Ladies and gentlemen, good day, and welcome to the Devyani International's Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and anyone who wishes to ask a question may enter star and one on their touchtone phone. To remove yourself from the question queue, please enter star and two. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. 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 FY23 Earnings Conference Call. We have with us Mr. Ravi Jaipuria, Chairman of the company, Mr. Raj Pal 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 ending June 30, 2022. We reached an important milestone of Q1 . 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 2023 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 brand has gone up to 52% now. Our total system store count stood at 1,008 stores as of June 30, 2022.
We ended Q1 full year 2022-23 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 crore, nearly 2x the corresponding figure for the last year. KFC contributed INR 425 crore and Pizza Hut contributed INR 165 crore 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 Flavour 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 poised, 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 2022/2023 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 Q1 FY 2022 was seriously impacted by COVID wave two, and hence not strictly comparable. It is also important to note that the overall Q1 revenues surpassed the Q3 FY 2022 revenues, which is normally a high season quarter.
On the profitability front, timely price hikes and strict cost management helps us to maintain gross margins at 71.1% despite multi-year 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-interest EBITDA at INR 114 crore 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-interest, was INR 164 crore, with margins at 23.3% versus INR 62 crore a year ago.
Accordingly, profit before tax for the quarter stood at INR 77 crore versus a loss a year ago and INR 42 crore 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 SSSG of 63.6%. ADS for the quarter for KFC surpassed pre-pandemic levels and drove revenues to INR 425 crore. 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 four of FY 2022. 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 SSS 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 INR 36,000 in the current quarter versus INR 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 DIA. 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.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Abneesh Roy from Edelweiss. Please go ahead.
Yeah. Congrats on the numbers. I have three questions. First is there any seasonality in the KFC business? If you could tell us in terms of average daily sales Q1 to Q2 to Q3, is there a significant difference? If possible, if you could call that out in terms of numbers.
Abneesh, do you want to raise the other questions or should I go ahead?
No, I'll go ahead later.
Okay. I think the key difference you find is quarter three is always the best quarter because of Christmas, New Year and the holidays coming in. Quarter four is also a good quarter because of the holidays just getting over and the winter season being there. Major differences are not there, but some differences are there which make a big difference because of the top line and the bottom line.
Abneesh, if you look at your other part of the question, which is what was the ADS in the previous three quarters. Quarter four, if you remember, we were at about 113,000. Quarter three, 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 one. I think KFC is doing extremely well as far as the consumers are concerned.
Sure. Thanks. That was very helpful. My second question is, in KFC, did the price hikes have any impact on demand in your view? Have you covered the entire current raw material inflation impact already? I'm not asking about view on RM because that's difficult to give. 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 little dilutive versus the previous quarter. 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.
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.
Yeah, sure. My last question is on your store expansion mix. You have 1,000 stores over next four years. Want to understand will the KFC PH mix be similar, and do you expect other brands to ramp up over the four-year time frame in terms of the mix?
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. That is what basically constitutes the 1,000-store breakup that we've talked about earlier. 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.
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 2.5-3 times the ADS of Pizza Hut. The return on investment is better for KFC versus Pizza Hut. 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.
Sure, that's very helpful. That's all from my side. Thank you.
Thanks, Abneesh.
Thank you. The next question is from the line of Vivek Maheshwari from Jefferies. Please go ahead.
Hi. Good evening, everyone. A few questions. First is on the gross margins, Manish. If you look at, you know, 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. Just curious that, you know, given that you still have, you know, 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?
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. It was only just a timing piece, and we got some advantage out of it.
Okay, got it. Any further price hike that you have taken in either of the formats in this quarter, like in June quarter or until now in July?
Nothing as of now.
Okay, got it. The other question is on the Flavour Fun Pizza that you have launched. For a long time you have had not gotten into the value side of pizza, but now that you have gotten into it, two 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?
