Devyani International Limited (DEVYANI) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Devyani International's 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 Q1 FY '23 Earnings Conference Call. We have with us Mr. Ravi Jaipuria, Chairman of the company; Mr. Raj Gandhi, Non-Executive Director; Mr. Virag Joshi, CEO and Whole-Time Director; and Mr. Manish Dawar, CFO and Whole-Time Director of the company. We will initiate the call with opening remarks from the management, following which 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 detailed statement in this regard is available in the results presentation shared with you earlier. I would now request Mr. Ravi Jaipuria to make his opening remarks.

Good afternoon, everyone. I warmly welcome you all to our earnings conference call to discuss the business performance for the quarter ended June 30, 2022. We reached an important milestone of 1,000 stores this quarter. It took us 25 years to get to this important landmark. We believe this is just the beginning of our exciting journey and hope to cross many more such milestones in the coming year. The 1,000th store that we opened is a Pizza Hut store at a prime location at Sion, Mumbai. With this, we continue our efforts to grow the Pizza Hut brand across the country. This opening was also very special for us as we could host nearly 25 specially abled children from a Mumbai-based NGO to share our happiness and celebrate an important milestone in the journey of your company. On the economic front, we are seeing early signs of recovery in consumer sentiment. sectors like FMCG and retail are likely to report marginal volume growth over the next few quarters. While input prices have remained elevated, well-established businesses with scale have been able to navigate the same with some pricing initiatives and protect margins, this bodes well for organized players across industries. We had a strong start to FY '23 by way of adding 70 new stores in this quarter, led by 27 stores in KFC, 23 stores in Pizza Hut and 14 stores in Costa Coffee. Our pan-India reach has expanded further, and we are now present in 215 cities. The non-metro store contribution within our core brands has gone up to 52% now. Our total system store count stood at 1,008 stores as of June 30, 2022. We ended quarter 1 full year '22-'23 with growth across all our brands. As a result, we witnessed good recovery in overall sales in the quarter with strong traction in the dine-in channel. This helped us post consolidated revenue of INR 705 crores, nearly 2x the corresponding figure for the last year. KFC contributed INR 425 crores and Pizza Hut contributed INR 165 crores out of this. We also saw some new product launches from KFC and Pizza Hut. KFC launched the Popcorn Nachos an innovative blend of tender chicken popcorns on a bed of crunchy nachos. Pizza Hut launched the flavor Fun Pizza range just last week. We are excited about this launch since it addresses a significant gap in our portfolio. Our innovation engine remains robust as we continue to expand our business. Notwithstanding the current economic situation, we remain excited about the long-term potential of our brands and the food services sector in India. Existing urban centers and the upcoming ones are expected to be the consumption hotspots, supported by increasing urbanization of our population and the growth in disposable income. Changing lifestyles should also provide strong tailwind for an increase in the frequency of non-home cooked food consumed by families. The combination of growth in the relevant market and order frequencies gives us the confidence to continue with our expansion momentum. We believe we are well positioned and capitalized to leverage this opportunity. With this, I would like to conclude my address and now hand over to Manish for his comments. Thank you.

Thank you, Mr. Jaipuria. Good evening, everyone. A warm welcome to all of you for your valuable time and presence on our Q1 FY '22-'23 earnings conference call, our fourth results call since the listing. Our revenues for the quarter stood at INR 705 crores versus INR 591 crores in the previous quarter, a quarter-on-quarter growth of 19%. On a year-on-year basis, revenues have nearly doubled. It is pertinent to note that quarter 1 FY '22 was seriously impacted by COVID wave 2 and hence, not strictly comparable. It is also important to note that the overall quarter 1 revenue surpassed the quarter 3 FY '22 revenues, which is normally a high season quarter. On the profitability front, timely price hikes and strict cost management helped us to maintain gross margins at 71.1% despite multiyear high inflation across the raw materials and packing material basket. Brand contribution has been constrained at 20.5% due to increase in utilities and logistics charges versus 21.2% in the previous quarter. This was offset by a leverage benefit on higher revenues, leading to pre-Ind AS EBITDA at INR 114 crores during the quarter, the highest in our history. The EBITDA margin came in at 16.1% versus 16.5% in the previous quarter. Reported EBITDA, which is post Ind AS was INR 164 crores with margins at 23.3% versus INR 62 crores a year ago. Accordingly, profit before tax for the quarter stood at INR 77 crores versus a loss a year ago and INR 42 crores in the previous quarter. Our core brands continue to perform well. KFC with 27 new additions reached 391 store count at the end of the quarter. Average daily sales grew to 127,000 with an SSG of 63.6%. ADS for the quarter for KFC surpassed pre-pandemic levels and drove revenues to INR 425 crores. Timely price hikes helped us contain the impact of unprecedented increase in input costs with gross margins coming in at 69%. Brand contribution margin, helped by leverage on higher sales improved sequentially to 22.4% from 21.8% in quarter 4 of FY '22. With COVID restrictions receding, on-premise consumption has further increased to 65%. Pizza Hut added 23 new stores to reach a store count of 436. ADS has also improved sequentially to reach 44,000 with SSSG at 31.5%. On-premise consumption inched higher to 46% for Pizza Hut also. Revenues came in at INR 165 crores with stable gross margins and brand contribution margin at 17.5%. Costa Coffee added 14 stores to reach a total of 69. Revenues grew to INR 18 crores in the quarter with stable gross margins and brand contribution margin profile. Brand contribution stood at INR 5 crores with a margin at 30.5%. The ADS for the brand improved to 36,000 in the current quarter versus 30,000 in the previous quarter. Overall, consumption demand is holding reasonably well at present. The full impact of input costs will be fully evident in the current quarter. However, we expect that input prices should stabilize in the coming quarters. With normal monsoon forecasted, we expect better demand and softer raw material prices towards the latter half of the year, which should help in better top line momentum as well as margins for DIL. 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.

