Buy Sapphire Foods Ltd for the Target Rs 240 by Motilal Oswal Financial Services Ltd
Improved print; positive SSSG across brands
* Sapphire Foods India (SAPPHIRE) reported revenue growth of 15% YoY (highest in the last 11 quarters; in line) in 1QFY27. KFC sales grew 17% YoY with SSSG of 5% (in line). Pizza Hut (PH) posted 3% revenue growth with SSSG of 1% (in line) on a weak base of -8%. Sri Lanka maintained its strong momentum, with revenue growth of 16% YoY (+14% in LKR terms), driven by 9% LKR SSSG and healthy store expansion.
* Demand trends remained broadly unchanged sequentially. Sapphire’s initiatives helped KFC deliver healthy momentum, while PH witnessed improvements in dine-in trends. April-May remained healthy, June softened, and July demand has again turned encouraging. The company has been gradually reducing discounting (~50bp since Oct'25), while ~2% price hikes taken during 1QFY27 supported gross margins and profitability. Management expects no further price hikes as stable raw material costs and operational efficiency are expected to offset inflation.
* KFC margins remained strong despite energy cost inflation. KFC ROM expanded 120bp YoY to 16.9% (in line), supported by GM expansion of 160bp YoY. PH ROM remained under pressure at -3.6% (vs. -2.5% in 1QFY26) due to higher energy costs. Sri Lanka ROM declined 70bp YoY to 12%. At the company level, EBITDA (pre-Ind AS) increased 24% YoY to INR749m (beat), with EBITDA margin expanding 90bp YoY to 13% (beat).
* KFC is witnessing a gradual improvement in operating performance, with positive trends in both SSSG and margins, supported by Sapphire's initiatives to enhance consumer engagement. We expect improving demand trends, stronger execution, operational efficiencies and recovering unit economics to drive earnings growth ahead. Additionally, the proposed Devyani-Sapphire merger is likely to unlock scale synergies and strengthen execution across brands and geographies. We maintain our BUY rating with a TP of INR240, based on 20x Mar'28E pre-Ind AS EV/EBITDA.
Highlights from the management commentary
* The demand environment has remained broadly unchanged sequentially. Healthy KFC performance is attributed to the company’s initiatives. PH dine-in sales have improved and the overall brand has done well.
* The company generally passes on only 50-60% of RM inflation and the rest is managed by operational efficiencies. Sapphire has taken a ~2% price hike in KFC and PH each and expects no further hikes given stable RM prices.
* In smaller cities, ADS came in ~20% lower vs. metros/T1 cities; however, operating costs are materially lower. Thus, from the profitability and payback perspective, small-city stores work similar to T1-city stores.
* While 1QFY27 was challenging for Sri Lanka business, management remains confident of a gradual recovery over the next two quarters and strong performance over the long term
Valuation and view
* We increase our EBITDA estimates by 1% for FY28.
* Demand trends remained broadly unchanged sequentially. Sapphire’s initiatives helped KFC deliver healthy momentum, while PH witnessed improvements in dine-in trends. While July demand trends remain encouraging, the sustainability of improving dine-in footfalls will remain a key monitorable. The company is gradually reducing discounting (~50bp since Oct'25), with ~2% price hikes taken to support margins. Management expects no further price hikes and operational efficiencies are expected to offset inflation.
* KFC is witnessing a gradual improvement in operating performance, with both SSSG and margins trending positively. This is supported by Sapphire's initiatives to enhance consumer engagement. We expect improving demand trends, stronger execution, operational efficiencies and recovering unit economics to drive earnings growth ahead. Additionally, the proposed Devyani-Sapphire merger is likely to unlock scale synergies and strengthen execution across brands and geographies. We maintain our BUY rating with a TP of INR240, based on 20x Mar'28E pre-Ind AS EV/EBITDA.
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