Motilal Oswal Financial Services has reiterated a BUY recommendation on Devyani International, assigning a target price of Rs 180, implying an upside of nearly 30 percent from the current market price of around Rs 139. The call is anchored in the strategic consolidation of Yum! Brands’ India operations through the merger of Sapphire Foods into Devyani, a transaction expected to transform the company into one of India’s most powerful quick-service restaurant platforms. The merger promises scale, synergy-driven margin expansion, and improved capital efficiency over the medium term. While near-term cash outflows remain visible, Motilal Oswal views the long-term value creation as structurally compelling.

Strategic Merger Reshapes the Indian QSR Landscape

The merger between Devyani International and Sapphire Foods represents a structural shift rather than a routine consolidation. Once completed, the combined entity will house Yum! Brands’ India operations under a single listed platform, creating a network of nearly 3,000 restaurants and annualized revenues approaching Rs 78 billion, comparable to Jubilant FoodWorks in scale.

The transaction will be executed via a share-swap mechanism, with 177 Devyani shares issued for every 100 Sapphire shares, reflecting differences in face value. Ahead of the merger’s effectiveness, Sapphire’s promoter will divest its 18.5 percent stake to Devyani’s group entity, Arctic International, aligning ownership with Yum! Brands’ long-term governance framework.

Scale Benefits Expected to Redefine Unit Economics

Motilal Oswal believes scale is the most underappreciated lever in the Devyani-Sapphire merger. The integration is expected to unlock efficiencies across procurement, supply chain, technology, finance, and corporate overheads. Larger combined volumes are likely to strengthen bargaining power with landlords, vendors, and logistics partners, while standardized execution should improve store-level productivity.

The merged platform is positioned to accelerate store additions while simultaneously improving same-store sales growth, a balance that has historically proven difficult for fragmented QSR operators. Analysts expect this dual benefit to create a more resilient earnings profile across demand cycles.

Synergy Pool Estimated at Rs 2.2 Billion Annually

The transaction’s economic logic rests on recurring synergies estimated at approximately Rs 2.2 billion per year. According to management, nearly 60 percent of these synergies—about Rs 1.1 billion—should be realized in the first year after integration, with the full run-rate benefit emerging from the second year onward.

Motilal Oswal has conservatively modeled Rs 500 million of incremental EBITDA in FY28, factoring in a softer QSR demand environment and potential delays in full synergy capture. The bulk of these gains are expected to originate from lower Pizza Hut operating costs, reduced corporate overheads, and procurement efficiencies across brands.

Pizza Hut Turnaround Becomes a Critical Earnings Lever

Pizza Hut’s improving trajectory stands out as a pivotal earnings swing factor. Management expects the brand to turn profitable at the contribution level in the first year post-merger, with margins scaling into low double digits over time.

Motilal Oswal forecasts Pizza Hut’s return on margin to improve to approximately 5 percent in FY28, compared with negative margins in FY26. This turnaround, combined with disciplined store expansion and tighter cost controls, could materially alter Devyani’s consolidated margin profile.

Upfront Payments Viewed as Strategic, Not Dilutive

The deal includes near-term cash outflows totaling about Rs 4.1 billion. This comprises Rs 900 million for acquiring 19 KFC restaurants in Hyderabad and a one-time Rs 3.2 billion payment to Yum! India for merger approval and expanded territorial rights.

While these payments may appear earnings-negative in the short run, Motilal Oswal views them as strategic investments that enhance Devyani’s long-term competitive positioning, territorial exclusivity, and growth optionality.

Post-Merger Financial Profile Signals Margin Expansion

Financial projections indicate steady revenue growth and margin recovery post-integration. Consolidated revenues are estimated to grow from Rs 78.3 billion in FY25 to over Rs 110 billion by FY28, driven by store additions and operational leverage.

EBITDA margins are projected to expand from sub-15 percent levels to nearly 18 percent by FY28, supported by synergy realization and improving brand economics. Return ratios, particularly RoE and RoCE, are expected to inflect meaningfully as profitability stabilizes and capital efficiency improves.

Valuation Anchored to FY28 Earnings Visibility

Motilal Oswal values the merged entity at 25x EV/EBITDA on FY28 estimates. This multiple, applied to an estimated pre-Ind AS EBITDA of Rs 13.2 billion, yields an enterprise value of approximately Rs 329 billion.

After adjusting for debt and merger-related payments, the implied equity value translates to a target price of Rs 180 per share, broadly in line with current valuation benchmarks for scaled QSR peers. Analysts note that the valuation does not fully price in upside from faster-than-expected synergy capture or a sharper Pizza Hut recovery.

Investment Levels and Risk Considerations

Motilal Oswal maintains a BUY rating with a 12-month target of Rs 180. The stock currently trades near Rs 139, offering a risk-reward skewed favorably toward long-term investors.

Key risks include delays in merger approvals, slower-than-expected synergy realization, sustained weakness in discretionary consumption, and execution challenges during integration. However, analysts argue that Devyani’s diversified brand portfolio and improving balance between growth and profitability mitigate these risks.

Final Take: A Platform Built for the Next Phase of QSR Growth

The Devyani-Sapphire merger is less about near-term earnings and more about building a durable, national QSR platform. With scale approaching industry leaders, visible synergy pools, and improving brand economics, Devyani International emerges as a structurally stronger player in India’s formalizing food services market.

Motilal Oswal’s BUY call reflects confidence that the company is entering a new phase of disciplined growth—one where execution consistency and operating leverage, rather than aggressive expansion alone, define shareholder returns.