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Sustained SSSG momentum

Sapphire Foods (SAPPHIRE IN) reported 4% same store sales growth (SSSG) in Q4, with KFC remaining the key bright spot, aided by resilient dine-in & takeaway channels and stabilized delivery mix at ~43%. Global quick service restaurants (QSR) chains like KFC are better positioned to gain market share over standalone firms amid LPG disruption and inflationary pressures, given competitive value meal pricing. We expect KFC SSG of 5–6% in FY27E, supported by low base. However, Pizza Hut SSG decline and weak international profitability continue to weigh on consolidated earnings. Synergistic benefits from Devyani International (DEVYANI IN, Buy, CMP: INR 115, TP: INR 165) and operating leverage are set to drive a 232bp margin expansion to 2.1% in the next two years. We retain Buy with a lower TP of INR 260. KFC is trades at 25x FY28E EV/EBITDA and re-rating is contingent on sustained SSG and margin delivery.

KFC remains a silver lining: The company reported healthy SSSG of 4% in Q4, led by improvement in the dine-in and takeaway channels. Delivery mix, particularly for KFC, appears to have stabilized at ~43%, we do not expect a meaningful jump from the current levels. However, we believe amid LPG-related issues and recent near-term disruptions, global QSR chains are well placed to gain market share vs smaller standalone firms. First, in the current inflationary environment, pricing at global QSR companies has become significantly more competitive in the past three years via value meals and promotional offers, positioning them favorably vs peers. Second, the QSR segment has demonstrated resilience, with minimal impact from food inflation and limited negative effect from the recent West Asia crisis. Supported by these triggers and aided by low base, we expect KFC SSSG in the range of 5% to 6% in FY27E, largely led by stronger dine-in growth (35% contribution).

Pizza Hut – continued pressure on performance: Other businesses remain cause for concern, as Pizza Hut SSG continues to decline, although respite was visible this quarter. Losses in the Pizza Hut business and lower profitability in international operations continue to weigh on overall earnings.

Retain Buy with a lower TP of INR 260: Synergistic benefits with Devyani International are set to accrue via lower cost and incremental operational efficiency. We expect margin to improve by 232bp to 2.1% in the next two years, driven by operating leverage and stronger SSSG. KFC is currently trading at 25x FY28E EV/EBITDA; a rerating in valuation multiples could be triggered by better SSSG and margin improvement. However, risks persist in the other businesses, particularly Pizza Hut and international operations, which, if profitability does not improve, could continue to drag consolidated earnings. After factoring in Q4, we raise our revenue by 3% and EPS by 22% for FY28E. We retain Buy and expect sustained SSSG momentum to support valuation in the upcoming quarters. We lower our TP of INR 260 from INR 300 as we value KFC on 22x (from 28x) FY28E EV/EBITDA, Pizza Hut on 1x (from 2x) and Sri Lanka business on 1x (from 2x). We introduce FY29 estimates.

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