Buy Sapphire Foods Ltd For Target Rs.415 by Motilal Oswal Financial Services Ltd
Steady improvement; play on urban recovery
* Sapphire Foods India (SAPPHIRE) reported revenue growth of 14% YoY (in line) in 3QFY25, driven by a 13% YoY increase in store count. KFC revenue grew 12% YoY, supported by 22% store expansion, though offset by a 3% decline in same-store sales (est. -3.5%). Pizza Hut (PH) revenue rose 10% YoY, with 6% new store additions and 5% SSSG (est. 4%). Sri Lanka posted strong revenue growth of 30% YoY (+15% in LKR), driven by 14% LKR SSSG and 5% store growth.
* Gross margin contracted 30bp YoY and 20bp QoQ to 68.6% (est. 68.8%). KFC’s ROM was down 190bp YoY/up 170bp QoQ at 18.2%, impacted by operating deleverage. PH’s ROM expanded 10bp YoY to 4.7%, and Sri Lanka’s ROM improved 360bp YoY to 17.8%. Consolidated restaurant EBITDA pre-Ind-AS grew 9% YoY to INR1,164m (in line), though margins declined 60bp YoY to 15.4% (13.8% in 2QFY25). Pre-Ind-AS EBITDA rose 12% YoY to INR 811m, with a marginal 10bp contraction in margin to 10.7% (8.5% in 2QFY25).
* Underlying recovery was partial, while growth improvement was aided by a favorable base. Dine-in continued to underperform delivery. The company is focusing on innovation, customer engagement, and value offerings to drive recovery. Also, government measures for the middle class in the budget could support demand revival. However, ADS and SSSG recovery remain key monitorables, as they are critical to improving unit economics. We reiterate our BUY rating on the stock with a TP of INR415 (30x Dec’26 pre-IND-AS EV/EBITDA).
In-line revenue; store addition continues
* Double-digit revenue growth across business on favorable base: Cons. sales grew 14% YoY to INR7.6b (inline). KFC revenue grew 12% YoY and same-store sales declined 3%. PH revenue grew 10% YoY with SSSG 5%. ADS of KFC was down 8% YoY at INR115k, while PH ADS improved 7% YoY to INR48k. Sri Lanka sales grew 30% YoY (+15% in LKR term) to INR1,159m and SSSG was 14%. ADS grew 27% YoY to INR103k.
* Store addition continues: Store growth was 13% YoY in 3Q to 963 stores. It added net 54 stores (35 KFC, 16 PH, 5 stores in Sri Lanka and closed 2 stores in Maldives).
* Marginal improvement in margins: Consolidated gross profit grew 13% YoY to INR5.2b. Consolidated GM contracted 30bp YoY and 20bp QoQ to 68.8%. Reported EBITDA improved 15% YoY to INR1.4b (est. INR1.3b) and margin expanded 20bp YoY and 240bp QoQ to 18.5% (est. 17.2%). EBITDA pre-IndAS rose 12% YoY and margins were flat YoY/up 220bp QoQ at 10.7%. Higher deprecation (up 15%) and lower other income missed PBT expectation. PBT grew 20% YoY to INR168m (est. INR238m) with margin of 2.2%. APAT grew 30% YoY to INR127m at 1.7% margin.
* In 9MFY25, net sales/EBITDA grew by 11%/5%, while APAT declined 48% YoY.
Highlights from the management commentary
* Competitive intensity across the QSR industry remains largely unchanged. The revision of tax slabs in the budget is a positive development for middle-class consumers. While the impact may not be immediate, it will be important to monitor how it influences consumer spending over time.
* Delivery continues to outperform for both KFC and PH. However, the company expects dine-in sales to improve in the medium term, supported by product innovations and customer engagement initiatives.
* The company estimates that KFC SSSG needs to exceed 5% for restaurant margins to expand beyond 18%. At 5% SSSG, margins are expected to remain stable at 18%.
* For PH, at ADS of INR47-48k, margins will remain stable. At ADS of INR50k, margins will grow to high single digits. To achieve double-digit margins, the company will need to reach an ADS target of INR55k.
Valuation and view
* There are no material changes to our revenue/EBITDA estimates for FY25/FY26.
* KFC’s store addition will sustain in FY25, but PH’s store addition will be muted as management aimsto fix ADS and profitability snags for the current network.
* Underlying recovery was partial, while growth improvement was aided by a favorable base. Dine-in continued to underperform delivery. The company is focusing on innovation, customer engagement, and value offerings to drive recovery. Also, government measures for the middle class in the budget could support demand revival. However, ADS and SSSG recovery remain key monitorables, as they are critical to improving unit economics. The stock trades at 31x and 25x pre-Ind-AS EV/EBITDA on FY25E and FY26E, respectively. We reiterate our BUY rating on the stock with a TP of INR415 (30x Dec’26 pre-INDAS EV/EBITDA).
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