The first question is from the line of Abneesh Roy from Edelweiss.

Congrats on numbers. I have 3 questions. So first is, is there any seasonality in the KFC business? So if you could tell us in terms of average daily sales Q1 to Q2 to Q3, is there a significant difference? And if possible, if you could call that out in terms of numbers?

So Abneesh, do you want to raise the other questions or should I go ahead?

Sir, I'll go ahead later.

Okay. I think the key difference you find is quarter 3 is always the best quarter because of Christmas, New Year and the holidays coming in. And quarter 1 -- quarter 4 is also a good quarter because of the holidays just getting over and the winter season being there. But major differences are not there, but some differences are there, which make a big difference because of the top line and the bottom line.

So Abneesh, if you look at your other part of the question, which is what was the ADS in the previous 3 quarters. So quarter 4, if you remember, we were at about 113,000. Quarter 3, which was our best ever quarter until that time was 124,000 and the previous quarter was 116,000. Therefore, from that point of view, we are very encouraged with the numbers in quarter 1. And I think KFC is doing extremely well as far as the consumers are concerned.

That was very helpful. My second question is in KFC, did the price hikes have any impact on demand in your view? And have we covered the entire current raw material inflation impact already? I'm not asking about view on RM because that's difficult to give. But based on current RM scenario, have you already taken the price hike?

Abneesh, as we kind of talked about last quarter call, we've not managed to cover the full input inflation. However, largely, we covered it because if you remember, we took almost about 9% price hike in KFC. And therefore, if you see the margins, the gross margins in the current quarter, they are a little dilutive versus the previous quarter. But at the same time, we've also seen that the edible oil prices have started to come down. The chicken prices have started to stabilize. We are seeing some bit of inflation on the flour prices currently, but we expect in the next couple of quarters, it should stabilize. So therefore, in hindsight, I think we took a very balanced view as far as the price hike was concerned, and we are very glad that things are panning out the way we had anticipated.

Yes, sure. My last question is on your store expansion mix. So you have 1,000 stores over the next 4 years. I want to understand when the KFC-PH mix be similar? And do you expect other brands to ramp up over the 4-year time frame in terms of the mix?

So Abneesh, if you remember, we have talked about opening 100 stores for KFC every year, another 100 stores for Pizza Hut every year. And the remainder 40, 50 stores will be Costa. And then there will be some Vaango stores, which would also come in. So that is what basically constitutes the 1,000 store breakup that we've talked about earlier. So obviously, Costa in the mix is improving. Vaango in the mix is improving. But again, compared to the overall business that we have, these are still relatively smaller brands, and we continue to see that this will improve. But what you also need to understand behind the numbers, while, let's say, we've talked about 100 stores for KFC and 100 for Pizza Hut, the business is gravitating more towards KFC because if you see the CapEx per store for KFC is higher than the CapEx per store for Pizza Hut. The ADS for KFC is almost 2.5 to 3x the ADS of Pizza Hut. The return on investment is better for KFC versus Pizza Hut. So while, let's say, on a headline number, the number looks similar, but KFC as a brand is kind of becoming stronger in the overall portfolio that we have.

The next question is from the line of Vivek Maheshwari from Jefferies.

A few questions. First is on the gross margins, Manish. If you look at KFC margins are more or less stable. But in case of Pizza Hut margins are actually moving up. I know there has been different level of price hikes that you took between KFC and Pizza Hut. But just curious that given that you still have ground to cover in case of Pizza Hut, why go for margin at this stage? Or is there something that I'm missing in this math?

