the reason, if you see, while kind of Costa was -- I mean, we really kind of activated the brand post IPO because there were some concerns with respect to our agreement after Coke acquisition of Costa. And post that, we really kind of expanded the brand.So versus last year, if you look at we've more than doubled the store count. So we were at a 55 store count last year, we are close to 112. Our revenues have grown up by almost 140%, 150%. So therefore, we are absolutely where we are expanding the brand. The consumer feedback for our coffee is very positive. They believe that the Costa Coffee taste is excellent, the flavor and the aroma is above par.So all of those things are positive. We are positive on the brand. But this will not be a mass play like a KFC or a Pizza Hut because coffee as a phenomenon is right now majorly in metros and the Tier 1 cities. So we are focused, we want to expand. We want to play in that category, which is growing. And I already indicated in my previous response that we are looking at about 60 to 70 store visions for Costa for the next year and that will also grow as we see the response to the brand.

[Percy Panthaki, analyst]

And any kind of light you would like to throw in terms of that INR 1,000 crore kind of benchmark? How many years do you think you can take to go to that level?

[Manish Dawar, executive]

No, I would not like to list that. So -- sorry.

[Percy Panthaki, analyst]

Okay. Sure. Next question on KFC, although Vivek has asked this, I still sort of go a little bit deeper into this. You've taken close to 3.5%, 4% pricing on KFC in April. That's what [ Safia ] said, and I'm assuming that it's pan-India phenomenon.

[Manish Dawar, executive]

Yes, [indiscernible].

[Percy Panthaki, analyst]

Right. And basically this is on the back of close to 10% kind of pricing taken about 12 to 15 months ago. So if I look at it like on a 15-month basis, the total price increase is close to about 13%, 14%. Now I understand there is a mix effect, et cetera, it doesn't really translate to 14%. But what we've seen in categories like this and not just recently, but even like Jubilant has been listed for 10 years, so we have a long data history, et cetera.Whenever we've seen high price increases in QSR categories, we have seen that the price elasticity of demand actually was greater than minus 1. So what I mean to say is that if you've taken a 3% price increase, the number of transactions or volumes might fall by more than 3%. This doesn't always happen, but it happens after a certain inflection point.So how do you judge this? And how do you sort of -- are you sort of pushing the envelope a little bit? I think it's a risky move, especially because the key ingredient which is chicken, is now going into a Y-o-Y deflation kind of a scenario. So in this kind of scenario, was this really warranted? Are you trying to sort of balance overall company margins because Pizza Hut is not making that, so why not sort of earn a little more in KFC? What is the thought process behind this price increase?

[Manish Dawar, executive]

Sure, Percy. So that is not the objective. We don't want to kind of balance the company margins through KFC. We are absolutely cognizant and careful on every and each brand of ours and we want to kind of make sure that we nurture all these brands in that because, as you know, we've kind of elaborated this in the past that at a brand level, we have separate CEOs. There are separate teams, and they don't allow us to kind of take those kind of leverages. So therefore, that is not the case. But having said that, as I responded to Vivek, that is the overall portfolio call, it is not just the chicken prices.So for example, there is labor also, there is flour also, there are other overheads, there are store running expenses. And at the same time, on top of that, as you know, we've launched a value layer to attract the new consumers in and to ensure that the existing consumers also can draw benefit from that. And therefore, we have to balance out the entire portfolio. So therefore, if you look at, for example, the response that we've seen to our rolls and the KFC lunch is phenomenal.And we think that could become a very strong leg as we go forward. And at the same time, we also -- because we have much more granular data available, we think the earlier price increase has got absorbed. And if you see this recent price increase in April, we've taken after a gap of 12 months. So our last pricing was in April of last year. Then throughout the year, there was no pricing for KFC. And now after 12 months, we've taken about 3.5% kind of pricing. So that's how it is.Whereas Pizza Hut, if you remember, it was a different pricing strategy. We took pricing in small bouts and it was almost throughout the year. So therefore, it's a different strategy depending on the brand and so on and so forth and you have to balance the portfolio from various manifestations, so.

[Percy Panthaki, analyst]

Right, right. Understood. So basically, you're saying in spite of this price increase, it's not as if the margins will sort of go higher than what they used to be a year ago or something like that?

[Manish Dawar, executive]

No, no, no. That's the reason I said, I mean, we will come back to our old margins, but we want to expand the category. We want to grow the consumer base. We want to attract the new consumers into the category and that is what we are trying to play with these kind of balances.

