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Sapphire Foods India LTD

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Brief Company Introduction

Sapphire Foods is a prominent food and beverage company based in India. Established in 2015, Sapphire Foods has rapidly grown to become one of the largest franchisees of Yum! Brands in the country. Yum! Brands is a global fast-food company that owns popular brands such as KFC, Pizza Hut, and Taco Bell. Sapphire Foods operates a vast network of KFC and Pizza Hut outlets across India, Nepal, and Sri Lanka. With a focus on delivering high-quality food and exceptional customer service, the company has gained a strong foothold in the Indian food industry.

Sapphire Foods has non-exclusive rights to operate restaurants under three of Yum’s brands: KFC, Pizza Hut, and Taco Bell in India, Sri Lanka, and Maldives. As of Dec. 2022, the company owned and operated 325 KFC restaurants in India and Maldives, 274 Pizza Hut restaurants in India, Sri Lanka, and the Maldives, and 2 Taco Bell restaurants in Sri Lanka.

Detailed Results:

  1. The company generated revenue of INR 22.6 billion for the year.
  2. The company delivered an adjusted EBITDA of INR 2.6 billion and  margin of 11.7% for FY ’23.
  3. The company had a deferred tax credit of INR 125 crores this quarter.
  4. The company delivered adjusted PAT of INR 1.4 billion at 6.2% PAT margin.
  5. In quarter 4 consolidated sales were INR 5.59 billion. It grew by 13% year-on-year.
  6. Consol restaurant EBITDA remained flat year-on-year in absolute terms. Margin was 16.2%, down 210 basis points over last year.
  7. India restaurant EBITDA grew in absolute terms by 19% and margin was 16.5%, down50 basis points primarily due to Pizza Hut.
  8. Console EBITDA post IndAs was INR1.03 billion or 18.4% and that declined Y-o-Y by 1% down 260 basis points.
  9. Consol adjusted EBITDA was INR56 crores or 10.1%, which declined year-on-year by 11%, and largely on account of the Sri Lanka impact. 
  10. Consol PAT came in at INR136 crores or 24.2%, due to a deferred tax credit of INR125 crores in this quarter. 
  11. Consol adjusted PAT before this DTC, Deferred Tax Credit, is INR 187 million or INR19 crores, 3.3% in quarter 4 of FY ’23.
  12. For Pizza Hut, SSSG was minus 4% for the quarter.
  13. In Pizza Hut, overall revenue grew by 18% to INR122 crores for the quarter, and gross margins dropped by 50 basis points. Restaurant EBITDA came at 8.6%, which is a drop of 290 basis points over previous year.
  14. Pizza Hut had 67 store additions in the last 1 year, that’s 30% on a previous year’s base. 
  15. In Sri Lanka 

SSSG for the quarter was minus 3%. 

The company had 19 store additions in the last 1 year, that’s 20% on the previous year’s base. 

The revenue in Sri Lanka Rupees witnessed a growth of 10% overall. However, when accounting for the translation effect to Indian Rupees, there was a decline of 27% for the quarter.

The gross margin dropped by 390 basis points year-on-year and overall restaurant EBITDA was 14.2%.