I'm saying for a long time you did not, you know, you stayed away from value side of, you know, value side of offering in pizza, in Pizza Hut rather, which is now you have entered with Flavour Fun pizzas, right? Two parts. One is, you know, 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, you know, this important offering, you know, 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. 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. Based on that we kind of tested the entire Pizza Hut smaller format at scale, and therefore we opened a lot of stores and they are doing well. Therefore, while all of this was on and there was COVID, we were little slow as far as the innovation was concerned. 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 Flavour Fun 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.
A week.
Otherwise in the test market, we've seen some encouraging response, but let's see how it goes.
Okay. Sure. Last question, Manish. I mean, the ADS disparity between. So KFC is a very powerful brand, and you have highlighted in the earlier response. You know, the difference, so KFC, you know, being ahead of pre-pandemic levels, whereas Pizza Hut is not. What do you think, you know, what will it take, given that competition is also significantly ahead? We have discussed this in the past also, but any new thoughts? Do you think that, you know, Flavor Fun will be a driver for this ADS to move up from this level? Because this is still, you know, you're trailing behind quite a bit on Pizza Hut still.
Vivek, if you look at strictly pre-pandemic level, and I would say I would not like to just isolate one or two years. We used to operate large stores, right? 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 Flavour Fun 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 brand. This is what we are trying to address through this launch.
Just a follow-up. Would this also be, you know? 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?
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. It will be for the quarter. We'll continue doing that year to see that how does it pan out across the country in that year.
Got it. Great. Wishing you all the very best. Thank you.
Thanks so much, Vivek.
Thank you. The next question is from the line of Percy Panthaki from IIFL Securities Limited. Please go ahead.
Hi. Good evening. My first question is on the CapEx. As you are well aware, there's a difference in the CapEx per store for what you do versus what Sapphire. 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. I just wanted to understand, you are doing about INR 1.25-INR 1.3 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 to three years down the line. 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. Our renovation is included in the CapEx, what we are telling you.
You believe that apart from a normal, sort of inflation, this 1.25, 1.3 number is the number to go with for the next three-four years, apart from, let's say, 5%-7% inflation every year, increase.
I can't 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 two 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 a 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 in which we got late last year, and that's why we have started our expansion from this quarter. We see a huge opportunity in the coffee field. I think we'll scale it up reasonably fast, which you'll see in the next quarters coming through. 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.
Compared to Starbucks, our pricing is similar to Starbucks. We will be at about 90% index, Percy, to Starbucks.
Okay. Understood. Secondly, for this Flavour Fun pizzas, I understand you have been test marketing them for a few months now in few, one or two states. In that test market, what kind of percentage increase in the ADS did this products were tested?
Well, we got a reasonably good response and, exact numbers was different in each state, but we got reasonably good response. That was without advertising. Hopefully with the advertising, this should give us enough headway in our numbers of clients coming in.
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? Also, is this mainly a food court type of format or is it amenable to some other types of formats? 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, 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. The speed of opening will be much faster than what we have been doing.
This is state-wise when you say where it is working, where it is doing well, do you mean state-wise?
No, region-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.
Understood. Yeah. That's all from me, sir. Thank you very much.
Thanks, Percy.
The next question is from the line of Preeti Shah from Spark Capital. Please go ahead.
Good evening.
Mr. Shah, your voice is breaking.
Excuse me.
We are not able to hear you. Could you please use your handset to ask a question?
Is this better?
Please proceed.
Thanks for the opportunity. 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 and then volume of transactions as well?
Preeti Shah, we do not disclose the transactions separately, but we are seeing a good traction on transactions as well. They are stable and doing well.
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 is.
Yeah. Let's say if you look at the current quarter, it is more of pricing. If you look at, let's say, the previous quarter, it is more of transactions. Every quarter things could be different depending on what the situation is. Overall, we keep a good eye on both transactions as well as the value, and we ensure that we kind of drive both.
