Buy Sapphire Foods Ltd for the Target Rs 300 by Emkay Global Financial Services Ltd
We retain BUY on Sapphire and TP of Rs300 (22x Jun-28E EBITDA), owing to sustained momentum in KFC (5% SSG), recovery in PH, and attractive valuation (25-30% discount vs QSR peers). Sapphire’s 1Q revenue/EBITDA were in line and saw healthy ~15%/37% growth (vs ~8% topline growth in FY26), signaling a strong start to FY27. A major part of this momentum is being driven by the right strategy finally in place for the on-premise channel, albeit partly also by improved demand. KFC is now offering everyday value (Krisper chicken burger meal at Rs99) for new recruitments and abundant value (BOGO on Hot & Crispy buckets) on select days across markets for driving repeat consumption. For PH India, SSG (+1%) has turned positive after 5 quarters, though the outlook remains cautious. Sri Lanka maintained strong momentum, with 9% SSG, but margins were impacted by cost inflation. Sapphire 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. Prolonged slowdown and lengthy merger timeline with DEVYANI have been a drag for SAPPHIRE’s stock performance, but improving growth profile and potential merger synergies are likely to drive significant rerating
Another quarter of healthy SSG in KFC/SL; PH SSG turns positive
KFC clocked robust yoy revenue growth of ~17% in 1Q, led by SSG at 5% (highest in last 15 quarters) and healthy store adds. Encouragingly, KFC restaurant margin improved by 120bps yoy to 16.9%, led by 160bps expansion in gross margin (~2% price hikes and lower discounts), partially offset by higher energy cost. Pizza Hut (PH) topline growth turned positive (3% yoy growth) after 5 quarters, led by positive SSG of 1%. However, restaurant margins fell by ~110bps yoy due to higher gas cost, partially offset by higher gross margin (up by ~80bps yoy; price hikes: 2-3%). PH continues to exhibit better performance in Tamil Nadu (Sapphire’s exclusive territory), led by additional marketing investments and dine-in offers driving transaction growth. Sri Lanka (SL) reported strong ~16% revenue growth, led by 9% SSG (in local currency terms). SL gross margin (GM) expanded by ~220bps, however, restaurant margin contracted by ~70bps, due to a hike in minimum wages and higher energy costs. At the overall consolidated level, 1Q has been a strong quarter for Sapphire, with ~37% yoy growth in adj EBITDA on the back of sustained growth in KFC and optimization of HO cost (down by 50bps).
Strategic initiatives yielding strong benefits for KFC; PH playbook in place
KFC’s growth is driven by a strategic two-pronged approach, with everyday value (Krisper chicken burger meal at Rs99) for new recruitments and abundant value (BOGO on Hot & Crispy buckets) for driving repeat consumption. The initiative has led to improvement in growth of dine-in at ~21% yoy (vs 17% overall KFC growth). Further, PH India saw SSG turnaround (+1%) after several quarters of decline, led by an enhanced dine-in experience/value launches, new product innovations, and increased marketing investments. A relatively strong performance in Sapphire’s exclusive Tamil Nadu market also validates management strategy.
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