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Forget China, the Real Potential for Yum! Brands Is in India

By Mark Yagalla - Dec 27, 2013 at 12:53PM

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While China may get all the headlines, future profits could be greater out of India for the owner of KFC, Pizza Hut, and Taco Bell.

With all the trouble that Yum! Brands (YUM 2.82%) has been having in China, the one bright spot for the company is its operations in India. Yum! sees tremendous potential for all three of its brands in India -- KFC, Pizza Hut, and Taco Bell.

Right now Yum! has about 730 restaurants in the country, which is quite a small number considering that Yum! has more than 40,000 restaurants across 130-plus countries and territories. The company plans to have more than 2,000 locations by 2020. So for us Fools, while China gets all the headlines for Yum! right now, the future headlines for the company will likely come from India.

KFC besides chicken
KFC is well known for adjusting its menus to cater to its local markets. Well, in India, the company will have to do just that with 40% of India's population being vegetarians. While there still will be plenty of tasty chicken on the menu, you'll also find a veggie-zinger sandwich, vegetable strips, potato-krisper sandwich, and a vegetable-rice bowl.

To illustrate how important India is to KFC, the company celebrated the opening of its 40,000th restaurant in Goa, India. India has a rapidly growing middle class and 65% of its 1.2 billion population are under the age of 35. For KFC, perhaps the most important statistic is that India has the sixth-highest consumption of poultry in the world.

Don't forget pizza
Yum! Brands' approach to India is a three-pronged attack. The second phase is bringing its Pizza Hut franchise to the masses. Pizza Hut has built a great reputation in India and has been named the No. 1 most trusted food-service brand seven years in a row. Pizza Hut's marketing campaign has been 'pizzas and much more,' and it has really resonated with the local population. The company has about 181 casual-dining restaurants and 132 home-delivery locations in India.

If Pizza Hut wants to dominate the market in India, it's going to have to hurry up and catch Domino's Pizza (DPZ 3.57%), which has more than 675 locations in India. It claims to have 54% of the total pizza market and 70% of the pizza home- delivery market in India. Domino's has sought to cement its position in India with its ad slogan, 'Yeh Hai Rishton Ka Time.' This means that people's bonds become stronger over the love of a good pizza.

Last, but not least
Yum! is also bringing Taco Bell to the Indian market. Taco Bell is just getting started there, and is focused on the city of Bangalore. There are only four locations, but the Facebook page for Taco Bell India already has more than 97,000 likes. To promote the brand, the company is using social media to track a Taco Bell truck as it makes its way around India.

Overall outlook
Yum! Brands aims to invest $100 million in the Indian market over the next three to four years. By 2015, Yum! hopes to have more than 1,000 restaurants in the country. The company also separated its Indian operations from the rest of its international operations due to its tremendous growth potential. Next year, the company plans to open at least 150 units in India.

For investors, Yum! Brands has lagged the market this year. Shares have risen only 14% this year compared to the 31% rise in the S&P 500 index. Shares are trading at 20 times next year's earnings and pay a 2% dividend yield. To finance its growth plans, Yum! Brands has $793 million in cash and $2.9 billion in debt.

Shares of Yum! Brands are more attractive than Domino's Pizza. Domino's is trading at 30 times earnings and pays only a 1.2% dividend yield. The chain also has a more leveraged balance sheet with only $32 million in cash but $1.5 billion in debt. Shares have outperformed the S&P 500 this year after rising more than 65%.

Foolish assessment
For Yum! Brands, the future looks bright in India. The country has more than 1.2 billion people and the majority of the population is younger than 35. As incomes rise, more Indians will be dining out and Yum! is at the forefront of this trend with its three brands. I see great potential for KFC, Pizza Hut, and Taco Bell in the country. For us Fools, that makes Yum! Brands a winner for the long run. 

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Stocks Mentioned

Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
$116.71 (2.82%) $3.20
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
$403.61 (3.57%) $13.90

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