Fair point. Second pertains to gross margin. We have done a very good job in an inflationary environment to contain the pressure over here. 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? Along with that, how do you measure in an inflationary environment net promoter score or competitive value standing when we take such price decision versus rest of the competition?
Sure. From a philosophical standpoint, Preeti, 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. 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 under-penetrated in the country.
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.
Thanks. That's all from my side and all the best.
Sure. Thank you so much.
Thank you. The next question is from the line of Chirag from CLSA. Please go ahead.
Yeah. Thank you for taking my question and congrats on very good set of numbers. My question is on Pizza Hut. You know, obviously over the last few years, there is a lot of things that has worked, but, you know, elaborating on that point of ADS, right? 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 three or four 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-for-like data available because over the last, let's say about two and a half to three 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 time. Having said that, if you were to look at, let's say on a per sq ft 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. That's where you're seeing that Pizza Hut as a brand has turned around and it's become much more efficient versus what it used to be.
Okay, that really helps. On a revenue per sq ft basis, what kind of CAGR growth that you would have achieved over the last three, four years or for the last, you know, 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?
Yeah. Let me just work out on a per sq ft basis the question that you have, and we can come back to you on that.
Sure. Secondly, when we look at the Pizza Hut sales mix, you know, of course, the same point around how the mix has changed, it has also impacted the sales mix and obviously there are other factors as well. 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, you know, incrementally, we have not added larger format stores. As far as the mix is concerned, how would you look at the sales mix going forward?
If you look at, let's say our large format dine-in stores would be roughly about 10% of the total store count.
Yeah.
Going forward, I mean, seeing how Pizza Hut has turned around, we could open a little larger format stores. Let's say what we used to open earlier would remain only, let's say, I would say less than 5%-10%, and that will be more like a flagship if we are going to a new location or something like that. Broadly, we are going to be operating in the same range. Let's say if we are currently at about 1,100, it could well be 1,200-1,300. Is it to do with channel mix or sales mix you are asking?
Actually, my question was on channel mix. You know.
Okay. On channel mix, we stand at about 55% on delivery counter play in Pizza Hut today.
Yeah.
about 45% on dine-in and takeaway in that year. That is where it stands today in that. That is where the format of 1,000-1,100 sq ft suits the mix very clearly in that year. We'll stick with that platform completely.
Sure. 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. We've seen that pizza market, long time back has moved towards home consumption. 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. Let's say it could be 5% here and there, but, we will be in the same range.
Understand. My last question is on Vaango. You know, from what Mr. Jaipuria said, it appears that, you know, you guys are now far more confident on the format than what it was a couple of quarters back also. You know, earlier we were struggling with the fact that, while there is a very large opportunity, you know, for Indian menu, whether the, how the price points can be set, et cetera. But now what you're saying 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, you know, 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, and we were opening so many stores suddenly. We know where Vaango works and where it is successful, so we are focusing on that. Now with the expansion and Vaango is giving us good margins, we will be focusing and opening all the new Vaangos in the territories and locations where it works for us. We are going to accelerate the growth in this.
Sure. Thank you, Mr. Jaipuria, and all the best to you guys. Thank you.
Thanks, Chirag.
Thank you. The next question is from the line of Priyam Khemawat from ASK Investment Managers. Please go ahead.
Good evening, team. Two questions from my end. Firstly, on Pizza Hut, brand margins have been on an upward trajectory for the last seven 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 SSG 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%-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 the long haul. As of now, I think we've kind of plucked all the low-hanging fruits. 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. Again, innovation contributes a small percentage to begin with. Secondly, the property portfolio is very different compared to what it used to be. Therefore, we've seen that our rent to revenue ratio is better compared to the deals that we used to get earlier, which is pre-pandemic.
These are marginal initiatives, so therefore you can assume that we will be more or less at the same level.
Okay. 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 four, six quarters back, especially from cloud kitchens like, say, Oven Story, et cetera?