No, there's nothing you're missing. It's just that in Pizza Hut, we took the price hike a little ahead of the input inflation, because KFC input inflation started hitting us earlier. For Pizza Hut, we were covered as far as the forward contracts were concerned. We took the Pizza Hut pricing, whereas you will see that in the current quarter, the margins will come back to the normal level. So it was only just the timing piece, and we got some advantage out of it.

Okay. Got it. And any further price hike that you have taken in either of the formats in this quarter, as in June quarter or until now in July?

Nothing as of now. So...

Okay. Got it. The other question is on Flavor Fun pizzas that you have launched. So for a long time, you have had not gotten into the value side of pizza. But now that you have gotten into it, 2 parts. One is what has changed versus in the past? And second, what is your expectation from this part of the portfolio?

Can you just repeat the question again?

So I'm saying for a long time, you did not -- you stayed away from value side of offering in pizza -- in Pizza Hut rather, which is now you have entered with Flavor Fun pizzas, right? So 2 parts. One is what gives you confidence that you should be launching it now? Or what has changed that you have launched it now? And second is, what is your expectation from this important offering given that it's reasonable for the competition?

Vivek, as we talked about earlier, our priority as far as Pizza Hut as a brand was concerned was to restructure the brand and to turn around the brand and then to start growing the brand. So which is what we've done over the last few years, as we've kind of talked from the IPO stage that we closed large-format stores. We started replacing the large format with smaller format, which worked very well for us. Basis that, we kind of tested the entire Pizza Hut smaller format at scale. And therefore, we've opened a lot of stores, and they are doing well. So therefore, while all of this was on and there was COVID, we were a little slow as far as the innovation was concerned. And now having got the full confidence in the business model, the brand has turned around, it's doing well for us. We've introduced this new innovation, which is Fun Flavor pizzas, which are starting at INR 79. Obviously, we've had this gap in our portfolio. We've tried to address that. It's too early to kind of gauge as to what is happening in the market because it's not even a week. But otherwise, in the test market, we've seen some encouraging response, but let's see how it goes.

Okay. Sure. And last question, Manish. I mean, the ADS disparity between -- so KFC is a very powerful brand, and you have highlighted in the earlier response. But the -- so KFC being ahead of pre-pandemic levels, whereas Pizza Hut is not. What do you think -- what will it take given that competition is also significantly ahead? And we have discussed this in the past also, but any new thoughts? Do you think that Flavor Fun will be a driver for this ADS to move up from this level? Because this is still -- you're trailing behind quite a bit on Pizza Hut still.

So Vivek, if you look at strictly pre-pandemic level, and I would say -- I would not like to just isolate 1 or 2 years, we used to operate large stores, right? And it was a heavily dine-in focused business. We've kind of managed to turn around and we've managed to change the profile of the business to delivery, and that's the reason we are gaining momentum from there. We think that Fun Flavor pizza will be able to address that gap. And we'll be able to attract new consumers. We'll be able to attract price-conscious consumers. We'll be able to attract, let's say, youngsters, college-going kids, who currently think and perceive Pizza Hut to be more expensive brands. So this is what we are trying to address through this launch.

And just a follow-up. So would this also be -- so what are the thoughts on, let's say, advertising or media spends behind this new launch? Is that going to be an important push from your side?

So we are promoting it through the digital platform in that year, and we are doing it also on the ATL piece here in that year. So it will be for the quarter. We'll continue doing that to see that how does it pan out across the country in that year.

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

My first question is on the CapEx. As you are well aware, there is a difference in the CapEx per store for what you do versus what Sapphire. And basically, they say that there is a renovation CapEx, which pushes up the number, and it's probably not that the store opening CapEx is so high. So I just wanted to understand, you are doing about INR 1.25 crores, INR 1.3 crores CapEx per store. Is there any material renovation CapEx in this number? And if not, is it just that the phasing of the renovation is different for you? Maybe for them, it is coming up now. Maybe for you, it will come up 2, 3 years down the line. So any kind of thoughts on that?

Well, I think the main thing is our CapEx includes renovation also. I don't know what they are including and what they are not including. So I don't want to comment on their costs. But our renovation is included in the CapEx, what we are telling you.

So you believe that apart from a normal sort of inflation, this INR 1.25 crore, INR 1.3 crore number is the number to go with for the next 3, 4 years, apart from, let's say, a 5%, 7% inflation every year.

I cannot talk about inflation, but otherwise, yes.

Okay. Understood. Secondly, just wanted to spend some time on Costa. You've added quite a lot of stores this quarter, 14 stores. That's a fairly decent number. So just wanted to understand 2 things. One is what according to you is the market opportunity here? And secondly, how are you positioned in this space versus, let's say, a Starbucks and versus McDonald's, especially in the coffee and beverages space, both in terms of what the brand stands for as well as in terms of relative pricing to these competitor brands?

