With a market capitalisation of ₹19,189.66 crores, Devyani International operates over 1,500 restaurants across India and Nigeria, positioning itself as a significant player in the organised quick-service restaurant segment. However, the company's Q2 FY26 performance reveals fundamental challenges in translating revenue growth into bottom-line profitability, with operating margins hitting their lowest level in recent quarters at 13.97%. The deteriorating financial performance has pushed the stock down 10.03% over the past year, significantly underperforming the Sensex's 3.65% gain by 13.68 percentage points.
Financial Performance: Revenue Growth Masks Profitability Crisis
Devyani International's Q2 FY26 results present a troubling picture of a company struggling with cost management despite achieving reasonable top-line growth. Net sales in Q2 FY26 reached ₹1,376.75 crores, marking a modest 1.46% quarter-on-quarter increase and a more encouraging 12.65% year-on-year expansion. However, this revenue momentum failed to translate into profitability as the company swung from a profit of ₹3.69 crores in Q1 FY26 to a loss of ₹21.89 crores in Q2 FY26.
The profitability collapse stems from severe margin compression across multiple fronts. Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) declined to ₹192.30 crores in Q2 FY26 from ₹206.03 crores in the previous quarter, resulting in an operating margin of just 13.97%—the lowest recorded in recent quarters and down from 15.18% in Q1 FY26. This 121 basis point sequential decline reflects deteriorating operational efficiency and pricing power challenges.
The margin erosion becomes even more pronounced when examining gross profit margins, which contracted to 9.34% in Q2 FY26 from 11.26% in Q1 FY26—a decline of 192 basis points. This suggests rising input costs, potentially driven by food commodity inflation and higher rental expenses for restaurant operations. Employee costs remained elevated at ₹201.69 crores, though relatively stable compared to the previous quarter's ₹201.09 crores, indicating controlled wage inflation but limited operating leverage benefits from revenue growth.
Interest expenses continued their upward trajectory, rising to ₹68.84 crores in Q2 FY26 from ₹66.78 crores in Q1 FY26, reflecting the company's high debt burden with a debt-to-equity ratio of 2.91 times as of H1 FY26. Depreciation charges also climbed to ₹155.18 crores from ₹149.68 crores, indicating ongoing capital expenditure for restaurant expansion. The combination of operating losses, high interest costs, and substantial depreciation pushed the company's profit before tax to negative ₹26.78 crores, culminating in the consolidated net loss of ₹21.89 crores.
| Metric | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 | Jun'24 |
|---|---|---|---|---|---|---|
| Net Sales (₹ Cr) | 1,376.75 | 1,356.97 | 1,212.59 | 1,294.40 | 1,222.16 | 1,221.90 |
| QoQ Growth | +1.46% | +11.91% | -6.32% | +5.91% | +0.02% | +16.70% |
| Net Profit (₹ Cr) | -21.89 | 3.69 | -14.74 | -0.49 | 0.02 | 30.11 |
| Operating Margin | 13.97% | 15.18% | 15.34% | 16.48% | 16.01% | 17.66% |
| PAT Margin | -1.57% | 0.18% | -1.38% | -0.59% | -0.40% | 1.84% |
Operational Challenges: Margin Erosion Signals Structural Concerns
The consistent decline in operating margins across recent quarters points to structural challenges in Devyani International's business model rather than temporary headwinds. The company's operating margin (excluding other income) has fallen from a peak of 17.66% in Jun'24 to just 13.97% in Sep'25—a deterioration of 369 basis points over five quarters. This sustained margin compression suggests difficulties in passing through cost increases to customers, possibly due to intense competition in the quick-service restaurant segment or weakening consumer spending power.
Return on equity (ROE) metrics reveal a mixed picture of capital efficiency. The company's average ROE over the past five years stands at a respectable 15.42%, indicating historically strong capital productivity. However, the latest ROE has collapsed to just 1.26% as of the most recent period, reflecting the current profitability crisis. This sharp divergence between historical performance and current reality underscores the severity of the company's operational challenges and raises questions about management's ability to restore profitability.
