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All-round performance

Q3 growth for Sapphire Foods (SAPPHIRE IN) was in-line, led by KFC (better dine-in share QoQ), Pizza Hut (PH; low base) and Sri Lankan operations (continued momentum). EBITDA margin rose 94bps, on cost cut. Expect store addition at KFC to be healthy. In Q3, PH losses pared to INR 1mn (almost on the verge of a turnaround). Increased A&P spend should support traction in dine-in. Our EBITDA and EPS estimates remain broadly unchanged. We roll over to FY27E with SoTP-based TP retained at INR 390. We upgrade SAPPHIRE to Buy from Accumulate. Any disruption in same store sales growth (SSSG) is key risk to our call.

KFC – Drop in SSS arrested:

KFC posted a QoQ recovery in Q3. The drop in same store sales (SSS) was at 3% YoY (8% dip in Q2) led by: a) net store addition at 35, and b) festivalseason quarter leading to higher demand. The recovery may have been better had the base been low. Channel sales-wise, the share of dine-in rose by 100bps QoQ. However, channel sales dropped by 1% YoY on high base (43% share a year ago). Healthy dine-in share augurs well for restaurant margin. Gross margin for KFC was stable at 68.2% and ADS improved by 4% QoQ (though declined 8% YoY). SAPPHIRE will continue with 70- 80 net store additions amid lower penetration of fried chicken category versus other QSR chains. Thus, store growth will be healthy versus peers’ QSR categories. We retain our positive stance on recovery and expect 3.0% SSSG each in FY26E/27E.

PH performs on a low base:

SSSG growth for PH was 5.0% YoY, on a mix of low base last year (SSS dip of 19%) and retained ADS YoY. Restaurant margins improved ~60bps QoQ, led by lower staff cost. SAPPHIRE is keen to ramp up its A&P spends on PH to cement the brand’s recall and increase store footfall to support ADS. PH has added 16 stores in Q3 and expects to add 25 stores each in FY26E/27E. EBITDA (pre-Ind As) losses have reduced to mere INR 1 mn. Healthy SSSG, improved ADS and prudent A&P spends are key to a turnaround in PH

Margin supported by overall recovery:

EBITDA margin was 94bps above our estimates, led by curtailed employee expenses and other expenses. This was commendable given that Q3 witnessed the festival season and store network expansion. At KFC, SAPPHIRE will focus on: a) three-tier structure in value meals, b) maintaining store expansion and c) enhancing the relevance of the fried chicken category. And at PH, the focus will be on driving footfall by investing in A&P. Business momentum in Sri Lanka continued – Healthy 14.0% YoY SSSG and 411bps YoY gain in EBITDA margin (pre-IndAS). Revenue growth may be led by a mix of store addition and SSSG. For PH, expect EBITDA margin (pre-IndAS) at 1% each in FY26E/27E and for KFC 14-15%, respectively.

Upgrade to Buy; TP maintained at INR 390:

SAPPHIRE offers a well-balanced opportunity in the QSR space on: a) store addition-led growth at KFC, b) recovery in PH and c) robust momentum at Sri Lankan operations. So, we upgrade SAPPHIRE to Buy from Accumulate. We largely retain EBITDA/EPS estimates as higher A&P spends at PH will be balanced by SL/KFC performance. Our TP is unchanged at INR 390 as we value KFC at 34x EV/EBITDA (pre-IndAS), PH at 22x EV/EBITDA (pre-IndAS) and Sri Lankan operations at 2x FY27E EV/EBITDA (pre-IndAS).

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