Devyani International's KFC recovery and merger synergies support margin-led earnings growth

Investment View and Key Takeaways

Motilal Oswal Financial Services Limited (MOFSL) reiterated its BUY rating on Devyani International following an improving operational performance in 1QFY27. The view is supported by KFC’s recovery, improving profitability and the expected benefits from the proposed Devyani-Sapphire merger.

MOFSL expects improving unit economics and operating leverage to support earnings growth. The broker values the combined entity at 25 times March 2028E pre-Ind AS EV/EBITDA and derives a target price of Rs 160 per share.

1QFY27 Financial Performance

Devyani International reported consolidated revenue growth of 17 per cent year-on-year to Rs 15.8b in 1QFY27, broadly in line with MOFSL’s estimate. India revenue grew 15 per cent year-on-year, led by KFC and own brands, while international revenue increased 21 per cent year-on-year to Rs 5.2b.

Profit before tax was Rs 223m, aided by higher other income. Consolidated restaurant operating margin increased 110 basis points year-on-year to 14.2 per cent.

Brand Performance and Network Metrics

KFC Recovery

KFC sales increased 12 per cent year-on-year to Rs 6.8b. Same-store sales growth improved to 3.3 per cent from a negative 0.7 per cent base, while average daily sales remained flat year-on-year at Rs 98,000. KFC’s restaurant operating margin improved 140 basis points year-on-year to 16.9 per cent, supported by a 220-basis-point expansion in gross margin.

Pizza Hut and Other Brands

Pizza Hut revenue declined 2 per cent year-on-year to Rs 1.8b. Same-store sales growth remained negative at 2.2 per cent, although performance improved sequentially. Pizza Hut’s restaurant operating margin was negative 2 per cent, compared with negative 1.1 per cent a year earlier.

Franchisee-brand revenue from Costa Coffee, New York Fries and the South Korea brands grew 6 per cent year-on-year. Own-brand revenue from Vaango and BBK increased to Rs 978m from Rs 911m in 4QFY26.

Store Network

The network closed one net store during the quarter and ended 1QFY27 with 2,255 stores, comprising 794 KFC stores, 626 Pizza Hut stores, 197 franchisee-brand stores, 218 own-brand stores and 400 international stores. International restaurant operating margin expanded 140 basis points year-on-year to 18.1 per cent.

Management Outlook and Operating Priorities

Management said that the recovery momentum in same-store sales from 2HFY26 continued into 1QFY27. July 2026 trends were encouraging despite volatile demand. The company retained its guidance for 200–225 net new stores in FY27, while focusing on improving average daily sales and profitability across the existing network and adopting a more cautious approach to future openings.

• Modest price increases have been implemented at KFC and Pizza Hut to offset cost pressures.
• KFC plans to introduce global initiatives in India around the KWENCH beverage sub-brand, sauces and boneless chicken products.
• Pizza Hut’s revival strategy is focused on back-to-basics execution, including product, ingredient and innovation initiatives.

Earnings Estimates and Merger Synergies

MOFSL largely maintained its FY27E and FY28E EBITDA forecasts, while increasing them by 2.2 per cent and 2.3 per cent, respectively, to Rs 10,388m and Rs 12,199m.

The broker estimates recurring annual merger synergies of about Rs 2.2b from lower Pizza Hut operating costs, lower corporate overheads and other efficiencies. However, it conservatively forecasts an EBITDA benefit of about Rs 500m in FY28E because of weak QSR industry conditions and the potential for delays in synergy realisation.

The proposed Devyani-Sapphire merger is expected to be completed by the end of FY27. In MOFSL’s view, the combination should improve scale, commercial terms, execution and unit economics across brands and geographies.