⚠️ Critical Margin Pressure
Operating margins have declined 369 basis points from 17.66% in Jun'24 to 13.97% in Sep'25, marking the lowest level in eight quarters. The company's inability to maintain pricing power amid rising costs signals fundamental challenges in its operating model. With high fixed costs from restaurant infrastructure and limited room for price increases, the path to margin recovery remains uncertain.
Balance sheet metrics indicate elevated financial leverage that constrains operational flexibility. The company's debt-to-equity ratio stands at 2.91 times as of H1 FY26, significantly higher than comfortable levels and reflecting substantial borrowings to fund restaurant expansion. Long-term debt reached ₹670.05 crores as of Mar'25, down modestly from ₹725.51 crores in Mar'24 but still representing a considerable burden given the company's current profitability challenges. The high leverage amplifies financial risk, particularly in a scenario of sustained losses or rising interest rates.
Return on capital employed (ROCE) averaged 9.78% over the past five years but has deteriorated sharply to just 5.88% in the latest period, falling well below the cost of capital. This suggests the company is destroying shareholder value at current profitability levels. The EBIT-to-interest coverage ratio of 1.41 times indicates limited cushion for debt servicing, with operating profits barely covering interest expenses. In Q2 FY26, the company's operating profit before interest was insufficient to cover interest costs of ₹68.84 crores, highlighting acute financial stress.
Industry Context: Navigating a Challenging QSR Landscape
The quick-service restaurant industry in India has faced headwinds in recent quarters, with consumer spending patterns showing signs of moderation amid broader economic uncertainties. Devyani International's performance reflects these sectoral challenges, though the company's margin compression appears more severe than peers, suggesting company-specific execution issues alongside industry-wide pressures.
The company operates in a highly competitive landscape dominated by global brands like McDonald's, Domino's, and Burger King, alongside emerging domestic players. Intense competition limits pricing power, forcing companies to absorb cost increases through margin compression rather than price hikes. Additionally, the shift towards food delivery aggregators like Zomato and Swiggy has altered industry economics, with commission payments to these platforms squeezing restaurant profitability.
Devyani International's expansion strategy, whilst driving revenue growth, has come at the cost of profitability. The company added significant restaurant capacity in recent years, reflected in fixed assets growing from ₹1,165.64 crores in Mar'23 to ₹2,716.55 crores in Mar'25—a 133% increase. However, this aggressive expansion has loaded the balance sheet with debt and depreciation charges, whilst new stores typically take 12-18 months to reach maturity and contribute meaningfully to profits. The current loss-making position suggests the company expanded too rapidly without adequate focus on unit economics.
The Expansion Dilemma
Devyani International's fixed assets more than doubled from ₹1,165.64 crores in Mar'23 to ₹2,716.55 crores in Mar'25, reflecting aggressive restaurant expansion. However, this growth strategy has burdened the company with elevated depreciation (₹155.18 crores in Q2 FY26) and interest costs (₹68.84 crores), whilst new stores have yet to deliver expected returns. The company must now balance growth ambitions with profitability imperatives—a challenging trade-off given current margin pressures.
Peer Comparison: Valuation Premium Without Profitability Justification
Devyani International's positioning relative to industry peers reveals a troubling disconnect between valuation and fundamentals. The company trades at a price-to-book value ratio of 17.99 times, representing a significant premium to most competitors despite being loss-making. This valuation appears unjustified given the company's inability to generate consistent profits and its deteriorating margin profile.