[Percy Panthaki, analyst]

And last question from my side. The gap between SSSG and ADS growth. So SSSG growth is 2% for KFC. ADS has declined 6%. So there is a 800 basis point gap between these 2. Now my understanding is, and correct me if I'm wrong, you would need approximately flat kind of ADS so that you don't bear the negative impacts of operating deleverage because the sales -- sorry, the cost per store will increase at a particular rate.So from that point of view, just wanted to understand that to get this flat ADS, what kind of SSSG would you require going ahead? And in case my basic assumption itself is wrong that to avoid deleverage, you will need a flat ADS, then correct me on that?

[Manish Dawar, executive]

So Percy, there is a very strong third element, which I think you missed to mention and that is at what pace are you adding the new stores, right? So for example, if you are expanding, say, 10% year-on-year in terms of store additions, it will be a different equation versus, let's say, if you're adding a 30% store additions, it will be a different equation versus, let's say, a brand which is adding 100%, that will be a completely different equation.So it is dependent on how soon you are expanding. And therefore that -- and that plays and that variable plays a very important role when we try and balance out the ADS and SSSG.

[Percy Panthaki, analyst]

Yes. So for that variable, you already know what your expansion plans are for FY '24, '25. So put those actual numbers? And maybe on those bases, you can sort of answer the question.

[Manish Dawar, executive]

So look, so we can work that out and connect offline. So that is an option we can do.

[Operator]

The next question is from the line of Nihal Mahesh Jham from Nuvama.

[Nihal Jham, analyst]

Manish, you made a comment about the value layer in Pizza Hut, mainly the flavor fund range as I assume. Is there a case where you believe that -- I know you mentioned that longer term, it will get more customers into the fold. But was there a case that ex of this launch, maybe the ADS or the SSSG of pizza would have been significantly different?

[Manish Dawar, executive]

Nihal, right, we can get to various hypotheses. But the point is, for example, let's say when you want to draw a newer category of consumers in, it takes a much longer time period to be able to protect your existing consumers and get the new category of consumers in. Now with -- when we launched the fun flavor pizza category, that was the time we saw hyperinflation also. And therefore, while the newer consumers took time, our existing consumers started down-trading and rather than lapsing out of the brand or lapsing out of the category.So therefore, from that point of view, it has been a good initiative that we've been able to protect our existing consumer set and this will help us in the long term. Now obviously we can all argue that, for example, if let's say, this was not there, the numbers would have been different. And again, I mean, there is no -- because that was not the case. And now for example, the new innovation that we've launched from our -- from a menu refresh perspective is going to kind of help us and compensate.We are going to mass media as far as the new range is concerned. That is at the top end of the category. We are taking initiatives from a gamification perspective because that kind of draws the youth in. So therefore, we are balancing again the portfolio from both sides. So therefore, that piece is already kind of that initiative is taken. We've already launched this in April. So also it's already started.

[Nihal Jham, analyst]

Point taken on that. There was a related question that if I look at the intensity of launches in Pizza Hut, it has been significantly higher than a lot of other brands, including KFC. But say, if you look at within your own brands, the performance of PH has been lacking. So is this a category issue in pizzas you think? Because I know the price hikes have been lower in PH. So what do you think is the reason maybe the SSSG profile of PH has been lower than of Pizza Hut over the last couple of quarters? Apologies, PH has been lower than KFC?

[Manish Dawar, executive]

Sure. So Nihal, our hypothesis, if you look at pizza as a category, it's a very price-sensitive category. And traditionally, if you look at, I mean, pizza category, there used to be a very high volume of discounting, high volume of these offerings and so on and so forth, whereas KFC from that perspective, the plan has been built very differently. And therefore, the consumer expectation is very different. So obviously, it will take some time to correct the pizza piece, and that is what we are trying to do.

[Nihal Jham, analyst]

One final question, Manish, was that on the chicken side, you mentioned there are some benefits which will play out given you're sitting on some inventory. In case of Pizza Hut is it the case that maybe the raw materials we use ahead are a higher price? Or how will that play out in the coming quarters?

[Manish Dawar, executive]

So Nihal, if you remember, when we entered the inflation scenario, our margins took a hit after a gap because we were -- we normally hold a higher inventory. And similarly, now when the benefits are coming, it will take a little while, maybe another couple of months by the time you start to see those numbers in. But otherwise, from a ordering perspective, we've already started locking in the orders. And therefore, we know and we are certain that the chicken prices will come down, so.

