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In line with peers, Sapphire reported weak SSG print at 0%/-20% for KFC/PH that drove a 7% EBITDA miss on estimates. Near-term commentary was muted, on shift of veg-consumption days to Q3 and sporting events in the base as well— a negative read-through for peers, in our view. Sapphire remains confident of 20-25% EBITDA CAGR in KFC over FY23-26 and revival efforts are under way for PH, with product innovation, store refurbishments and import of kitchen management solution Dragon Tail from Yum! Brands (USA). Company also expects gradual normalization of the spike in competitive intensity with low RoIs for smaller pizza-franchisees. Sri-Lanka is seeing encouraging recovery from the macro-led trough. We clip FY24-26E EBITDA by 7-11%, on subdued demand trend. Stock has seen a 1M correction of ~10%. We maintain BUY, with TP pruned to Rs1,550/share, on significant valuation gap of 30-35% with peers, despite similar performance and improving growth prospects in Sri-Lanka.

Sapphire Foods: Financial Snapshot (Consolidated)

KFC sustains ~20% growth; weak trend persists in the pizza category: KFC’s revenue grew 19%, led by 27% growth in store-count and a flat SSG, while PH sales declined 6% owing to 25% growth in store-count and a 20% dip in SSG. KFC was helped by a weak competition, snacker traction, value combos and launch of ‘Double down burger’. Efforts for digitization continued, with Kiosks implemented at 115 KFC outlets. PH introduced large pizzas in Gujarat/Kerala, with a 1+1 deal. For SL, demand improved ahead of expectations and better INR conversion aided in delivering 29% growth in Q2. Store additions were healthy, with Q2 seeing 36 net adds, of which KFC’s contribution was dominant at 23 additions; PH India/SL saw 9/4 adds. Encouragingly, gross margin gained 220bps, led by improving input cost structure in PH/KFC. However, store margins declined by 60bps to 16.2%, due to a 750bps decline in PH India, while KFC/SL saw 120/30bps gain. Overall EBITDA at 10.6% dipped by 50bps.

Earnings-call KTAs: 1) Despite a typically muted ‘Shravan’/‘Adhik mass’ period in Q2, KFC saw flat SSG, as Shrad/Navratri shifted to Q3; demand environment remains subdued due to sporting events in the base and incremental veg-eating days in Q3. 2) RM inflation cooled on YoY basis, leading to GM gains; remained stable sequentially. 3) Guidance maintained to double KFC store count over 3-4 years, but PH store-count now expected to double in 4 years (vs. in 3-4 years earlier). 4) Product innovation, improved marketing, Dragon-tail integration with aggregators, and capex optimization remain key focus areas for PH revival. Sapphire is the only brand in India to have this kitchen solution. 5) SL business witnessed tailwinds with country inflation back to a single digit, currency stability and lower input cost; Utility inflation on the other hand increased. 6) Mgmt implemented Dragon Tail Tech (DTT) in PH to allow faster servicing of hot pizzas and rating improvement with aggregators. The DTT cost will be based on transaction volume; not one-time. 7) Adoption of loyalty rewards, in line with Yum! Brands (USA), remains the key medium-term agenda. 8) Per its strategy, Sapphire aims to keep store margin at ~20% for KFC and invest incremental margin towards new-store openings.

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