Well, I think we are equally positioned as far as Starbucks is concerned, and our coffee is loved by everybody in the country. It's just that we were waiting for all the final agreements and which we got late last year. And that's why we have started our expansion from this quarter. And we see a huge opportunity in the coffee field. And I think we'll scale it up reasonably fast and which you'll see in the next quarters coming through. And the opportunity actually of coffee is unlimited actually. It's huge.

In terms of pricing for like-for-like products compared to Starbucks and compared to McDonald's, where would your pricing be just on a relative percentage premium or discount?

These are compared [indiscernible] compared to Starbucks. Our pricing is similar to Starbucks. We will be at about 90% index, Percy, to Starbucks.

Okay. Okay. Okay. Understood. And secondly, for this Fun Flavor pizzas, I understand you have been test marketing them for a few months now in a few -- 1 or 2 states. So in that test market, what kind of percentage increase in the ADS did this result in for those stores in which these products were tested?

Well, we got a reasonably good response and exact numbers was different in each state, but we got reasonably good response, and we feel this should -- and that was without advertising. So hopefully, with the advertising, this should give us enough headway in our numbers of clients coming in.

And one last question, if I may, on Vaango. What is the reason that we are not going sort of more aggressive on this, just like we are now on Costa Coffee? And also, is this mainly a food court type of format? Or is it amenable to some other types of format? I mean I just wanted to understand, are you still a little unsure about the store economics and therefore, you are not going for a much larger rollout? Or what is the reason that you are not doing that?

No, we are quite sure of the product and where it works. So we are now scaling it up slowly. And we are only putting Vaango where we have seen success and where it works for us. So we are not going in a haste, but there will be enough stores of Vaango coming in the right location. So we don't have to shut the stores after opening it. So we are making sure that we have analyzed over the last few years where Vaango is more successful, and that's where we are opening the stores. And the speed of opening will be much faster than what we have been doing.

So this is state-wise, when you say where it is working, where it is doing well, do you mean state wise?

Location-wise, I mean, if it works in shopping malls or it works in airports or it works in hospitals, where there is a captive consumption, this works very well.

The next question is from the line of Tejash Shah from Spark Capital.

[indiscernible].

Mr. shah, your voice is breaking. We are not able to hear you. Could you please use your handset to ask a question.

A couple of questions from my side. First one pertains to ADS. So on value terms, ADS is actually tracking very well and we are pre-COVID level in KFC and then on Pizza Hut, we are showing very good recovery. But in terms of volume of transactions, are we seeing similar recovery in volume of transactions as well?

Tejash, we do not disclose the transaction separately, but we are seeing a good traction on transactions as well. So they are stable and doing well.

Okay. But I don't want the number, but point-to-point, the gap or the recovery won't be totally price led, it will be volume led as well. That's what that my question was.

So let's say, if you look at the current quarter, it is more of pricing. If you look at, let's say, the previous quarters, it is more of transactions. So every quarter, things could be different depending on what the situation is. So -- but overall, we keep a good eye on both transactions as well as the value, and we ensure that we kind of drive both.

Second pertains to gross margin, and we have done a very good job on in an inflationary environment to contain the pressure over here. But just wanted to understand our GM philosophy. Is it a goal seek number which we actually work with backward on taking price hike decision? Or is it like many other factors like competitive price points and even our ability to make other interventions also come into picture? And along with that, how do you measure -- in an inflationary environment, how do you measure Net Promoter Score or competitive value standing when we take such price decision versus rest of the competition?

Sure. So from a philosophical standpoint, Tejash, I mean, basically, the philosophy that we follow that gross margins, we need to kind of stabilize. We don't want to exploit the pricing to be able to drive the volumes. At the same time, all of the innovation gets introduced at a margin-accretive basis. So that is where the accretion in gross margin comes. because our basic philosophy where we come from is that QSR as a category is highly underpenetrated in the country. And if we have to really cover the population and we have to grow the store count and we have to kind of take the industry to a different level, then we have to be kind of reasonable in terms of our gross margin expectation and yet ensure that it gives us a good ROI and return on equity for the investors.

The next question is from the line of Chirag from CLSA.

On a very good set of numbers. My question is on Pizza Hut. Obviously, over the last few years, there is a lot of things that has worked. But laboring on that point of ADS, right, and I understand that there is a mix change that has happened and which is why the headline ADS numbers haven't changed much. But without giving or sharing numbers with us, can you help us understand that on smaller format stores to smaller format stores, whether the ADS numbers for the last 3 or 4 years, what kind of CAGR you would have achieved?

