Buy Sapphire Foods India Ltd For Target Rs. 365 By JM Financial Services
Operational performance weak; elongated recovery ahead
Sapphire’s revenue grew 13% YoY (in line) led by 12%/5%/31% growth in KFC/Pizza Hut (PH)/Sri Lanka business. KFC’s SSSG continues to recover (QoQ) but is still negative (-1%) while PH reported 1% SSSG on weak base. Store openings remain underwhelming with addition of 6 stores in KFC and closure of 5 stores in PH. The management couldn’t undertake mass advertising in 4Q in PH due to difference of opinion with Devyani, leading to lower footfalls and weak SSTG in PH. This coupled with weak operating leverage and high delivery mix in KFC/ PH dragged EBITDA margin (~140bps contraction YoY to 14.9%) in 4Q along with ~70bps YoY contraction in gross margin due to increase in value offerings. Performance remained resilient in Sri Lanka, with 16% SSSG and 27% ADS growth. The management maintains its store opening guidance of 70-80 stores in KFC with extreme caution in Pizza Hut limiting store openings to a maximum of 20-25 stores. It highlighted that demand trends remain neutral with SSSG flat in April. Going ahead, the focus will be to drive SSSG led by improvement in SSTG driven by higher value offerings in KFC/PH. We cut our Pre Ind AS EBITDA estimates by 14%/10% for FY26/27 due to the weak demand environment and elongated recovery in SSSG and ADS in KFC/PH. While near-term demand remains challenging, the company’s core fundamentals are intact. We maintain our BUY rating with a revised TP of INR 365 (earlier INR 400) as the valuations remains attractive and still offers upside of ~18%, based on 25x EV/EBITDA Mar’27.
* Revenue in line, margins disappoint; lower depreciation leads to PAT beat: Consolidated revenue grew 13% YoY to INR 7.1bn (in line with estimate). EBITDA grew 3 % YoY to INR 1.1bn (4% below estimate) as EBITDA margin contracted ~140bps YoY to 14.9% (JMFe: 15.4%) led by gross margin (GM) contraction of 70bps YoY to 68.2% (JMfe: 68.4%) and higher employee/other expenses by 20/50 bps YoY due to negative leverage. APAT declined 27% YoY to INR 18mn (JMFe: loss of INR 18mn) despite 2% YoY decline in depreciation expense (17% lower vs. JMFe) due to 8% YoY increase in interest partially offset by 5% YoY higher other income. Pre-Ind AS EBITDA was down 7% YoY to INR 508mn as margin contracted 150bps YoY to 7.1%. Consolidated brand EBITDA stood at INR 856mn, down 1% YoY as brand margin contracted 160bps YoY to 12%.
* KFC/PH remains impacted; SL business improvement sustained: KFC’s revenue grew 12% YoY to INR 4.8bn. It added 6 stores QoQ (502 stores). EBITDA declined 6% YoY to INR 753mn as brand EBITDA margin contracted ~300bps YoY to 15.7% (JMFe: 16%) on ~30 bps YoY gross margin (GM) contraction to 68% and negative leverage. Pizza Hut’s (PH) revenue grew 5% YoY (4% below JMFe) to INR 1.2bn due to closure of 5 stores (334 stores). EBITDA margin contracted ~190bps YoY to -4.6% (JMFe: 0%) led by GM contraction by 70bps YoY to 74.8%. Sri Lanka (SL) revenue grew 31% YoY to INR 1.1bn (2% above JMFe). It added one store QoQ (127 stores). EBITDA grew 57% YoY to INR 158mn as brand contribution margin grew 250bps YoY to 14.8% (JMFe: 15.5%) despite GM contracting by ~130bps YoY to 60.6%. KFC/PH/SL’s SSSGs were at -1/+1/+16%. ADS of KFC declined by 5% YoY while that of Pizza Hut/SL increased by 2%/27% YoY.
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SEBI Registration Number is INM000010361