Look, pizza is a large market and it is a growing market. 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. 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 15-20 local pizza brands. Which are not so visible, both from share of voice and whatever they are doing, but the competitive intensity remains strong.
Okay. If I may squeeze one more. When I try and look at our corporate expenses, which is nothing but the difference between our pre-interest brand contribution and EBITDA, it has stabilized at around INR 30 crore per quarter for the last four, five quarters. 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 substantially lower rate than revenues and there will be operating leverage playing out here?
Yeah, you can assume that. 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 business.
Perfect. Thanks a lot. All the best going forward.
Thank you. The next question is from the line of Jaykumar Doshi from Kotak Securities. Please go ahead.
Hi, thanks for the opportunity and congrats on a very good performance. My question is on, you know, can you shed some light on how have you progressed on delivery time? I think the market leader recently called out that about 70% of their deliveries are done at an average of 20 minutes. What has been the progress for you over the past two years in terms of delivery time? 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. What is your demand from them and, you know, 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 rate, 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. Therefore, as of now, we've not seen a huge impact on us. We are where we were. Let's see how the entire situation pans out. We have our own delivery infrastructure as well as we kind of alluded earlier. From an insurance policy, we are absolutely well-prepped. I don't see there could be a big issue as far as the take rates are concerned. Therefore that is how we're looking at it.
The second part of question in terms of, you know, your delivery timings. How has it improved over the past four-six quarters? What are you averaging today? Or what % of your orders are delivered in the 30 minutes?
In fact, 70%-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. We have managed to improve the delivery timelines. 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. With higher penetration as we are opening the stores, our delivery times automatically are becoming better.
70% of the orders in about 30 minutes, or within 30 minutes. Is this across the network, all India?
On an average basis, yes. Yeah. 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 street store or a mall store, or we are catering to a flatted housing environment or multi-storey. There are multiple things and therefore within the region also it could vary a little bit.
Very impressive. Thank you so much. That's it from my side.
Okay.
Thank you. The next question is from the line of Vicky Punjabi from UTI Mutual Fund. Please go ahead.
Yeah. Thanks for taking my question, sir. Just one. I just had one clarification actually. Now if I look at Pizza Hut, one thing that I observed was that if I, you know, just take a difference between the gross profit and brand contribution, and basically, you know, deriving the SG&A or what have you on a store per store basis, it's kind of been, you know. I'm comparing this to 2Q FY 2022 last year. It's kind of been flat-ish, in fact, slightly lower than what we saw then. I mean, it works out to something around INR 24 lakh for 2Q FY 2022 versus INR 20 lakh for 1Q FY 2023. Wanted to understand this.
The assumption was that, as we move, you know, 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. It seems that there has been no additional cost that's come back. In fact, we've actually improved costs on a per store basis. Can you help me understand what really changed here? Because in KFC, I think this is not just around KFC, it's quite different, where we have seen the cost actually increase. I mean, I'm in line with what the thought process was.
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 credits as far as the rentals were concerned, during wave one and wave two of those quarters, and we isolated those quarters and we focused on the normalized quarters because normalized quarters did not have such credits. That's how we've kind of managed to build and it has remained the same. 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's 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 times, 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. Therefore on an overall basis, it's a better property market also that we are seeing.
Okay. 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 just wanted to understand your thoughts because I thought, you know, the thought process was going more towards delivery with the larger part of revenues coming out of delivery. But out here we are seeing delivery revenue shrink to, you know, I think possibly 60% plus in 2QFY20 from 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. 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 choice rather than a norm. 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. I think that is what is panning out.
We are quite pretty confident that the overall delivery versus the in-store consumption would probably settle at the pre-pandemic levels in the next few quarters.
What would be expectations on those levels?
Let's say your off-premise would be anywhere close to 60% for Pizza Hut. For KFC, it will be between 35%-40%.