| Company | P/E (TTM) | P/BV | ROE (%) | Div Yield | Debt/Equity |
|---|---|---|---|---|---|
| Devyani Intl. | NA (Loss Making) | 17.99 | 15.42 | NA | 2.75 |
| Jubilant Food | 150.19 | 18.64 | 15.46 | 0.20% | 1.98 |
| Travel Food | 47.51 | 16.38 | 34.47 | NA | -0.60 |
| Westlife Food | NA (Loss Making) | 15.12 | 8.09 | 0.13% | 2.59 |
| Sapphire Foods | 2,976.97 | 0.66 | 7.85 | NA | 0.09 |
| Restaurant Brand | NA (Loss Making) | 4.32 | 0.00 | NA | 1.40 |
Compared to profitable peers like Jubilant Food Works (P/BV of 18.64x, ROE of 15.46%) and Travel Food Services (P/BV of 16.38x, ROE of 34.47%), Devyani International's valuation appears stretched. Whilst the company's historical average ROE of 15.42% matches Jubilant Food's current performance, the critical difference lies in profitability trajectory—Jubilant maintains consistent profits whilst Devyani struggles with losses.
The company's debt-to-equity ratio of 2.75 times ranks among the highest in the peer group, exceeded only by Westlife Food's 2.59 times. This elevated leverage, combined with the current loss-making status, creates a riskier financial profile than most competitors. Travel Food Services, for instance, operates with negative net debt (indicating net cash position), providing far greater financial flexibility. Sapphire Foods maintains minimal leverage at 0.09 times debt-to-equity, highlighting Devyani's relatively aggressive capital structure.
Valuation Analysis: Premium Pricing for Uncertain Returns
Devyani International's current valuation of ₹155.65 per share, translating to a market capitalisation of ₹19,189.66 crores, appears disconnected from underlying fundamentals. With the company loss-making, traditional earnings-based metrics like P/E ratio are not applicable. However, the price-to-book value of 17.99 times represents a substantial premium to book value of ₹9.07 per share, implying significant growth and profitability expectations that current performance fails to justify.
The enterprise value multiples paint an even more concerning picture. EV-to-EBITDA stands at 28.33 times, whilst EV-to-sales reaches 4.46 times—both elevated for a company with deteriorating margins and inconsistent profitability. The EV-to-EBIT multiple of 106.20 times reflects minimal operating profit generation relative to enterprise value, highlighting the disconnect between market pricing and operational reality.
The proprietary Mojo Score of 45 out of 100 reflects a "SELL" rating, indicating the stock is overvalued relative to fundamentals. The valuation grade has fluctuated between "Fair" and "Attractive" in recent months but currently stands at "Fair," suggesting the market has partially adjusted to deteriorating fundamentals but further downside risk remains. Given the company's loss-making status, high leverage, and margin compression, a fair value estimate would place the stock at least 20-25% below current levels, implying a target price around ₹120-125 per share.
Shareholding Pattern: Institutional Confidence Waning
Shareholding pattern analysis reveals concerning trends in institutional investor confidence. Foreign institutional investors (FIIs) have been consistent sellers, reducing their stake from 11.17% in Dec'24 to just 6.55% in Sep'25—a decline of 460 basis points over three quarters. This sustained FII selling suggests growing concerns about the company's profitability outlook and valuation sustainability among sophisticated global investors.
| Investor Category | Sep'25 | Jun'25 | Mar'25 | Dec'24 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| FII | 6.55% | 9.42% | 10.46% | 11.17% | -2.87% |
| Mutual Funds | 15.94% | 14.36% | 13.35% | 12.27% | +1.58% |
| Insurance | 3.24% | 3.63% | 3.51% | 3.08% | -0.39% |
| Other DII | 0.58% | 0.10% | 0.01% | 0.11% | +0.48% |
| Non-Institutional | 12.28% | 9.88% | 9.95% | 10.64% | +2.40% |
Mutual funds have shown contrasting behaviour, increasing their holdings from 12.27% in Dec'24 to 15.94% in Sep'25, adding 367 basis points over the period. This suggests domestic institutional investors maintain a more optimistic view, possibly betting on long-term recovery potential. However, the sequential increase of 158 basis points in Sep'25 appears modest given the magnitude of the stock's decline, indicating cautious accumulation rather than aggressive buying.
