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Established QSR franchisee with substantial presence

About the company: Sapphire Foods, set up in 2015, is one of the Yum brand’s restaurant operators in the Indian subcontinent. It is also Sri Lanka’s largest quick service restaurant (QSR) chain as per FY21 revenues. The company operates 482 stores with 219 KFC & 188 Pizza Hut stores in India. It has another 73 stores in Sri Lanka and two in Maldives.

* The company operates KFC & Pizza Hut brands in India, Sri Lanka & Maldives and Taco Bell operations in Sri Lanka

* It operates under a three-way franchisee arrangement for Yum in India

Key triggers/Highlights:

* Sapphire Foods has leading QSR brands in its portfolio of restaurant operations and enjoys a substantial presence in the QSR space in geographical markets of India and Sri Lanka

* The company enjoys a strong relationship with Yum Brands of US, which enables it to use Yum’s system, system property and expertise in building and establishing brands and operating large-scale restaurants chains

* Sapphire Foods is increasingly working on its omni-channel strategy and focusing on delivery channels. The company has adopted a hybrid model of maintaining a significant owned online delivery platform and also working with third-party delivery aggregators

* The company is optimising its restaurant size to reduce the costs in form of operations costs as well as the capex incurred. This would improve the profitability & reduce the payback period of outlet as well

* Sapphire Foods is focusing on delivering customer experience. It monitors the quality of customer experience through a sophisticated Guest Experience Survey (GES) system, a third-party tool used around the world to measure customer satisfaction

What should investors do?

* We assign UNRATED rating to the IPO

Key risk & concerns

* Negative publicity of junk food

* Non-exclusive franchisee agreement & termination possibility

* High competition in QSR segment

Industry overview

The food services market in India is pegged at | 4236 billion in FY20 and it has witnessed a consistent growth since FY15. It is further likely to grow at a CAGR of 8% in FY20-25E to be a | 6211 billion industry by FY25. The Indian food services industry has gained strong momentum in the last decade due to changing consumption patterns that have seen an increase in tendency to eat out that had not traditionally been a feature of the Indian lifestyle.

This has ensured constant growth of the Indian food services market, which has evolved considerably since the 1980s, when the numbers of organised brands operating in the country were negligible and the market was widely dominated by smaller unorganised players. A noticeable shift began in 1996 with the opening of QSR restaurants such as McDonald's, Pizza Hut and Domino's Pizza, followed by Subway, KFC, Burger King, Haldiram's, Moti Mahal and Taco Bell, among others.

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