Okay. Sure. Thank you so much.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Yes, sir. Congratulations on a strong execution. You indicated new innovations generally come at a higher gross margin. 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 strategically placed pricing that we've done. Therefore, it is marginally dilutive. Within Flavor Fun, there are higher categories of pizza which kind of compensate for the margins that are at a lower price point.
Okay. 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?
Yeah. Yes, absolutely. Yeah.
Secondly, our repair and maintenance expense are sort of relatively high at about 4%, versus Sapphire is at about 2%. 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 break-up of repairs and maintenance. 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. Otherwise the repairs and maintenance is not so high, so we'll have to check the numbers once.
Okay.
Also it could be a little bit higher because of the seasonality, because of April, May, June, because of summers coming in. That will not be-
It is every locality.
I don't know about Sapphire.
No.
We don't know about that, yeah.
Correct.
That, but...
Devanshu, we can check this out and come back to you.
Sure. You mentioned about some inflation in the CapEx. If you can give me, I missed that number. What is the CapEx inflation that you are seeing currently?
Overall, about 8%-9%.
Okay.
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. Overall would be about 8%-9%.
Okay. Lastly, what is the reason for sequential drop in depreciation? 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. The reason for higher other income, sir? We have reported about INR 9 crore of other income.
That is mainly to do with all of your interest adjustments and so on, so forth.
Okay. Okay, thanks. That's it from me.
Okay, thanks, Devanshu.
Thank you. The next question is from the line of Sandip Bansal from ASK Investment Managers. Please go ahead.
Congratulations on a great set of numbers. Just two 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. Let's say this run rate we expect to continue over the next three, five years, two years.
Look, if you look at it from a macro perspective, India as a market is under-penetrated 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. Keeping that in mind, we think we can go with 100 for a reasonable future.
Sure. Great. My next question was, you know, if you could highlight some of the key risks or challenges that you're facing in executing your expansion strategy, margin strategy. Anything that you can share in, you know, on the ground. You know, stuff like commodity costs, food inflation, all that. We get that. Other than that, any specific issues?
Sandeep, 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. 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. 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. 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.
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. Those are normal, which are kind of known.
Sure. Thank you and all the very best.
Thank you so much, Sandip.
Thank you. Ladies and gentlemen, please limit your questions to two per participant. The next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.
Yeah. Hi. Good evening. Thanks for the opportunity and 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. I just wanted to understand in your experience of such interventions, though, as a company it might be 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 planned for this launch. How it pans out, let's see. It is too early, I would say. Cannibalization will happen. 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 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 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 and, humongous, same-store sales growth. Just wanted to understand 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, IT/ITES companies are not working to the full bench. In that context, is there a room for growth, since you have taken 9%, price increase? This 127 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%-4% SSS numbers on a year-to-year basis. 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 SSS numbers are getting compared to the quarter where we had COVID wave two, and that's the reason those numbers are looking a little elevated.
I got that. Just touch a little more on ADS. You didn't comment on ADS.
Yeah, 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 15-18 months to reach a maturity level for a newer store. Therefore that's the reason we need to measure the new stores separately and the SSSG numbers for the existing stores separately. That is how you need to kind of build up your model in terms of the existing and the new stores.
Okay. All right. Thank you and all the best to you in the meantime.
Okay. Thanks a lot.
Thank you. Ladies and gentlemen, this would be the last question for today, which is from the line of Sanjaya Satapathy from Ampersand. Please go ahead.
My question was that the explanation that you gave on other expenses increased. 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. At the same time, quarter one 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, thanks. My last question is that within KFC, you of course have multiple products and you have been doing a lot of innovation. One of the key categories such as biryani and the other one would be burger. Do you kind of look at how each subcategory they are doing well in terms of growth? Within that, as we know that biryani per se is such a big category, how are you really looking at that?
Sanjay, 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.
That is continuing to be the trend and you are not really seeing much of a change.
Yeah, absolutely.
Okay. Thanks a lot.
Thank you. 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.