 "Thai acquisition offers additional growth engine for Devyani International")
The stock of Devyani International, a quick service restaurant (QSR) company, was up 5.2 per cent on Tuesday after it announced it will begin operating KFC outlets in Thailand by acquiring Restaurants Development Company (RDC). Devyani does business in Nigeria and Nepal and the new deal expands its international presence.
The deal, carried out in partnership with global investment firm Temasek, was clinched for Rs 1,066 crore ($128.9 million). Devyani will invest Rs 341 crore, while Temasek and a local Thai partner will pay Rs 328 crore and Rs 11 crore each. The rest of the acquisition cost is expected to be funded by a Thailand bank as debt of Rs 348 crore.
The transaction values RDC at 0.9 times its Financial Year 2022-23 (FY23) enterprise value (EV) to sales and eight times FY23 EV to operating profit. As the Thai firm was eyeing a deal value of $300 million some years ago, its acquisition for less than $130 million has come at reasonable valuation for Devyani.
The acquisition, when completed by the end of FY24, will position Devyani as a key player in the Thailand QSR market and pave the way for additional growth and expansion, said Motilal Oswal Research. The brokerage has a buy rating with a target price of Rs 220 a share.
The company highlighted that KFC, short for Kentucky Fried Chicken, is the market leader in the QSR category in Thailand with 1,009 stores. Its large presence (compared to other chains) is also on account of the fact that poultry is the largest contributor in Thailand’s meat consumption basket.
Nuvama Research, too, believes that the acquisition looks attractive given Thailand’s dynamic (upper middle-income economy, poultry consumption, KFC leadership) and valuations (versus South East Asian peers). The brokerage has a buy rating on Devyani’s stock with a target price of Rs 225. Devyani plans to double RDC’s store count of 274 in Thailand over the next decade. This will mean 7 per cent annual growth in store additions with revenue growth expected to be in low single digits.
Potential for margin gains
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In addition to Devyani’s plan to double store count over the next 10 years and the scope of low to mid-single digit SSG profile, Emkay Research believes there could be potential margin gains of 200-300 basis points over this period.
However, Emkay has a reduce rating for Devyani due to macro headwinds in the India business.
“While further acquisition of territories, stronger recovery in the tourism space, and better margin delivery remain potential upsides, we would like to be conservative as of now,” said Devanshu Bansal and Vishal Panjwani of the brokerage.
The reduce rating with a target price of Rs 165 is on account of muted demand trends in KFC India, challenges in the pizza category, and macroeconomic issues in Nigeria.
Despite rising Tuesday, Devyani’s stock has been an underperformer and is down 14 per cent from its September highs given slowdown and demand conditions in its core domestic market.
On a one-year basis, a return of 3 per cent (benchmark Sensex has up 16 per cent) is not impressive. Investors should await steady growth trends in the India business before considering the stock.