IGI Logo

Sapphire Foods’ Q3 print was in-line with our estimates; consol. revenue/EBITDA grew at 11.6%/4.3%, while PAT declined 69.9%. KFC India revenue grew at 16%, yet SSG declines 2% PH revenue/SSG declined by 4.3%/19.0%. However Sri Lanka revenues/SSG grew 22%/1.0% led by stability in economy. In Q3 SF added 25/8 stores under KFC/PH format (total stores count KFC/PH/Sri Lanka at 406/325/125). SF’s gross margin inched up to 68.9% (+180bp), with KFC at 68.4% (+190bp) and PH at 75.7% (+130bp). However higher employee cost (+19.5%) and other expenses (+18.7%) ensued post-IndAS EBITDA margins at 18.3% (-128bp). Management priority remain to rejuvenate brands through (1)  seamless customer experience using digital kiosks,  (2) operational initiative (Dragoon tail), (3) building consumption occasions, and (4) innovation supported by marketing investment. Though demand remain softer, management maintained store expansion guidance. With lower 9MFY24 performance we cut our earnings and change rating to ADD, with a revised DCF-based TP Rs1,500 (implying EV/EBITDA of 12.7x avg. FY25E/FY25E EPS).

Persistent weakness in Pizza demand coupled with local competition cut PH SSSG by 19.0%

SF reported consol. revenue at Rs6.7bn (+11.6%) YoY driven by persistent weakness in Pizza demand and local competition. With -2.0% SSSG, KFC India revenue grew at +16%, while PH saw 19% decline in SSSG and 4.3% decline in revenue. However Sri Lanka revenues/SSG grew 22%/1.0% led by stability in economy. SF added 25/8 stores under KFC/PH format (total stores count KFC/PH/Sri Lanka at 406/325/125) taking store count to 850 in Q3. Management attributed weak revenues and SSSG to, (1) intense local competition, (2) negative operating leverage due to higher scale of store addition, (3) cut in ADS for KFC/PH by 8.1%/22.5%, and (4) rising cloud kitchens/delivery aggregator. That said, SF upped media spends and also launched value meal/Snackers priced at Rs149/Rs99+. SF’s priority remained to rejuvenate brands through: (1) seamless customer experience using digital kiosks, (2) operational initiative (Dragoon tail), (3) building consumption occasions, and (4) innovation supported by marketing investments. Though demand remain softer management maintained store expansion guidance and on track to double store count for KFC ~3 years (base Dec’21).          

Gross margins inched up to 68.9% (+180bp), EBITDA margin 18.3% (-128bp)

SF’s gross margin inched up to 68.9% (+180bp), with KFC at 68.4% (+190bp) and PH at 75.7% (+130bp). However higher employee cost (+19.5%) and other expenses (+18.7%) ensued post-IndAS EBITDA margins at 18.3% (-128bp). Nonetheless PAT declined by 69.9% to Rs98.0mn on the back of higher depreciation and interest cost by 28.4%/21.3% respectively. Management guided for lowering input inflation coupled with fast track store expansion for KFC franchise indicate further room for margin expansion for the company.

Valuation and risks

As argued in our recent QSR Thematic report, with strong management, besides sharp improvement in its execution capabilities we expect turnaround in SF’s performance. However weak consumption demand, incremental competition in chicken QSR, and lower discretionary spending pose short term challenges in our view. We reckon the management has reworked store expansion strategy and also launched variety of lunch and limited period offers could ensure margin trajectory. With lower than 9MFY24 performance, we cut earnings for FY24E/ FY25E by 6.5%/5.0% and change out rating to ADD with a revised DCF-based TP of Rs1,500 (implying EV/EBITDA of 12.7x FY25E). Key risks: prolonged weakness in demand, rising inflation in key RM/PM and severe competition in chicken portfolio from organized/ unorganized players.

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331