The absence of promoter holding (0.00% across all quarters) reflects the company's ownership structure, with RJ Corp Limited holding 58.02% as the major shareholder along with Varun Jaipuria (3.22%) and Ravi Kant Jaipuria (0.17%). The professional management structure provides governance comfort, though the lack of significant promoter skin in the game may concern some investors. Non-institutional holdings surged from 9.88% in Jun'25 to 12.28% in Sep'25, possibly indicating retail investor accumulation attracted by the stock's decline, though this could prove premature given ongoing fundamental challenges.
Stock Performance: Consistent Underperformance Reflects Fundamental Weakness
Devyani International's stock performance has been consistently disappointing across all timeframes, significantly underperforming both the benchmark Sensex and its sector peers. Over the past year, the stock has declined 10.03% whilst the Sensex gained 3.65%, resulting in negative alpha of 13.68 percentage points. This underperformance has been even more pronounced over longer periods, with three-year returns of negative 17.01% compared to Sensex gains of 36.69%—a staggering 53.70 percentage point underperformance.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -7.16% | -1.30% | -5.86% |
| 1 Month | -5.75% | +1.86% | -7.61% |
| 3 Months | -3.14% | +3.44% | -6.58% |
| 6 Months | -12.06% | +3.31% | -15.37% |
| YTD | -14.31% | +6.62% | -20.93% |
| 1 Year | -10.03% | +3.65% | -13.68% |
| 3 Years | -17.01% | +36.69% | -53.70% |
The stock's technical position has deteriorated markedly, with the current trend classified as "Mildly Bearish" after changing from "Sideways" on November 4, 2025. The stock trades below all key moving averages—5-day (₹163.41), 20-day (₹164.26), 50-day (₹171.49), 100-day (₹169.62), and 200-day (₹169.37)—indicating sustained selling pressure and lack of buying support. This technical weakness aligns with deteriorating fundamentals and suggests the path of least resistance remains downward.
With a beta of 1.35, Devyani International exhibits higher volatility than the broader market, amplifying both gains and losses. The stock's volatility of 34.14% over the past year far exceeds the Sensex's 12.45%, reflecting heightened uncertainty about the company's prospects. The negative risk-adjusted return of -0.29 indicates investors are being penalised for taking on additional volatility, earning negative returns despite elevated risk. The stock currently trades at ₹155.65, down 25.76% from its 52-week high of ₹209.65 but still 19.68% above its 52-week low of ₹130.05.
"Devyani International's consistent underperformance across all timeframes—from one week to three years—reflects a fundamental disconnect between market expectations and operational reality, with investors increasingly questioning the company's ability to translate expansion into sustainable profits."
Investment Thesis: Weak Fundamentals Outweigh Growth Potential
Devyani International's investment case rests on its position as a leading franchisee for globally recognised QSR brands and its significant store network across India. The company's 38.18% five-year sales compound annual growth rate demonstrates strong top-line momentum, whilst its historical average ROE of 15.42% suggests the business model can generate attractive returns when operating efficiently. However, current execution challenges, margin compression, and high leverage significantly undermine the investment thesis.
The Mojo investment framework assigns the stock an overall score of 45 out of 100, translating to a "SELL" recommendation. This rating reflects weak near-term financial trends (flat performance in Sep'25), mildly bearish technical indicators, average quality metrics, and fair but not compelling valuation. The company's quality grade stands at "Average," upgraded from "Below Average" in August 2025, though this improvement appears premature given recent quarterly losses.
Key investment concerns include: (1) sustained margin compression from 17.66% in Jun'24 to 13.97% in Sep'25; (2) inability to generate consistent profits despite revenue growth; (3) high financial leverage with debt-to-equity of 2.91 times limiting financial flexibility; (4) weak interest coverage of 1.41 times indicating financial stress; (5) deteriorating ROE from historical 15.42% average to just 1.26% currently; and (6) consistent stock underperformance across all timeframes signalling market scepticism about recovery prospects.