[Nihal Jham, analyst]

I was asking to cheese actually from a Pizza Hut perspective, that is the incremental usage of [ RM ] going to be say, gross margin-dilutive? Or it's not going to have an effect?

[Manish Dawar, executive]

Yes. If the cheese prices continue to go up, it will be gross margin-dilutive.

[Operator]

The next question is from the line of [ Peter Shaw ] from [ Evandis Stock ].

[Unknown Analyst]

So first question is last quarter, looking at good traction in KFC demand and sluggishness in Pizza, we had indicated or made a comment that we might accelerate our KFC expansion and kind of decelerate a bit on PH. But this quarter expansion, actually PH has been better than KFC and even in your commentary for FY '24, there is not much difference from our past numbers. So just wanted to know, is there anything on that comment or that was just an observation on that last quarter.

[Manish Dawar, executive]

So Peter, as you know, I mean, we talk about our guidance from a store count perspective on a yearly basis and not on a quarterly basis. So let's say, depending on the property availability, depending on portfolio, depending on what is our priority on a given location and so on and so forth, obviously the quarter-to-quarter movement can take place.So if you were to look at the full year numbers, KFC, we opened almost 126 stores. And for Pizza Hut, we opened almost 93 stores. So therefore, during the year, when we said that KFC will be 100 plus and Pizza Hut will be 100 minus, it is -- the numbers are as per that. In quarter 3, if you were to look at KFC store addition was twice the PH addition because Pizza Hut in quarter 3 was 17 and KFC was 38. So therefore, on a yearly basis is what we give the guidance and that is how we kind of manage our portfolio.

[Unknown Analyst]

Fair enough. Very clear. Second, Manish, on employee cost growth, both sequentially and Y-o-Y, there is an inflation there. And even if I adjusted for store expansion and I do calculation on store, first [indiscernible] base also is a 14% inflation there. So just wanted to understand how should we think about it in FY '24? And was there any one-off in this particular quarter?

[Manish Dawar, executive]

Yes, there is a one-off. As I said earlier in my opening remarks, we provided for a statutory bonus in the month of -- sorry, in quarter 4 for the full year, which is, as you know, under the payment of Bonus Act, you are supposed to calculate the allocable surplus. And that calculation is done on a yearly basis once your audits and all the numbers are finalized. So that is a onetime impact, which is there.And going forward, we will be providing at that number. So therefore, that is the reason why quarter 4 employee cost also looks elevated.

[Unknown Analyst]

So on an annual basis, it's not a one-off, on quarterly?

[Manish Dawar, executive]

Yes.

[Unknown Analyst]

Okay. And last one on the fully-owned subsidiary Devyani International in Dubai, I just wanted to know what's the business that we have at this? And what are we planning to do in the overseas market? Or is just the consolidation of overseas investment for us?

[Manish Dawar, executive]

Yes. So that is what we are planning to do. And plus, let's say, if we were to kind of expand overseas in future, we've enabled as a company to be able to kind of have that subsidiary. So otherwise, there is nothing concrete as of now. But if there is something we will come back to you guys.

[Operator]

The next question is from the line of Ashish Kanodia from Citigroup.

[Ashish Kanodia, analyst]

The first question is on Pizza Hut, right, if I look at the brand contribution margin on a Y-o-Y basis, it was almost half and the gross margin has not gone down that drastically. Even SSSG is down 3%. So I mean, apart from just the impact of negative operating leverage because of negative SSSG, is there any other reason why the brand contribution has declined so steeply?

[Manish Dawar, executive]

So Ashish, as you know, there are multiple factors playing out. There are multiple factors which are playing out there. As I said, during the current quarter, we provided for the statutory bonus and that has kind of gone impacted all of our brands. It's KFC, Pizza Hut, Costa it's company-wide.Second, if you see over a period of time towards the back end of the year, we've not been able to take a price increase on pizza and that was a conscious decision despite the milk prices and the cheese prices going up, which kind of impacted the gross margins a little bit. And the period that you are referring to, in that period, the gross margins have also got impacted. So that is the other.Third, there is some bit of deleverage coming in because of the ADS because we are expanding the portfolio for the new stores, it takes some time to mature. So that is the other piece which kind of goes and impact. So therefore, there are multiple things at play. And then we also talked about the fun flavor pizza that we launched, which kind of impacted the pricing piece.So therefore, there are things which are kind of there. And we think these initiatives are good from a long-term perspective and we've taken immediate steps to kind of correct that also. So as you know, I've talked about this menu refresh. We've talked about gamification in the ordering of the pizza. So all of those initiatives have been taken so that we are able to kind of come back.