  1. The ESOP cost for the year is expected to be between 0.7% to 0.8% of revenue.

Investor Conference Call Highlights 

  1. The management stated that there was an addition of  164 new restaurants, KFC, Pizza Hut and in Sri Lanka.
  2. The management stated that in Sri Lanka, despite challenges, the company grew revenue by 48% in Lankan Rupee terms. Their restaurant EBITDA remained flat in LKR terms despite 100% inflation.
  3. The management stated that the same-store sales were challenged due to post-Diwali ’22 effects. Additionally, India’s GDP growth rate declined from over 7% in the first half of April to 4.4% in October-December.
  4. The management stated that KFC and Pizza Hut launched strong product innovation and increased marketing investments in April to gain differential momentum.
  5. The management stated that in Q4 FY ’23, the company expanded with 28 new restaurants—16 KFC and 12 Pizza Hut. However, they adopted a more cautious approach in Sri Lanka, with no new restaurant expansion planned for the next 12 months.
  6. The company’s primary focus is on strengthening the fried chicken category through improved taste, value, customer experience, and accessibility, all aimed at driving demand.
  7. The management stated that core product innovation is the primary contributor, but they also explore other innovations. For instance, they introduced Chizza as a core innovation and experimented with chicken popcorn with Maggi and popcorn Nachos in the past year.
  8. The management thinks that value is crucial in the QSR industry, encompassing entry value and abundant value. The launch of chicken rolls in April, starting at INR 99, has generated significant interest and traction.
  9. The management informed that KFC achieved a record-breaking opening of 78 stores. Meanwhile, although Pizza Hut experienced negative same-store sales growth (SSSG), the positive growth in same-store transactions was attributed to the significant value proposition.
  10. The company had an excellent first half on Pizza Hut. There has been a slowdown in Pizza Hut’s performance after Diwali.
  11. The management stated that Pizza Hut has achieved positive same-store transaction growth (SSTG) due to their focus on offering big value plays to customers.
  12. The management believes that building top-of-mind awareness is a priority for Pizza Hut. They are utilizing digital advertising and mass entertainment television to sustain their marketing presence.
  13. The management talked about Pizza Hut having launched a native app and a self-ordering QR code-based dine-in digital solution to provide a frictionless customer experience. These initiatives have received a good response from consumers.
  14. The management stated that they have invested in 2 technologies: Dragontail and HutBot to help them drive operational excellence. 
  15. The management stated that the Sri Lankan Rupee has appreciated marginally against the dollar, operating at a range of LKR 320 to LKR 330 compared to the previous rate of LKR 360 to $1. This can potentially have a positive impact on the business’s financials.
  16. In Sri Lanka, The business has experienced a high impact on customer spending due to economic challenges. There has been a significant drop in transactions, resulting in lost business.
  17. The management stated that there is a general softness observed on food aggregator platforms, including Zomato and Swiggy, which are the largest partners for Yum. This indicates a broader trend of weakness or lower demand in the category.
  18. Approximately 85% of orders from Pizza Hut are delivered within 30 minutes, and around 93-94% are delivered under 40 minutes. 
  19. The management stated that the approximate per-store capex for KFC is INR 2 crores, while for Pizza Hut, it is around INR 1.5 crores per store. These figures include factors such as inflation and reflect the investments required for each brand’s store development.
  20. The management informed that around INR 40 crores has been allocated for refurbishments, resizing, and major refurbishment projects. The remaining capex includes maintenance, IT, and warehouse-related expenses.
  21. The management mentions that there is a divergence in trends between KFC and Pizza Hut. This indicates that the two brands are experiencing different performance outcomes.
  22. The management explains that in Sri Lanka, Pizza Hut’s same-store sales growth (SSSG) is -3% and transaction decline is in high double digits. This indicates a significant impact on the business, likely due to pricing actions taken in response to inflation.
  23. The management explained the reason for the difference in gross margin performance compared to another QSR player – inflation in key components such as chicken and dairy has impacted their brands. Chicken saw high inflation in H1, while dairy experienced significant inflation across the board, affecting Pizza Hut’s margins.
  24. The management stated that ADS is influenced by both seasonality and the addition of new stores. New stores typically start at around 75% to 80% of the overall brand average in their first year and take 3 to 4 years to scale up. Therefore, as more new stores are added, it impacts the overall ADS. Q4 was also impacted by the Navratri festival in March.
  25. KFC has implemented a roughly 3.5% price increase. The company is increasing its marketing investments but believes that the increase in sales should offset the impact on restaurant EBITDA.
  26. Quarter 1 experiences a positive growth in absolute terms compared to the Jan-March quarter. An uplift of 5% to 15% is anticipated when compared to Q4, although predicting the exact outcome is challenging due to various incidents or reasons that have occurred over the past three years.

Analyst’s View

Sapphire Foods is one of the largest franchisees of Yum! Brands Inc. in the subcontinent, and operates more than 400 KFC, Pizza Hut, and Taco Bell restaurants across India, Sri Lanka, and the Maldives. Sapphire Foods India Limited reported their best-ever annual performance in FY ’23 with INR 22.6 billion in revenue, INR 2.6 billion in adjusted EBITDA, and INR 1.4 billion in adjusted PAT. In Q4 FY ’23, the company reported consolidated sales of INR 5.59 billion, with India restaurant sales growing at 23%, and same-store sales being challenged post-Diwali ’22.

KFC and Pizza Hut launched strong product innovation and increased marketing investments in April to gain differential momentum. Overall weak consumer demand conditions have affected the industry, but trusted large brands tend to do better in these conditions.

Pizza Hut aims to offer great value in the pizza category and plans to invest in television, digital, and higher marketing spends to enhance brand awareness. In the case of KFC, the launch of value range innovations like chicken rolls is expected to help drive transaction growth. These value offerings cater to both brand loyalists and new customers, attracting them to KFC.

The company believes that it can sustain the Q4 levels of gross margins in the near future. Inflation is seen in the range of 3% to 5% across the overall raw material basket. They expect to manage this inflation through price increases and cost efficiencies.

Nonetheless given growth opportunities and challenges it remains an interesting stock to keep track off.