Key Strengths & Risk Factors
✓ KEY STRENGTHS
- Strong Brand Portfolio: Exclusive franchisee rights for Pizza Hut, KFC, and Costa Coffee provide competitive moat and brand recognition advantages
- Impressive Revenue Growth: Five-year sales CAGR of 38.18% demonstrates strong market demand and successful expansion execution
- Historical Capital Efficiency: Average ROE of 15.42% over five years indicates the business model can generate attractive returns when operating efficiently
- Extensive Store Network: Over 1,500 restaurants across India and Nigeria provide scale advantages and market leadership in organised QSR segment
- High Institutional Holdings: 26.31% institutional ownership indicates professional investor interest and potential support during recovery phase
- Zero Promoter Pledging: No pledged shares eliminates concerns about forced selling or governance issues related to promoter financing
⚠️ KEY CONCERNS
- Severe Margin Compression: Operating margins collapsed from 17.66% to 13.97% over five quarters, indicating structural profitability challenges
- Persistent Losses: Q2 FY26 loss of ₹21.89 crores represents fourth loss-making quarter in past eight, raising concerns about business model sustainability
- High Financial Leverage: Debt-to-equity ratio of 2.91 times limits financial flexibility and amplifies risk during periods of operational stress
- Weak Interest Coverage: EBIT-to-interest ratio of 1.41 times provides minimal cushion for debt servicing, with Q2 FY26 operating profit insufficient to cover interest
- Deteriorating Returns: Current ROE of 1.26% and ROCE of 5.88% indicate value destruction at current profitability levels
- Consistent Underperformance: Stock has underperformed Sensex by 13.68% over one year and 53.70% over three years, reflecting sustained market scepticism
- FII Selling Pressure: Foreign institutional investors reduced holdings from 11.17% to 6.55% over three quarters, signalling eroding confidence among sophisticated investors
Outlook: What to Watch
POSITIVE CATALYSTS
- Margin Recovery: Sustained improvement in operating margins above 16% would signal successful cost management and pricing power restoration
- Return to Profitability: Two consecutive quarters of positive net profit would rebuild investor confidence in business model sustainability
- Debt Reduction: Meaningful deleveraging with debt-to-equity falling below 2.0 times would improve financial flexibility and reduce risk profile
- Same-Store Sales Growth: Positive like-for-like sales growth excluding new store additions would indicate underlying business health and brand strength
- Institutional Accumulation: FII holdings stabilising or increasing would signal renewed confidence among sophisticated investors
RED FLAGS
- Further Margin Erosion: Operating margins falling below 13% would indicate deepening structural challenges and potential for sustained losses
- Continued Losses: Third consecutive quarterly loss would raise serious questions about management's turnaround strategy and execution capability
- Rising Leverage: Debt-to-equity increasing above 3.0 times would signal deteriorating financial position and potential covenant breach risks
- Store Closure Announcements: Any significant restaurant closures would indicate failed expansion strategy and potential asset write-downs
- Accelerated FII Selling: FII holdings falling below 5% would represent capitulation by foreign investors and potential for further selling pressure
The Verdict: Avoid Until Profitability Stabilises
Score: 45/100
For Fresh Investors: Avoid initiating positions at current levels. The company's inability to generate consistent profits despite strong revenue growth, combined with severe margin compression and high financial leverage, creates an unfavourable risk-reward profile. Wait for at least two consecutive quarters of positive earnings and margin stabilisation above 15% before considering entry.
For Existing Holders: Consider reducing positions on any technical bounce towards ₹165-170 levels. The deteriorating fundamentals, persistent losses, and consistent underperformance suggest the stock faces further downside risk. Only long-term investors with high risk tolerance should maintain holdings, contingent on quarterly monitoring of margin trends and profitability trajectory.
Fair Value Estimate: ₹120-125 (20-23% downside from current levels)
Rationale: The SELL rating reflects fundamental concerns about profitability sustainability, elevated leverage constraining financial flexibility, and valuation that remains stretched despite recent corrections. Whilst the company's brand portfolio and market position provide long-term optionality, near-term visibility on margin recovery and return to consistent profitability remains poor. The stock's technical weakness and FII selling pressure suggest further downside risk before a sustainable bottom is established.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results, and all investments carry risk of loss.