Chirag, if you look at, let's say, because -- I mean, we don't have a like-to-like data available because over the last, let's say, about 2.5 to 3 years' time, we've actually changed the format for Pizza Hut very, very dramatically because it used to be large-format stores. We've converted all of that into smaller format. While we were doing that conversion, COVID hit us, and therefore, we are not able to measure as to what were the normalized numbers around the COVID times. But having said that, if you were to look at, let's say, on a per square feet efficiency basis, Pizza Hut is in a far better shape compared to what it used to be earlier because on a lower ADS numbers, our store formats were much larger, whereas with smaller formats, we've managed to kind of improve the top line also. And that's where you're seeing that Pizza Hut as a brand has turned around and has become much more efficient versus what it used to be.

Perfect. That really helps. So on a per revenue per square feet basis, what kind of CAGR growth that you would have achieved over the last 3, 4 years or for the last -- whatever measure you want to put in? Because I think that number is pretty important. And when people look at ADS headline numbers, that's where I think the confusion sets in, right?

Yes. So let me just work out on a per square foot basis, the question that you have, and we can come back to you on.

Sure. And secondly, when I look at the Pizza Hut sales mix, of course, the same point around how the mix has changed has also impacted the sales mix. And obviously, there are other factors as well. But where do you think the sales mix now settling down now that I think the mix change issue should now be behind us going forward, I would assume. I mean, incrementally, we have not added larger format stores. So as far as the mix is concerned, how would you look at the sales mix going forward?

So if you look at, let's say, our large-format dine-in stores would be roughly about 10% of the total store count. And going forward, I mean, seeing how Pizza Hut has turned around, we could open a little larger format stores, but let's say, what we used to open earlier would remain only, let's say, I would say, less than 5% to 10% and that will be more like a flagship if we are going to a new location or something like that. But broadly, we are going to be operating in the same range. So let's say, if we are currently at about 1,000, 1,100, it could well be 1,200 to 1,300.

Is it to do with channel mix or sales mix you are asking?

Actually, my question was on channel mix. Yes.

Okay. So on channel mix, we stand at about 55% on nondelivery currently in Pizza Hut today. And about 45% on dine-in and takeaway in that. So that is where it stands today in that. And that is why the format of 1,000 to 1,100 square feet suits the mix very clearly in that. And we'll stick with that platform completely.

Sure. So what you are trying to say is that the 55%, 45% would stick here going forward?

Chirag, look, it is evolving because right now, if you see people are coming out of pandemic, they are working from home. So obviously, people tend to come out for eating. But we've seen that pizza market a long time back has moved towards home consumption. So let's see. I mean, even while, let's say, we are coming out of pandemic, the situation is still not normal and this thing. But let's say, it could be 5% here and there, but we will be in the same range.

Understand. And my last question is on Vaango. From what Mr. Jaipuria said, it appears that you guys are now far more confident on the format than what it was a couple of quarters back also. Earlier, we were struggling with the fact that while there is a very large opportunity for Indian menu, whether -- how the price points can be set, et cetera. But now what you're seeing is that the unit economics are right -- are established. It's a question of now what format we plan to roll this out. Is that understanding correct that versus a couple of quarters back, the visibility of Vaango rollout is much better?

No, the visibility was there at that time also. I think our bigger focus was on KFC and Pizza Hut, as we were opening so many stores suddenly. And we know where Vaango works and where it is successful. So we are focusing on that. And now with the expansion and Vaango is giving us good margins, we will be focusing and opening all the new Vaango in the territories and locations where it works for us. So we are going to accelerate the growth in this.

The next question is from the line of Priyam Khimawat from ASK Investment Managers.

Two questions from my end. Firstly, on Pizza Hut, our brand margins have been on an upward trajectory for the last 7 quarters now and it's reached 17.5% in the current quarter. While this has absolutely been in line with what you had stated in your pre-IPO meetings, and I want to congratulate for you for it. I wanted to understand from you what trajectory can we expect on this going ahead, considering that we are targeting high single-digit SSSG on Pizza Hut and also with these new budget pizza launches, which could improve throughput per store. Should we see further improvement in margins from here on or 17% to 18% margin is what we will be comfortable with currently?

Look, our aspiration will be to kind of get to the KFC margins, but that's in a long haul. As of now, I think we've kind of plucked all the low-hanging fruits, and we would like to stabilize at the current level of margins. Having said that, there are some small opportunities which are available. One is, obviously, as I said, all of the innovation comes in at accretive margins. But again, innovation contributes a small percentage to begin with. And secondly, the property portfolio is very different compared to what it used to be. So therefore, we've seen that our rent-to-revenue ratio is better compared to the deals that we used to get earlier, which is prior pandemic. So these are marginal initiatives. So therefore, you can assume that we will be more or less at the same level.

