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BACKGROUND

Company Overview

Sapphire Foods Ltd. (SFL) is one of YUM’s franchisee operators in the Indian subcontinent operating brands like KFC, Pizza Hut etc. It is also Sri Lanka’s largest international QSR chain, in terms of revenue for the FY21 and number of restaurants operated as of March 31, 2021 (with 68 restaurants representing 39% of the total number of outlets in the market). SFL also established a presence in the Maldives. As of June 30, 2021, it owned and operated 209 KFC restaurants in India and the Maldives, 239 Pizza Hut restaurants in India, Sri Lanka and the Maldives, and two Taco Bell restaurants in Sri Lanka.

Objects of the Issue

The whole issue of Rs 2073 cr is offer for sale

Investment Rationale

* Focus on Omnichannel Platform

* Leading QSR Brands with a Substantial Market Presence and Scale

* Business Transformation to Drive the Store Economics

* Disciplined Financial Approach

Valuation and Recommendation

Due to Covid related disruptions, the company’s revenues declined by 24% in FY21 over FY20 after growing 12% in FY20. Nonetheless, the company continued to work on its business transformation while focusing on omni channel platform. The company reduced the average store size while maintaining almost same levels of store revenues. This has resulted in offsetting margin decline from 14.2% to 13.6% in FY21. We believe the full benefits of operational changes have not yet been accounted in current profitability and would continue to improve EBITDA in coming years as well. Considering the globally known brand portfolio, growing stores, improving profitability, we have a positive view on the company. At upper band of Rs 1180, the EV/Sales come to 7.4x FY21 Sales. We recommend “Subscribe”.

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