Devyani International rebounds 5% post weak Q4 show; Here’s what brokerages have to say

Shares of Devyani International rebounded over 5 percent in early trade on May 18 following a slump in the stock in the previous session post its weak results for Q4 . The rebound  in the stock comes amid hopes that margin pressure will subside from the current quarter as inflation cools down.

At 09.35 am, shares of Devyani International were trading at Rs 182.25 on the National Stock Exchange, up 4.56 percent from the previous close.

The quick service restaurant chain announced its weak Q4 earnings during market hours on May 17, which triggered an over 4 percent decline in the stock.

The company, which is the biggest franchisee of Yum Brands in India, posted a 21.15 percent on-year decline in its consolidated net profit at Rs 59.87 crore for the Janaury-March period. The consolidated net profit stood at Rs 75.93 crore in the year-ago quarter.

The weak bottomline was a result of the pressure on operating margins, largely due to rising prices of some raw materials. The EBITDA (earnings before interest, taxes, depreciation and amortization) margin contracted to 20.4 percent in the quarter from 23.6 percent in the year-ago period.

Revenue, however, was up 27.8 percent at Rs 754.97 crore from Rs 590.74 crore in the same quarter of the previous year.

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Brokerages’ view

The weak quarterly numbers have left brokerages divided. While some cautioned against weak margins, other remained optimistic of the company’s long-term future prospects.

CLSA has downgraded the stock to “outperform” with a price target of Rs 205. The brokerage said that demand took a hit for Devyani International as consumer sentiment remained weak. Despite the margin disappointment due to weak same store sales growth (SSSG), CLSA said the scale up of adjacencies augurs well for the quick service restaurant (QSR) chain.

Also Read: Stock Of The Day: Devyani International | What Makes This A Great Bet in QSR Space

Another global research and broking firm, Jefferies, too, downgraded the stock to “hold”, assigning a target price of Rs 195. While price hikes for KFC improve margin visibility, it raised demand concerns.

The broking firm also cut its EBITDA forecast for Devyani International by 1-4 percent on the back of a sharp margin contraction in Q4.

Also Read: Devyani International Q4 net profit down 21% to Rs 59.87 crore, revenue up 27%

However, Nuvama Institutional Equities has retained its “buy” call for the stock, with a target price of Rs 211.

“Our estimates were already factoring the current demand environment, hence no major estimate changes,” Nuvama said in a report. The firm also said that Devyani International trades at the highest multiple across the QSR space which reflects its robust store addition and margin turnaround.

Motilal Oswal Financial Services is also bullish on the company’s prospects, led by KFC’s strong brand equity and its growth opportunity, gradual turnaround in Pizza Hut, network expansion across the portfolio and healthy operating profitability in the mid-teens. Factoring the positives, the brokerage has retained its “buy” recommendation for the stock, with a price target of Rs 200.

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