Okay. Sir, secondly, just wanted some insights on competitive intensity in the pizza space currently because with most of the free dollars which were being spent on incubating new brands not being available so easily anymore, are we seeing reduced competitive intensity than, say, what we were seeing 4, 6 quarters back, especially from cloud kitchens like, say, Ovenstory, et cetera?

Look, pizza is a large market, and it is a growing market. So while, let's say, the large competitive intensity may not be visible to us. But at the local level, there are a lot of local city-based brands which are there. So while, let's say, on a national level, there are very few brands, but every large city, if you look at, would have at least 15 to 20 local pizza brands, so which are not so visible, both from share of voice and whatever they are doing, but the competitive intensity remains strong.

Okay. And if I may squeeze one more. When I try and look at our corporate expenses, which is nothing but the difference between a pre-Ind AS brand contribution and EBITDA, it has stabilized at around INR 30 crores per quarter for the last 4, 5 quarters. So going ahead, when we try and double our revenue and store count, will it be safe to assume that this corporate expense line item will grow at a substantively lower rate than revenues and there will be operating leverage playing out here?

Yes, you can assume that. So let's say, you can assume that corporate overheads will grow more or less in line with the inflation. At the same time, we are trying to build the organization because we've had some skill gaps as we are kind of growing and expanding, but that will have a marginal impact on the overall basis.

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

Congrats on a very good performance. My question is on -- can you shed some light on how have you progressed on delivery time? So I think a market leader recently called out that about 70% of their deliveries are done at an average of 20 minutes. So what has been the progress for you over the past 2 years in terms of delivery time? And what are the conversations you're having with Swiggy and Zomato to improve that further? I'm sure they are pushing you to increase take rates. That's what we gathered from Zomato's call yesterday. But what is your demand from them? And how should we think about this?

Jay, we continue to engage with the food aggregator platforms. Obviously, they push us to kind of increase the take rates. We push them to reduce the take rate. The balance always lies in the middle. We are one of the largest business partners for them. And therefore, as of now, we've not seen a huge impact on us. We are where we were. So let's see how the entire situation pans out. We have our own delivery infrastructure as well as we've kind of alluded earlier. So from an insurance policy, we are absolutely well prepped. But I don't see there could be a big issue as far as the take rates are concerned. So therefore, that is how we are looking at it.

And the second part of question in terms of your delivery timing, how has it improved over the past 4 to 6 quarters? What are you averaging today? Or what percentage of your orders are delivered in the 30 minutes?

So in fact, 70% to 80% of our orders are delivered within 30 minutes, which if you remember, let's say, when we talked about the same around the IPO time, it was more closer to 35 and 40 minutes. So we have managed to improve the delivery time lines. Obviously, the competition is doing a great job. And therefore, we are not in the zone of 20 minutes and so on and so forth. But we are kind of following our own trajectory. We've managed to improve from 40% to 30% now. So therefore, with higher penetration as we are opening the stores, our delivery times automatically are becoming better. So...

70% of the orders in about 30 minutes or within 30 minutes, is this across the network, all India?

On an average basis, yes, yes. Because there could be some pockets where the store penetration is still lower, there could be pockets where it is much more efficient depending on where we are catering it, whether we are catering it from a high-speed store or a mall store or we are catering to a flatted housing environment or multi-storage. So there are multiple things. And therefore, within the region also, it could vary a little bit.

The next question is from the line of Vicky Punjabi from UTI Mutual Fund.

I just had one clarification actually. If I look at Pizza Hut, one thing that I observed was that if I just take a difference between the gross profit and brand contribution and basically driving the SG&A overhead on a store per store basis, it's kind of been -- and I'm comparing this to 2Q FY '22 last year, it's kind of been flattish, in fact, slightly lower than what we saw then. I mean it works out to something around INR 24 lakhs for 2Q FY '22 versus INR 23 lakhs for 1Q FY '23. I wanted to understand this -- the assumption was that as we move to a complete unlock period, we will see most of these costs -- some of the costs, which is the rental savings and stuff come back. But it seems that there has been no additional cost that's come back. In fact, we've actually improved cost on a per store basis. Can you help me understand what really changed here? Because in KFC, I think this is not a phenomenon. KFC is quite different where we have seen the cost actually increase, I mean, and in line with what the thought process was?