[Ashish Kanodia, analyst]

Sure. And then I think in your opening remarks, you also talked about increased marketing spend. Now if I look at both Pizza Hut and KFC, there's new product launches. So I understand maybe in the longer end, it will not have significant impact. But maybe from next 2 quarter perspective, right, do you see on gross margins, you are taking some initiative, but purely because of marketing spend, there could be some impact on the brand contribution margin purely because of higher marketing spend?

[Manish Dawar, executive]

It's a marginal uptick on the marketing side. And obviously, the marketing guys and the brands take that call given what the launch is, what is the priority and so on and so forth. So therefore -- so it's kind of balancing depending on this, let's say, there are some major new initiatives in the quarter, we go and support it. And Yum also helps us there. So eventually, it will kind of come back and settle at the normal levels.

[Ashish Kanodia, analyst]

Sure. And just the last one is, I think on the inventory bit, I mean, see, when I look at the balance sheet, right, the inventory levels are fairly very low compared to the scale. So when you say carrying high-cost inventory, does that mean it's basically the contract which you already have, right? So there's a particular contract for the next 2 months, 3 months and that is why you still have high cost inventory?

[Manish Dawar, executive]

Yes, it's a combination of some bit of forward cover, some bit of physical inventory that we hold because, as you know, we are present across the country and we have our own warehouses. We have our own stores. So we cannot risk the stocks running out. So therefore, that inventory has to flush out by the time the new prices start to impact. And the same thing holds true when we were entering into the inflation scenario, our gross margins kind of got affected towards the end of the category, so.

[Ashish Kanodia, analyst]

Sure, sure. And just on the overall demand, I mean, I -- your thoughts that maybe we are reaching the bottom. And I'm not looking at specifically for numbers, but just some commentary in terms of how the last 45 days demand trend has been versus just adjusting for the seasonality, right? 1Q versus 2Q versus further seasonality and if you look at that, the last 45 days, do you see the sentiment kind of improving?

[Manish Dawar, executive]

Look, we've seen some sentiments improving. But again, there are multiple other factors also. So you -- as you know, there is IPL going on. There is summer holiday season also. So I mean, there were some festivals also in between, like over the weekend, there was Mother's Day and all of that. So therefore, I mean -- but otherwise, we are seeing improvement in the last 45 days.

[Operator]

The next question is from the line of Jay Doshi from Kotak.

[Jaykumar Doshi, analyst]

Just a follow-up on the previous answer and your comment on the demand has bottomed out. Look, usually, we see a 8% to 10% increase -- sequential increase in ADS for most QSR brands in June quarter versus March. That's the usual seasonality. If you sort of -- are you suggesting by your comment of bottoming out that you are seeing a similar seasonal uptick this year as you normally see every year? Or is the seasonal uptick still lower than the usual seasonality?

[Manish Dawar, executive]

So Jay, what you are saying is right, and that used to hold -- those trends used to hold very strongly, pre-COVID. During COVID, we saw a major disruption in terms of these trends. And obviously, we've seen some shift in quarters depending on whether restrictions were there, whether people were working from home, they are going to office and so on and so forth.So we'll have to kind of wait and watch for another few quarters so that we are able to comment that whatever was happening in the past is kind of coming back. So when we say that we think probably the demand is bottoming out -- sorry, the inflation seems to be bottoming out, that is more from the input prices that we are seeing. And therefore, it is not just in our category that is across various categories and various industries.With that, the disposable income for the consumer growth and therefore, that should kind of come back into the consumption category. So that is the whole analogy when we say that it thinks that the downturn is or seems to be bottoming out.

[Jaykumar Doshi, analyst]

That's very clear. Second question is if you were to add back those -- or if you were to provision for bonus across the 4 quarters, then what would have been your KFC brand contribution margin in this quarter? Just trying to understand the 17.5% print has gone up associated with the -- pertaining to the entire year. When I look at your overall numbers, your employee cost is up 200 basis points Y-o-Y. So just want to understand what will be the underlying margin?

[Manish Dawar, executive]

So there is almost a 1% impact because of this. So therefore -- and that has kind of not just impacted the KFC. It's impacted the other brands as well, so.

[Jaykumar Doshi, analyst]

Understood. So just a quick follow-up there. So when I look at KFC, gross margin is down 70 bps Y-o-Y. EBITDA margin, brand EBITDA margin is down 430 bps Y-o-Y. So 360 bps Y-o-Y decline of that 100 bps is attributable to the onetime bonus provisioning. Are the remaining 250, 260 bps is attributable to operating deleverage? Is that the right understanding? Or is there any one-off? Was there any one-off in the base quarter as well?

