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SAPPHIRE is one of the two franchisees of Yum! Brands (Yum) in India. Yum operates brands such as KFC, Pizza Hut (PH) and Taco Bell. It has a global presence with more than 53,000 Restaurants in over 150 countries. SAPPHIRE develops and operates KFC/PH stores in 10/11 Indian states. It also has an international presence in Sri Lanka and Maldives. Set up in Sep’15 with the acquisition of 250 KFC and PH stores in India and Sri Lanka, it is promoted by a group of leading Private Equity firms, led by Samara Capital, Goldman Sachs, CX Partners, Creador, and Edelweiss. It operates a total of 579 stores across all brands and geographies as of 31 st Mar’22.

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On the cusp of a turnaround, valuations attractive

SAPPHIRE offers an exciting investment opportunity in the Indian Quick Service Restaurant (QSR) space on account of the following factors:

* The Indian Food Service Industry (FSI) is expected to clock 9% CAGR in the coming years, with QSRs likely to grow faster at 23% CAGR over FY20-25.

* SAPPHIRE’s new scalable Restaurant economic model is a game-changer. Its omnichannel strategy and reduction in store sizes, along with other elements of the model, have led to a big shift in SAPPHIRE’s unit economics.

* KFC India’s business is on a strong footing, with a healthy ADS and profitability. We expect it to register 31% sales CAGR over FY22-24E driven by rapid store additions and strong SSSG aided by a smart recovery post-Covid.

* PH’s India business is seeing a turnaround, with a higher focus on delivery, while retaining its dine-in edge. We expect it to register 35% sales CAGR over FY22-24E with a resultant improvement in its Restaurant EBITDA margin.

* Overall, SAPPHIRE is poised to deliver strong growth with 29%/43% sales/EBITDA (pre-Ind AS 116) CAGR over FY22-24E.

* SAPPHIRE’s valuations are at a considerable discount to peers. We initiate coverage with a Buy rating and TP of INR1,420 per share (27x/17x FY24E EV/EBITDA for KFC/PH) which is at a significant discount to the target multiples for DEVYANI’s KFC/PH at 45x/35x.

Large opportunity in FSI with an established right-to-win for QSRs

* The INR4.2t Indian FSI is expected to clock ~9% CAGR over FY20-25. Within FSI, the QSR segment is expected to grow at the fastest pace (23% CAGR) over FY20-25. The segment is expected to see its market share increase to 54% in FY25 from 47% in FY20 within the organized space.

* QSRs have established their right-to-win through their competitive advantages, which include: a) scale, b) aspirational positioning, c) offering new cuisines, d) higher convenience through delivery, on-the-go, and intransit consumption, and e) greater trust.

* As elaborated in our FSI thematic note in Dec’21, the organized Indian FSI is witnessing enhanced growth prospects after the lifting of COVID-related restrictions, led by several tailwinds.

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