So Vicky, if you remember during the IPO time, we did mention that we have to look at the normalized quarters because we did get the credit as far as the rentals are concerned during wave 1 and wave 2 of those quarters, and we isolated those quarters, and we focused on the normalized quarters because normalized quarters did not have such credits. And that's how we've kind of managed to build and it has remained the same. And obviously, with some leverage coming in, it is kind of helping us. At the same time, I did also say that while, let's say, the metro areas, prime property would always be in demand, but there is some bit of expectation change from the landlord end also now because earlier, it used to be the highest rental payer will get the property, whereas whatever the landlords have experienced during the COVID time, they've kind of managed to respect the brands much more, and we are seeing a little better environment. Non-metro continues to be favorable as far as the rent-to-revenue ratio is concerned. So therefore, on an overall basis, it's a better property market also that we are seeing. So...

Okay. Okay. And just one more question was again on the sales mix of Pizza Hut, I mean, we've seen off-premise consumption coming off and on-premise increasing. I mean, of course, that's a part of it is because of the unlocking period. But I just wanted to understand your thoughts because I thought the thought process was going more towards delivery with a larger part of revenues coming out of delivery. But out here, we are seeing delivery revenue shrink to, I think, possibly 60% plus in 2Q FY '22 last year to around 54% now.

I thought we've seen some exceptional delivery performance during COVID time, because people used to kind of -- they were restricted from going out and so forth. So it's more of a normalization, which is kind of -- and the balancing which is happening because -- if you see prior to COVID, everybody kind of used to come out for work and people used to order at home. Whereas now post-COVID, we've seen that a lot of people are still working from home. Work from home has become a norm rather than -- has become a choice rather than a norm. And therefore, to that extent, I mean, you need some bit of environment change. You need to have some bit of balance between staying at home and coming out. So I think that is what is panning out. But we are pretty confident that the overall delivery versus the in-store consumption would probably settle at the pre-pandemic levels in the next few quarters.

And what would be expectations on those levels?

So let's say, your off-premise would be anywhere close to 60% for Pizza Hut. And for KFC, it will be between 35%, 40%.

The next question is from the line of Devanshu Bansal from Emkay Global.

Congratulations on a strong execution. Sir, you indicated new innovations generally come at a higher gross margin. So does that apply to our new launch Flavor Fun as well?

No, it does not apply to Flavor Fun because obviously, it's a very, very strategically placed pricing that we've done. And therefore, it is marginally dilutive. But within Flavor Fun, there are higher categories of pizza, which kind of compensate for the margins which are at a lower price point.

Okay. So the operating leverage that you'll be gaining through ADS increase that may sort of compensate for some loss in the gross margin. Is that right?

Yes, absolutely.

And secondly, our repair and maintenance expense are sort of relatively higher at about 4% versus Sapphire is at about 2%. So do we also expense a part of our maintenance CapEx in the P&L?

Devanshu, we'll have to understand what is the exact mix and breakup of repairs and maintenance that they are kind of. I will not be able to comment on their numbers, because it will not be because of the maintenance CapEx because the refurbishment CapEx that we do normally gets capitalized. But otherwise, the repairs and maintenance is not so high. So we'll have to check the numbers once.

Also it could be a little bit higher because of the seasonality because of April, May, June because of summers coming in. But that will not be.

That will be let's say.

I don't know Sapphire -- we don't know about that.

Devanshu, we can check this out and come back to you.

Sure. And you mentioned about some inflation in the CapEx. So if you can give me, I missed that number. So what is the CapEx inflation that you are seeing currently?

Overall, about 8% to 9%. Because within that, we've seen higher inflation for air conditioning equipment. We've seen higher inflation on imported equipment and so on and so forth. But overall would be about 8% to 9%.

Okay. And lastly, what is the reason for sequential drop in depreciation? So we added about 70 stores, but depreciation amount has dropped sequentially.

Devanshu, there was a small impairment charge that we have taken towards the end of the year, and that's the reason the depreciation was a little higher towards the year-end, whereas now it is kind of -- that's the reason you're seeing a little drop in the current quarter.

Okay. And the reason for higher other income, sir, we have reported about INR 9 crores of other income?

That is mainly to do with all of your Ind AS adjustments so on and so forth.

The next question is from the line of Sandip Bansal from ASK Investment Managers.

Congratulations on a great set of numbers. Just 2 questions from my side. Firstly, any thoughts on what could be the potential number of KFC stores that we could be looking at?

We are looking at about 100 stores every year.

Right. But let's say, this run rate, we expect to continue over the next 3, 5 years, 2 years?

Look, we expect -- look, if you look at it from a macro perspective, India as a market is underpenetrated as far as our category is concerned. There is a mismatch in terms of non-vegetarian offering versus the consumption patterns of population and all. But -- so keeping that in mind, we think we can go with 100 for a reasonable future.

Sure. Great. My next question was if you could highlight some of the key risks or challenges that you're facing in executing your expansion strategy, margin strategy? And anything that you can share on the ground, stuff like commodity costs, food inflation, all that is -- we get that. Other than that, any specific issues...

