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We maintain BUY on Sapphire with an unchanged TP of Rs300, supported by a step-up in normalized SSG to 6% in Q4, after remaining in flat to negative zone for 11 straight quarters. The momentum has sustained in Q1TD as well, aided by an improved recruitment and frequency strategy, with Krisper Meal at Rs99 and BOGO bucket offers in select markets on specific days. Despite higher promotional and ad spends, KFC brand margins notably improved ~100bps, likely helped by a 1.5-2.0% price hike and support from vendors. However, margins might face headwinds from a likely increase in fuel costs and a potential withdrawal of vendor support, which might have a combined margin impact of ~100bps. PH India continues to struggle, while PH Sri-Lanka delivered another resilient quarter with ~15% EBITDA growth. Sapphire incurred capex of Rs3.2bn toward the opening of 80 stores (largely KFC) and expects a similar run-rate to continue going ahead as well.

KFC sees a strong SSG recovery; SL continues its healthy growth trajectory

KFC saw robust YoY revenue growth of 14.6% in Q4, led by SSG of 4% (6% ex-Chaitra Navratri; highest in the last 14 quarters) and healthy store additions. Encouragingly, KFC restaurant EBITDA margins improved 110bps YoY to 16.8%, led by a 70bps expansion in gross margin (1.5-2% price hikes and vendor support for value offering) and operating leverage. Pizza Hut (PH) continued its weak revenue performance with a YoY decline of ~6%, owing to a 7% dip in SSG. However, in Tamil Nadu (Sapphire’s exclusive territory), the brand continues to exhibit better performance, delivering double-digit delta on both SSG and EBITDA vs other territories. Sri Lanka (SL) reported strong 16% revenue growth, led by 11% SSG (in local currency terms). SL gross margin (GM) expanded by ~290bps, led by reduced discounts and price hikes, but restaurant EBITDA margin contracted by ~20bps, due to a significant hike in minimum wages. Overall, at the consol level, Q4 has been the best quarter over the last 12 quarters in terms of SSG and Adj EBITDA growth (~20% YoY growth) on the back of strong new consumer recruitment by KFC and continued strong performance in SL, despite supply-side challenges.

Strategic initiatives yielding strong initial benefits for KFC

KFC’s growth was driven by the management’s strategic two-pronged customer recruitment approach, featuring a Rs99 Krisper Chicken Burger Meal in the evolving chicken market of the North and West, and a Hot & Crispy buy-one-get-one (BOGO) offer in the South, both limited to dine-in and takeaway. The management emphasized that these are structural value initiatives, not short-term promotions. The Rs99 offer has been scaled from 150 stores to the entire network (ex-TN) and has been vendor-supported, helping protect GM. The management expects a potential 50-70bps GM impact if the support is withdrawn. While the BOGO offer is margin-dilutive, its selective offering (once a month) and strong throughput help offset the impact, resulting in no material EBITDA dilution. Management also highlighted an increased focus on its innovation strategy this year, launching KFC’s global ‘Dunked’ saucy range and KFC ‘shawowrma’, both of which have seen strong initial traction.

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