Analysts bullish on Devyani after Sapphire Foods merger approval

Brokerages remain positive on Devyani International after the Board's approval of Sapphire Foods merger, citing scale benefits, cost synergies and stronger QSR economics

D-Street analysts have maintained their positive view on Devyani International, following the board’s approval to merge operations with Sapphire Foods. 

On Thursday, Devyani Foods had said Sapphire Foods will merge into the company via a share-swap deal. 

As part of the agreement, Sapphire Foods shareholders will receive 177 shares of Devyani International for every 100 Sapphire shares. 

The merger will consolidate KFC and Pizza Hut operations in India under a single operator, which has been approved by the American-parent Yum! Brands. 

Analysts see the Devyani-Sapphire merger creating one of the largest and most diversified quick service restaurant (QSR) platforms in India. 

 

JM Financial Institutional Securities said the merger is structured to unlock scale benefits, improve unit economics through operating leverage and revised commercial terms. 

It would also strengthen execution across brands and geographies. 

On the bourses, Devyani International shares jumped 7.7 per cent intraday (₹159.45) on the BSE, before closing 0.14 per cent up at ₹148.15. 

Sapphire Foods, however, fell 5.5 per cent intraday (₹246.80), but ended 4 per cent lower (₹250.65). By comparison, the BSE Sensex settled 0.67 per cent higher. 

 

Devyani-Sapphire merger fineprint

 

As part of the transaction, Devyani will acquire 19 KFC stores from Yum! India for ₹90 crore and make a one-time payment of ₹320 crore towards merger approval and additional territory rights. 

However, prior to the scheme becoming effective, Sapphire Foods’ promoter Sapphire Foods Mauritius Limited will have to sell its 18.5 per cent equity stake in Sapphire Foods to Devyani International’s group company Arctic International. 

At present, Devyani International has around 1,233 million outstanding shares and Sapphire Foods has 321 million shares.

Post-merger, the combined entity will have nearly 1,802 million shares outstanding. 

The merger is subject to regulatory and shareholder approvals and is expected to be completed over a 12–15 month period.

Nonetheless, simplification of the operating structure would reduce overheads, synchronise sales and service channels, and improve operational efficiency. 

Amendments to development and commercial agreements with Yum! Brands, including certain waivers and cost rationalisation, should support better unit economics and sustainable brand development, said analysts. 

That apart, integration of Sapphire's strong regional presence in southern and western India, and Sri Lanka with Devyani's pan-Indian network will expand geographic reach, they said.

 

According to Devyani, financial year 2027-28 (FY28) would likely be the first year of combined operations, while FY29 would see full synergy benefit of ₹210-225 crore.

 

"The highlighted savings are significant, at around 15 per cent of the combined Ebitda estimate for the two companies," said analysts at Emkay Global Financial Services.

 

The combined entity, it said, will have a 50-60 per cent higher revenue/Ebitda scale (vs current levels), and agreement negotiations with Yum! provide synergies in terms of improved decision-making, new innovations, use of tech, and better sourcing efficiencies.

 

"Based on FY25 financials, the combined entity has a scale of ₹7,800 crore, with potential revenue CAGR of 15 per cent over FY25-28 (similar to Domino's-operator Jubilant FoodWorks). Also, Sapphire operates at a lower gross margin (50-70bps across the Pizza Hut/KFC formats) than Devyani International, the merged entity could see margins on an improving trend," Emkay said.

 

Add to it, the combined network would rise to 1,200 stores for KFC and ₹1,000 stores for Pizza Hut in India, leading to cost synergies.

 

Besides, the merger should enable faster decision-making in terms of go-to-market and new product innovations which, analysts feel, was being delayed due to the involvement of tripartite decision makers – Devyani, Sapphire, and Yum!.

 

"We believe the merged entity could deliver 15 per cent revenue CAGR and around 24 per cent Ebitda, and 26 per cent net profit CAGR over FY25–28, translating into FY28 revenue estimate of ₹12,200 crore, and a pre-Ind AS Ebitda margin of ₹11.7 per cent and pre-Ind AS Ebitda of ₹1,420 crore," JM Financial noted.

 

Factoring-in benefits from unit economics, overhead rationalisation, and productivity gains, the brokerage expects pre-Ind AS Ebitda to increase to ₹1,520 crore, and FY29 Ebitda to rise to ₹1,950 crore.

 

JM Financial, Emkay Global, and UBS maintained their 'Buy' ratings on Devyani with share price targets of ₹180, ₹190, and ₹190, respectively.

 

Antique Stock Broking, however, has a 'Hold' rating on Devyani with a target price of ₹142.