[Manish Dawar, executive]

So as I said, we kind of took some initiatives on the local marketing. So that is also kind of going and impacting the brand contribution margins. There is a deleverage which is there on the -- again, I mean, on KFC and Pizza Hut both. So it's a combination of multiple factors.

[Operator]

The next question is from the line of Avi Mehta from Macquarie.

[Avi Mehta, analyst]

First, I wanted to kind of just appreciate the competitive intensity, if you would give us some update on how it's happening in KFC and in pizza category? Is that increased? Is it similar and broadly on that?

[Manish Dawar, executive]

I would say it is more or less at the same level. And let me just kind of give you a little bit of -- so if you were to look at -- let me talk about the KFC first. You know that Popeyes got launched last year. So they are expanding. We believe the competition will expand. The chicken consumption will help grow the category, will help the brand. So therefore, it's a good thing.On Pizza, we've seen there's a lot of local competition, which has started to come up post the COVID because during COVID time, there were a lot of small-scale players who did not renew their licenses or they shut the shops because of financial difficulties and all. And now things getting normalized, there are a lot of smaller either, let's say, within the city, there are some brands available, the local competition is there, the local brands are there. So some of that is coming back.And therefore, that is where the competition intensity is going. But let's say, if you were to ask me, on a national level, any other very strong brand which is kind of emerging, we've not seen that yet. But otherwise, it's kind of -- we believe that if the competition intensity is there, good for the brands because there's much more noise in the market, people tend to kind of consume more. So therefore, it's a good thing, so.

[Avi Mehta, analyst]

Okay. No, where I was coming from, Manish, was essentially on the marketing intensity or cost intensity, pricing-based competition as well, if there's any change? Or is -- because we have clearly kind of upped the ante on marketing, does that essentially mean our share of voice has gone up? Is that how I should read it? Or that is where -- what has led to [indiscernible]?

[Manish Dawar, executive]

Yes, because, for example, let's say, right now given where the consumer sentiment is, given the inflation scenario, so it is more to kind of protect the environment and to come back so rather than becoming too aggressive, so.

[Avi Mehta, analyst]

Okay. Okay. And second, I just wanted to kind of pick up on the last question. And sorry I missed that. You said it's bottomed out, the seasonality. If you could just re-explain that, I'm sorry, I didn't quite get that part. That's all from my side.

[Manish Dawar, executive]

So the question was, do you think the consumer sentiment or a demand or, let's say, this inflation has bottomed out. So that is where the whole piece was. And therefore, I was trying to link that end of the day, it's the inflation which kind of impacted the entire demand in the first place and that is the starting point where we are seeing the signs that the inflation is bottoming out. And therefore, we think that there would be revival in the consumer demand as well.

[Operator]

The next question is from the line of Shirish Pardeshi from Centrum Broking.

[Shirish Pardeshi, analyst]

Congratulations, team. Just 2 questions, if I draw the attention on Slide 16, where ADS has declined from a peak of 127 to 106. And you partially mentioned that it is a function of SSSG. But my whole question is that when you say that the value piece is growing much faster in pizza, can you give some more qualitative comments that what kind of SSSG and the impact which has come because of the competition also?

[Manish Dawar, executive]

Sure, Shirish. So Shirish, if you look at Slide 16, which is what you're alluding to, so that is a KFC slide. It is not Pizza Hut.

[Shirish Pardeshi, analyst]

No, no, I used the example of Pizza Hut because you said competition from local side is more on pizza and not KFC.

[Manish Dawar, executive]

Sure, sure. No issues. I will come to Pizza Hut also. If you look at -- it is not just the SSSG, which is where I talked to Vivek and Percy earlier because there is a strong element of how rapidly you're expanding your stores as well. So for example, in a given vicinity, if you have one store and you end up having another store, let's say, whatever, a kilometer away, it kind of gets the demand divided. For example, if you go to a new city for a new store, obviously, nothing happens.So it is not just, let's say, what is the account, what is the location, what is the vicinity. So there are multiple factors which kind of play out there. And ADS is a combination of how many new stores are opening. What is the location of the new store? How is your SSSG doing? So all of that kind of then eventually gets reflected in the average number.