So Sandip, I mean, if you see, I mean, this is a retail business. So the most important piece is you have to have the right property location. And while, let's say, we've kind of evolved this as a science, we get and subscribe to multiple databases to ensure that we do not have errors and we do not face problems because of the property locations. But this is something, obviously, you have to live with. And at times, we are kind of stuck with a situation whereby despite all the efforts, we do have to take a call on a store and we close down the store. So this is, I think, one big risk which is there. We've tried to minimize over a period of time, but it continues to remain a risk. And otherwise, in terms of -- you've talked about and alluded to the normal input inflation, the commodity prices, the geopolitical situations, I mean, the exchange risk and so on and so forth. So those are normal which are kind of normal.

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

Congratulations. My first question is a fundamental question. In your experience, when we have launched INR 79 pizza, I'm sure you would have factored in some cannibalization. But obviously, that is also -- will draw the lot of footfall to the store. So I just wanted to understand in your experience, such interventions, though as a company, it might be a better thing to do, but what kind of cannibalization you would have expected or maybe you can use any past example?

Look, in the past, we've not had this kind of experience, but you are right in saying that there would be cannibalization, and we factored that when we plan for this launch. How it pans out, let's see. It is too early, I would say. But cannibalization will happen. But as you also said, it is good for the brand. It is good for the company. It will help us to draw in newer consumers. It will help us to kind of draw in younger crowds, which is very important for this category because it's a very young category, and that is what we are trying to correct.

Manish, I got that, but a little deeper insight if you can provide, it would be more than 10%, it would be less than 10%, it would be 5% or marginal?

Look, I think given that it's -- the launch is only a week old, I think we'll be in a position to talk about it in detail maybe in the next call when we'll have some data available and we can kind of then take it up.

Sure. My second question is on Slide 15, where you have given ADS for KFC at 127,000 and humongous same-store sales growth. Just wanted to understand in your experience, in any normalized quarter, when you think -- even I think right now, it's not a correct way to look at because still ITES companies are not working to the full bench. So in that context, is there a room for growth since you have taken a 9% price increase. So this 127,000 directionally will look up in the format and the changes what you're doing or it will remain at that level? And what will be the impact or one should model your same-store sales growth in a normalized behavior?

On KFC, we are looking at about 3% to 4% SSSG numbers on a year-to-year basis. And we do hope that, yes, we will be in a position to meet that. Obviously, in the current year, because of the input inflation, we've taken a price hike. But you also need to remember that the current quarter SSSG numbers are getting compared to the quarter where we had COVID wave 2, and that's the reason those numbers are looking a little elevated.

I got that. But just touch a little more on ADS. You didn't comment on ADS.

Yes, because, for example, typically, because ADS is a mix of our existing stores and the new stores. And obviously, the new stores start at a lower level, it takes almost about 15 to 18 months to reach a maturity level for a newer store. So therefore, that's the reason we need to measure the new stores separately and the SSSG numbers for the existing stores separately. And that is how you need to kind of build up your model in terms of the existing and the new stores.

Ladies and gentlemen, this would be the last question for today, which is from the line of Sanjaya Satapathy from Ampersand.

Sir, my question was that the explanation that you gave on other expenses increase, I could not really get that clearly. Can you please clarify again?

On other expenses, basically, look, there are a couple of items, which I kind of talked earlier. We've seen not just the input inflation on the raw material and packing material. We've seen the inflation on the logistics, on utilities, on electricity and so on and so forth, which kind of sits as far as the other expenses are concerned. So that is the reason. And at the same time, quarter 1 typically is a very high season summer quarter, and therefore, the air conditioning costs are the maximum in this quarter. That also impacts and that kind of contributes to the other expenses.

Okay. And my last question is that within KFC, you, of course, have multiple products and you have been doing a lot of innovation. But one of the key categories they are sitting are, let us say, Biryani and the other one would be Burger. Do you kind of look at how each subcategories are doing well -- doing in terms of growth? And within that, as we know that Biryani per se is such a big category, how are you really looking at that?

Sanjaya, from a KFC menu mix perspective, our biggest item that we sell is basically chicken on the bone, and that is what we are known for. In terms of the other sides or, let's say, Biryani, those are small contributors. Burgers, I would say, would be the second biggest contributor after the chicken on the bone and they are growing well. So...

And that is continuing to be the trend and you are not really seeing much of a change?

Yes, absolutely.

As that was the 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 participants, analysts who have been on the call. I do hope that we have managed to respond to your questions satisfactorily. Should you need any further clarifications or would like to know more about the 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.

Thank you. Ladies and gentlemen, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.