Buy Sapphire Foods Ltd for the Target Rs. 400 by Motilal Oswal Financial Services Ltd
Subdued performance but in line with expectation
* Sapphire Foods India (SAPPHIRE) reported revenue growth of 13% YoY (in line) in 4QFY25, driven by a 10% YoY increase in store count. KFC revenue grew 12% YoY, supported by 17% store expansion, though offset by a 1% decline in same-store sales (est. +1%). Pizza Hut (PH) revenue rose 5% YoY, with 5% YoY new store additions and 1% SSSG (est. 6%). Sri Lanka posted strong revenue growth of 31% YoY (+19% in LKR), driven by 16% LKR SSSG and 6% store growth.
* Gross margin contracted 70bp YoY and 40bp QoQ to 68.2% (est. 67.7%). KFC’s ROM was down 300bp YoY/250bp QoQ at 15.7%, impacted by lower ADS (down 5% YoY to INR108k), a higher mix of delivery orders, and operating deleverage. PH’s ROM contracted 190bp YoY/930bp QoQ to - 4.6%. Margins are at an all-time low (excluding Covid period). Sri Lanka’s ROM improved 250bp YoY to 14.8%. Consolidated restaurant EBITDA preInd-AS declined 2% YoY to INR853m (miss), and margins contracted 180bp YoY to 12% (15.5% in 3QFY25). Pre-Ind-AS EBITDA was down 7% YoY at INR508m, with a 150bp contraction in margin to 7.1% (10.7% in 3QFY25).
* The company continues to face challenges in unit economics, with dine-in seeing more pressure than delivery. To drive recovery, the focus remains on product innovation, customer engagement, and value-led offerings. However, improvement in ADS and SSSG will be key monitorables, as they are essential for restoring unit-level profitability. The store expansion spree is expected to slow down in FY26 (mainly in PH) to fix profitability metrics. We reiterate our BUY rating on the stock with a TP of INR400 (30x Mar’27E pre-IND-AS EV/EBITDA).
Operationally in line; moderate store addition
* In-line revenue growth: Cons. sales grew 13% YoY to INR7.1b (in line). KFC revenue grew 12% YoY and same-store sales declined 1%. PH revenue grew 5% YoY with SSSG of 1%. ADS of KFC was down 5% YoY at INR108k, while PH ADS inched up 2% YoY to INR42k. Sri Lanka sales grew 31% YoY (+19% in LKR term) to INR1,066m and SSSG was 16%. ADS grew 27% YoY to INR95k.
* Moderate store addition: Store count increased by 10% YoY in 4Q to 963. It added net zero stores during the quarter (added 6 KFC stores and 1 store in Sri Lanka and closed 5 PH stores and 2 stores in Maldives).
* Contraction in margins: Consolidated gross profit grew 11% YoY to INR4.8b (est. INR4.8b). GM contracted 70bp YoY to 68.2%. Reported EBITDA grew 3% YoY to INR1.1b (in line), while margins contracted 140bp YoY and 280bp QoQ to 14.9% (est. 15.2%). Consolidated ROM (Pre Ind-AS) decreased 180bp YoY and 350bp QoQ to 12.0%. EBITDA Pre-Ind AS contracted 150bp YoY and 360bp QoQ to 7.1%. PBT was up 434% YoY at INR45m (est. of INR195mn) with margin of 0.6%. APAT was up 189% YoY at INR59m (est. INR139m).
* In FY25, net sales/EBITDA grew by 11%/3%, while APAT declined 38% YoY.
Highlights from the management commentary
* The demand situation remains neutral, showing no significant improvement or deterioration compared to the last 3-4 quarters. Competitive pressure has intensified, but efforts are underway to drive growth.
* The cash balance declined during the year as capex and EBITDA (pre-Ind AS) for FY25 remained similar, while the company also repaid INR250m loan in Sri Lanka; however, working capital efficiency improved during the period.
* Dine-in footfalls remain challenging, although delivery growth continues, albeit at a slower pace than previously experienced.
* The company aims to maintain its KFC expansion run rate of 70–80 stores annually while taking a cautious approach to PH with 20-25 net store additions per year. In Sri Lanka, it plans high-single-digit store additions over the next two years.
Valuation and view
* We cut our EBITDA estimates by ~2% for FY26/FY27.
* KFC’s store addition is expected to continue in FY26, while PH’s store addition will be muted as management focuses on addressing ADS and profitability challenges within the current network.
* The company continues to face challenges in unit economics, with dine-in seeing more pressure than delivery. To drive recovery, the focus remains on product innovation, enhancing customer engagement, and strengthening value-led offerings. However, improvement in ADS and SSSG will be key monitorables, as they are essential for restoring unit-level profitability. The stock trades at 28x and 22x pre-Ind-AS EV/EBITDA on FY26E and FY27E, respectively. We reiterate our BUY rating on the stock with a TP of INR400 (30x Mar’27 pre-IND-AS EV/EBITDA).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
