Deven Choksey Research has issued an "ACCUMULATE" rating for Devyani International Limited with a target price of Rs 193, representing a 13.3% upside from the current market price of Rs 170. The QSR franchisee operator's Q1FY26 results fell short of expectations, with revenue growing 11.1% year-on-year to Rs 13,570 million while EBITDA margins contracted 318 basis points to 15.1%. Despite challenging operational metrics including subdued same-store sales growth and elevated input costs, the research house maintains optimism based on strategic expansion plans and anticipated demand recovery in tier-2/3 markets.

Research House Recommendation and Investment Thesis

Deven Choksey Research has reiterated its "ACCUMULATE" rating on Devyani International Ltd., positioning the stock as a medium-term value creation opportunity despite near-term headwinds. The brokerage firm has established a target price of Rs 193, implying a potential upside of 13.3% from the current trading level of Rs 170. This valuation framework is predicated on 22.5x June 2027 EBITDA multiples, aligning with the stock's one-year average next-twelve-months EV/EBITDA ratio.

The investment rationale centers on Devyani's robust store expansion trajectory, particularly in the KFC segment, coupled with strategic portfolio diversification through the Sky Gate Hospitality acquisition. The research house anticipates gradual margin recovery driven by operational efficiencies and reduced competitive intensity in key markets.

Financial Performance Deterioration Amid Market Challenges

Devyani International's Q1FY26 financial metrics presented a mixed narrative of growth tempered by profitability pressures. Consolidated revenue demonstrated resilience with 11.1% year-on-year growth to Rs 13,570 million, primarily driven by KFC's 10.5% revenue expansion and Costa Coffee's impressive 14.1% growth trajectory.

However, EBITDA performance painted a concerning picture, declining 8.3% year-on-year to Rs 2,049 million, with margins compressing significantly from 18.3% to 15.1%. This deterioration stemmed from multiple operational challenges including average daily sales deleverage, escalated marketing expenditures, and persistent input cost inflation affecting key commodities such as flour, cheese, and edible oils.

The company's adjusted net profit experienced a precipitous decline of 92.4% year-on-year to Rs 29 million, reflecting the compounding impact of higher depreciation charges, elevated interest expenses, and operational inefficiencies.

Brand-Specific Performance Analysis and Strategic Outlook

KFC continues to serve as Devyani's primary revenue engine despite operational challenges. The brand generated Rs 6,126 million in Q1FY26, representing 10.5% year-on-year growth, though same-store sales growth remained marginally negative at -0.7%. Average daily sales declined to Rs 98,000 from Rs 104,000 in the corresponding previous quarter, primarily due to weakened dine-in performance.

Pizza Hut's performance remained particularly concerning, with brand contribution margins turning negative at -1.1% compared to a positive 4.9% in Q1FY25. Same-store sales growth deteriorated to -4.2%, reflecting challenging urban market conditions and intensified competitive pressures in the premium pizza segment.

The franchisee brands portfolio, encompassing Costa Coffee, Tealive, and New York Fries, demonstrated stronger momentum with 14.1% revenue growth, though contribution margins moderated to 12.9% from 14.9% due to startup costs associated with new brand launches.

Strategic Expansion and Portfolio Enhancement Initiatives

Devyani's aggressive expansion strategy remains a cornerstone of its long-term value proposition. The company added 103 net new stores in India during Q1FY26, including the significant integration of 105 Sky Gate Hospitality outlets following its 86.13% stake acquisition for Rs 1,030 million.

Management has articulated ambitious expansion targets for FY26, including the addition of 110-120 new KFC outlets while maintaining selective expansion criteria for Pizza Hut locations. The Sky Gate integration is expected to achieve positive brand contribution and operational turnaround within 12 months, potentially enhancing Devyani's presence in the biryani and Indian cuisine segments.

International operations demonstrated resilience with 11.2% revenue growth to approximately Rs 4,332 million, supported by improved gross margins in Thailand and strategic market positioning across Nigeria, Thailand, and Nepal markets.

Market Dynamics and Competitive Positioning Assessment

The quick-service restaurant industry continues to face macroeconomic headwinds including consumer spending moderation and heightened competitive intensity. Devyani's management anticipates demand recovery driven by urbanization trends, rising disposable incomes, and evolving consumer preferences, particularly in tier-2 and tier-3 markets where penetration remains relatively underdeveloped.

Input cost inflation represents a persistent challenge, with commodity prices for essential ingredients experiencing upward pressure. The company's gross margin contracted 97 basis points year-on-year to 68.2%, necessitating strategic pricing adjustments and operational optimization initiatives to restore profitability metrics.

Technical Levels and Investment Parameters

Risk Assessment and Investment Outlook

Key investment risks include sustained margin pressure from commodity inflation and competitive intensity in urban markets. Pizza Hut's underperformance represents a significant concern, particularly given its premium positioning and vulnerability to economic downturns affecting discretionary spending patterns.

However, positive catalysts include KFC's market leadership position, strategic tier-2/3 expansion opportunities, and potential synergies from the Sky Gate acquisition. The company's diversified brand portfolio and international presence provide defensive characteristics during domestic market volatility.

Deven Choksey Research anticipates gradual recovery in FY27-28, with EBITDA margins expected to expand to 17.9% and 18.3% respectively, supported by operational leverage and strategic pricing initiatives. Investors should consider accumulating positions on market weakness, targeting the Rs 193 price objective over a 12-month investment horizon.