[Shirish Pardeshi, analyst]

I got that, Manish. The explanation is helpful. But if I say that if you have a store which is open for like 3 years before and if I look at the SSSG, would that be a significant number, which will be higher on SSSG and even ADS?

[Manish Dawar, executive]

So we don't bifurcate the stores and disclose those numbers. We disclose it on one set of population. And the definition of SSSG is that whatever stores where we are measuring this, out of that set of stores, whatever stores are present in the comparable period last year.

[Shirish Pardeshi, analyst]

And similar comments on pizza?

[Manish Dawar, executive]

So therefore, that could also include some of the stores which got opened very recently in that period. That would also include some of the stores which are very old in that period. So therefore, the maturity curve, even though it is 1 year prior number would be very, very different.

[Shirish Pardeshi, analyst]

Okay. On the new offering, like 10 new pizzas, which has been launched by Yum and also the INR 99 chicken roll, over last 45, 50 days, what is the response? I mean, is it that consumers are going to get down-trading and that's one of the things which we are trying like fun flavor pizza, via what we tried during the COVID time?

[Manish Dawar, executive]

So if you see the new pizza that we've talked about is a refresh. That's not on the -- that's not in the fun flavor range. That is on the premium pizzas that we have. It's only got launched towards back end of April. So it's too early to give any read, but we thought that -- so therefore, number one, in the quarter 4 results, it has no impact.And second, we wanted to kind of keep all of you updated on the new initiatives we are taking. So that's the reason we've talked about it. As far as the KFC lunch and the rolls are concerned, we first experimented with that in Bangalore and Gurgaon. We got the response and then we expanded nationally. And that also the full quarter read is still not there because, I mean, this happened in phases. So -- but otherwise, whatever numbers we are seeing on KFC lunch and the rolls, the response is excellent.

[Shirish Pardeshi, analyst]

Okay. Just a quick word on the international business, Nigeria and Nepal because not much discussion has happened so far.

[Manish Dawar, executive]

So that's a small business, as you know. So if you look at Nepal, we have KFC stores. We have 4 of Pizza Hut stores. So it's about 22 store count. We have 37 KFC stores in Nigeria. We are not making any fresh investment in Nigeria, as we've stated in the past because of currency issues. So whatever profits we generate locally, we kind of invest that back into the business.Both the businesses on a brand contribution level and EBITDA level are positive. They kind of sustain the CapEx momentum that they have. So it's completely self-sufficient business. And the whole objective is that continue to kind of grow the business out of whatever they are generating. And then over a period of time, we will build a business out of that.

[Shirish Pardeshi, analyst]

Any comments on the own brand beyond KFC, Pizza Hut and Costa?

[Manish Dawar, executive]

Vaango is doing well. We crossed the store count of 50. But again, since these numbers are very small in the overall context, that's the reason we don't talk about it. But otherwise, we can talk about Vaango in detail, we can talk about Nepal, Nigeria Food Street. But overall, all of these businesses put together would be single digits of the total business, so.

[Shirish Pardeshi, analyst]

Okay. I agree. But when you're doing the annual number, at least one slide could have helped us how we should look at because you've given a lot of commentary on KFC and how the growth is going to pan out over '25. So that's why I was looking some qualitative comments how growth we should be building in these numbers.

[Manish Dawar, executive]

No, we can look at it going forward. And your suggestion is valid that at least on a full year basis, we can do that. So it's a very valid position.

[Shirish Pardeshi, analyst]

Just last question on Slide 34, where I look at the other income has moved from INR 161 million last year to INR 326 million. What is the nature and what is it that happened that it has grown 2x? And what should we be looking going forward?

[Manish Dawar, executive]

Sorry, can you just repeat the question? The other income has moved from INR 16 crores last year to INR 33 crores this year. So what is the nature and how this growth has happened is primarily because of the store expansion fees, what we are doing from Yum!? Or is something more sitting in it?

[Manish Dawar, executive]

No, no, there's nothing that. If you see, there is this IND-AS adjustment, which we are supposed to do. And there is some element of IND-AS adjustment, which kind of goes and sits in this category as well. So that is the main reason.

[Operator]

Ladies and gentlemen, that was the last question for today. I will now to hand the conference over to the management for closing comments. Over to you, sir.

[Unknown Executive]

Thank you very much. Thank you, Mr. Chairman. Thank you, colleagues, and thanks to all the investors unless whoever participated in this call. I do hope that we have managed to respond to all your questions satisfactorily. Should you need any further clarification 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 also. Thanks.

[Operator]

Thank you, sir. On behalf of Devyani International Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines. Thank you.