Buy Sapphire Foods Ltd for the Target Rs 245 by Motilal Oswal Financial Services Ltd
Beat across heads; cautious commentary on margins
* Sapphire Foods India (SAPPHIRE) reported revenue growth of 20% YoY (highest in the last 12 quarters; in line) in 2QFY27. KFC revenue grew 26% YoY, with 14% SSSG (beat). Underlying SSSG was at high-single-digit after adjusting for the shift in Navratri season to 3QFY27. Pizza Hut (PH) revenue grew 7% YoY, with 5% SSSG (in line) on a weak base of -12% in 2QFY26, while Sri Lanka revenue grew 9% in LKR terms, with 5% SSSG.
* Both KFC and PH have seen a pickup in footfall, well supported by aggressive value offers and higher marketing spends. Management expects FY27 marketing spends to increase 50-100bp for KFC and 100- 150bp for PH vs FY26. Price hikes of 2-3% were taken in April-May, with a further 2-3% hike in PH toward the end of 1QFY27.
* Given the rising cost inflation (energy, input material), restaurant margins faced higher sequential pressure. Management remains cautious on near-term margins, as cost inflation is expected to further rise in 3QFY27. KFC restaurant’s EBITDA margin expanded 70bp YoY to 14.5% (16.9% in 1QFY27), supported by 50bp gross margin expansion. PH restaurant’s EBITDA margin contracted to -2.8% from -1.8% in 2QFY26, while Sri Lanka’s margin contracted 290bp YoY to 12.5% (2QFY26: 15.4%). Consolidated adjusted EBITDA rose 39% YoY to INR624m (beat), with margin expanding 90bp to 7.1%.
* Management remains focused on transaction growth and customer acquisition, limiting further price hikes to protect demand. Improving SSSG, operating efficiencies, and better unit economics should support earnings growth. Additionally, the proposed Devyani-Sapphire merger is likely to unlock scale synergies and strengthen execution across brands and geographies. We reiterate our BUY rating with a TP of INR245, based on 20x Sep'28E pre-Ind AS EV/EBITDA
Beat on performance; positive SSSG across all brands
* Strong growth in KFC; improvement in PH: Consolidated sales grew 20% YoY (highest in the last 12 quarters) to INR8.9b (est. INR8.5b). KFC revenue grew 26% YoY (beat) to INR6.1b, with SSSG of 14%. Adjusted for Navratri, SSSG was close to double digits. KFC ADS increased 10% YoY to INR113k. PH revenue grew 7% YoY (in line) to INR1.4b, with SSSG of 5% (vs. -12% base). PH’s same store transaction growth was in double digit, including positive SSTG in Dine in and Takeaway. PH ADS rose 5% YoY to INR44k. Sri Lanka sales grew 8% YoY (+9% in LKR terms) to INR1.4b, with SSSG of 5% in LKR terms. ADS remained flat YoY at INR109k
* Store additions remained in line: Store base grew 9% YoY to 1,086 stores. The company added a net 12 stores during the quarter (15 KFC, 1 in Sri Lanka and closed 4 in PH).
* Sequential contraction in margins: Consolidated gross profit grew 20% YoY to INR6.1b (est. INR5.8b). Consolidated GM expanded 50bp YoY, while contracted 50bp YoY to 68.3% (est. 67.6%). It was impacted by higher food inflation, higher minimum wages, and elevated utility costs, particularly gas and electricity. Reported EBITDA margin expanded 50bp YoY to 14.3% (est. 13.5%). EBITDA grew 24% YoY to INR1.3b (est. INR1.1b). Consolidated RoM (Pre Ind-AS) expanded 10bp YoY, while contracted 150bp YoY to 11.5%. EBITDA Pre-Ind AS expanded 100bp YoY, while contracted 140bp YoY to 7% (est. 6.1%).
* Loss before tax stood at 6m vs loss of 166m in 2QFY26.
Valuation and view
* We cut our EBITDA estimates by 5% for FY27 and 4% for FY28, given the inflationary pressure.
* Both KFC and PH have seen a pickup in footfall, well supported by aggressive value offers and higher marketing spends. Management expects FY27 marketing spends to increase 50-100bp for KFC and 100-150bp for PH vs FY26.
* Management remains focused on transaction growth and customer acquisition, limiting further price hikes to protect demand. Improving SSSG, operating efficiencies and better unit economics should support earnings growth. Additionally, the proposed Devyani-Sapphire merger is likely to unlock scale synergies and strengthen execution across brands and geographies. We reiterate our BUY rating with a TP of INR245, based on 20x Sep'28E pre-Ind AS EV/EBITDA.
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