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We retain BUY on Sapphire, while cutting our TP by ~13% to Rs260 (20 Sep28E EBITDA), owing to a ~5% cut in the TP multiple and 5-12% cut in EBITDA estimates on account of near-term inflation. Sapphire delivered an all-around EBITDA beat of ~8% in 2Q, led by ~32% growth in KFC EBITDA (vs expectation of ~20%). PH India is seeing strong turnaround, with 5% SSG in 2Q while KFC top-line growth was strong at 26%, though partly aided (400-500bps) by festive shift. Management focus remains on growth, as near-term margin is likely to be impacted by inflation across food, employee wages, and utilities (together forming ~50% of sales), resulting in a 100-150bps cut in annual EBITDA margin estimates for FY27-29. KFC is gaining new customers with everyday value (Krisper chicken burger meal at Rs99) and driving repeat consumption with abundant value (BOGO on Hot & Crispy buckets) on select days. Management reiterated its guidance of opening 60–80 KFC stores annually and high single-digit openings in PH Sri Lanka, while maintaining a cautious stance on the PH India expansion. Given its restrained margin commentary, the stock is expected to remain rangebound; we though maintain BUY, on improving top-line growth and potential merger synergies.

Strong performance led by KFC; inflationary pressure could weigh on margins

KFC clocked a robust yoy revenue growth of ~26% in 2Q (the highest since 16 quarters), led by strong SSG at ~14% (near-double-digit SSG adjusted for festive shift) and healthy store adds. Encouragingly, KFC restaurant margin improved by 70bps yoy to 14.5%, led by 50bps expansion in gross margin (GM). However, management highlighted inflationary pressures across raw material, wages, and utilities. Management emphasized its strategy of prioritizing growth over margins and adopting a cautious approach toward price hikes. Pizza Hut (PH) reported another quarter of positive topline growth, with growth improving to 7% in 2Q (vs 3% in 1Q), led by 5% SSG. However, restaurant margins fell by ~100bps yoy due to higher gas cost, partially offset by higher GM (up by ~190bps yoy; price hikes of 2-3% taken at 1Q-end). Sri Lanka (SL) topline growth moderated to ~8% in 2Q (vs recent trend of 16-23%). SL GM was largely flat at ~63%, though restaurant margin contracted by ~290bps due to a hike in minimum wages and higher energy costs. At the overall consolidated level, 2Q has been a strong quarter for Sapphire, with ~39% yoy growth in adj EBITDA on the back of robust growth in KFC, improved momentum in PH (India), and optimization of HO cost (down by ~90bps).

Value-led offerings supporting transaction growth

KFC delivered a strong performance in 2Q, with adjusted SSG near double digits. Over 50% of the SSSG was driven by transaction growth, supported by value-led offerings such as Everyday Value at Rs99, the Rs149 ‘Thalaiva’ meal in Tamil Nadu, and BOGO offers on chicken buckets. Among channels, DITA SSG was higher than Delivery, backed by double-digit transaction growth. Management indicated that 60–70% of customers recruited through the Rs99/Rs149 offers were making repeat purchases, with APC increasing on subsequent visits.

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