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Weak quarter; pace of recovery in SSSG will be key monitorable

Sapphire’s 4QFY24 earnings print was no different vs trend seen in recent quarter – revenue inline but soft led by store additions, while scale deleverage led c.5% miss on vs our comparable EBITDA forecast. Same store sales continued to remain under pressure across brands impacted by weak demand trend and high competitive intensity (PH). From FY24 performance, KFC delivered a resilient operating performance – c.19.7% is the highest ever restaurant margin despite strong store additions and SSS decline (Westlife’s restaurant margins were down c.190bps in FY24). PH had forgettable year with 16% decline in SSS resulting in RoM closer to lows of FY21. Sapphire has upped ante on innovations & stepped up brand investments; seasonal uptick in PH in 1Q so far is better vs trend last year along with store rationalisation which should help gradually revive brand performance over medium term. Srilanka business has seen green shoots with uptick in SSS & management expects better delivery here vs FY24. While operating environment has been challenging, commentary suggests further weakness is unlikely & performance should gradually revive. We like Sapphire’s approach to go aggressive on a more resilient KFC (c.65% of sales) and be calibrated in PH, green shoots in SL also augurs well. Valuations at 20x FY26E EBITDA (preIND AS) not demanding. BUY.

* Revenue inline, weak SSS-led scale deleverage drove EBITDA miss: Consolidated sales of INR 6.3bn, up 12.7% yoy was slightly ahead of our expectation. India sales grew by 11.4% yoy, while Srilanka business continued strong momentum with sales growth of 22.3% yoy. India store count was up 19.3% while average sales/store was down by c.7% yoy – a function of muted same store sales across brands due to challenging operating environment, soft consumer sentiments and higher competition (PH). Gross margins remained healthy (largely inline with expectations) and were up 94bps/flat qoq (GM improved yoy across brands & for Srilanka too) to 68.9% (JMFe: 69%). While KFC’s operating performance was resilient, sharp deterioration in PH margins and cost inflationled impact on SL businesses resulted in 267bps/143bps yoy decline in pre-IND AS restaurant EBITDA/company EBITDA margins to 13.6%/8.6%.

* KFC relatively resilient, SL trajectory improves while PH was miss across metrics: 1) KFC India revenues were up 16.1% yoy (SSSG -3% vs Westlife’s -5%), led by store additions (+25.8% yoy). ADS was down 10.2% yoy (c.-8-9% yoy for Westlife) - a function of higher pace of store additions & muted SSS. GM improved 150bps/flattish yoy/qoq to 68.3% led by favorable input-costs environment. However, scale deleverage resulted in restaurant margins declining by 80bps yoy to 18.3%. 2) PH India business remained under pressure due to sluggish demand and higher competitive intensity; sales declined by 2.7% yoy. While store additions remained healthy (+11.5% yoy), decline in ADS remained steep at 18% yoy. Same store sales declined by 15% on soft base. GM improved 120bps yoy to 75.5%. Scale deleverage coupled with additional marketing investments resulted in EBITDA loss of INR 32 mn. Excluding the additional marketing spend, the brand broke even at the ROM level. 3) Srilanka sales saw growth of 22.3% yoy (ADS +15.4% yoy). CC growth was 8% (SSSG improved to 4%). Though greenshoots were seen, store operating costs inflation was a drag on the profitability.

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