Equity Research INDIA

February 13, 2022

BSE Sensex: 58153
Sapphire Foods India BUY
ICICI Securities Limited
is the author and
distributor of this report Premium QSR at a Happy Price – initiate at BUY Rs1,441
We like Sapphire Foods’ business model, growth opportunities, execution,
Consumer Staples & management quality and importantly the valuation discount vs some of the peers.
Discretionary We reckon there is significant scope for rerating as consensus (over a period of
time) fully appreciates Narrative vs. Reality about Devyani and Sapphire (margin
Initiating coverage differential, Indian promoter vs private equity, nuances of Pizza Hut delivery
opportunity, markets with high non-vegetarian population adjusting for per capita
Target price: Rs1,800 income, etc.). We model revenue / EBIDTA / PAT CAGR of 31%/37%/63% over FY22-
24E. Initiate at BUY with a DCF-based target price of Rs1,800 (~25% upside
Shareholding pattern potential). Key risk: Competition is likely to intensify in the industry as most of the
Sep Dec
’21 ’21 listed QSR players have announced their aggressive store expansion plans to
Promoters 51.3 51.3
Institutional capture increased industry opportunity.
investors 26.3 24.5
MFs and others 2.1 2.5  Multiple avenues to drive further growth: We expect Sapphire to: (1) be aggressive
FIs/Banks 0.4 0.3
Insurance 1.9 3.1 in store expansion driven by new development program with YUM (we expect 868
FIIs 21.9 18.6
Others 22.4 24.2 stores by FY24E from 550 as of Dec’21), (2) delivery sales to sustain and improve with
Source: BSE increasing consumer preference for convenience channels and increasing penetration
of food aggregators, (3) potential brand turnaround for Pizza Hut India (financial
Price chart turnaround already underway) and (4) potential inorganic growth opportunities.
1500
1400 Furthermore, Sapphire (including other organised QSR players) will likely be a
1300 beneficiary of strong industry tailwinds of a shift from unorganised to organised players
1200
(as per media reports, ~30% of restaurants have shut down due to covid-led
(Rs)

1100
1000 disruptions). We expect margin expansion (+190bps from 20.2% in FY22E to 22.1% in
900
FY24E) to be driven by (1) tighter operating structurers (including store size reduction)
800
and (2) operating leverage.
Jan-22

Feb-22
Nov-21

Dec-21

Dec-21

 Narrative to improve with performance: We reckon there is significant scope for

rerating as consensus (over a period of time) fully appreciates Narrative vs. Reality
about Devyani and Sapphire (margin differential, Indian promoter vs private equity,
nuances of Pizza Hut delivery opportunity, markets with high non-vegetarian
population adjusting for per capita income etc.).
 Initiate with BUY: We model revenue and EBITDA CAGR 31% and 37% respectively
over FY22-FY24E. We initiate coverage on the stock with a BUY rating and DCF-based
target price of Rs1,800. Key risks: (1) irrational competition due to increased store
expansion and (2) failure to turnaround Pizza Hut business.

Market Cap Rs92bn/US$1.2bn Year to March FY21 FY22E FY23E FY24E

Research Analysts: Bloomberg SAPPHIRE IN Revenue (Rs mn) 10,196 17,836 23,960 30,682
Shares Outstanding (mn) 63.5 Adj. Net Profit (Rs mn) (985) 706 1,309 1,878
Manoj Menon
[email protected] 52-week Range (Rs) 1441/992 Dil. Rec. EPS (Rs) (19.0) 11.1 20.6 29.6
+91 22 6807 7209 Free Float (%) 48.7 % Chg YoY NM NM 85.3 43.5
Aniket Sethi FII (%) 18.6 P/E (x) NM 129.6 70.0 48.7
[email protected]
+91 22 6807 7632 Daily Volume (US$'000) NA CEPS (Rs) 21.4 45.6 67.5 87.6
Karan Bhuwania Absolute Return 3m (%) NA EV/EBITDA (x) 59.9 25.5 17.8 13.5
[email protected]
Absolute Return 12m (%) NA Dividend Yield (%) - - - 0.4
+91 22 6807 7351
Sensex Return 3m (%) (2.9) RoCE (%) (15.3) 12.8 17.8 22.7
Sensex Return 12m (%) 14.0 RoE (%) (20.5) 6.9 11.3 14.4

Please refer to important disclosures at the end of this report

 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

TABLE OF CONTENT

Sapphire Foods ................................................................................................................ 3

Key differences between Sapphire Foods and Devyani ................................................. 3
New Store Expansion Model ........................................................................................... 6
KFC – A Dominant Player in Chicken category .............................................................. 7
Pizza Hut, India – Turnaround opportunity ................................................................... 10
Pizza Hut, Sri Lanka – Growing and Profitable Business ............................................. 13
Store footprint to potentially double by FY26E ............................................................. 15
Pursue inorganic growth to create house of brands ..................................................... 16
Strong Industry Tailwinds to drive SSSG and store expansion .................................... 16
Improving Delivery Channel .......................................................................................... 20
Competition .................................................................................................................... 24
Key Players in Chained Restaurant Business .............................................................. 24
Financial performance................................................................................................... 27
Valuation ......................................................................................................................... 30
DCF assumptions.......................................................................................................... 30
Key Risks ........................................................................................................................ 33
Financial summary ........................................................................................................ 34
Appendix - 1.................................................................................................................... 38
Appendix - 2.................................................................................................................... 43
Appendix - 3.................................................................................................................... 45
Appendix – 4 ................................................................................................................... 46
Index of tables and charts............................................................................................. 47

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Sapphire Foods
Key differences between Sapphire Foods and Devyani

Operating regions of Sapphire and Devyani

Yum Brands follows a dual franchisee system in India, similar to McDonald’s and various
global franchisees of Yum Brands. Sapphire Foods and Devyani International are two
franchisees for Yum Brands in India. Unlike McDonalds, where there is a very clear cut
division of North and South India to Westlife Development and North and East India to
another company, division of regions between both the franchisees of Yum Brands is
not very consolidated in a particular region. Please see the table below for the division
of regions between both the franchisees for both the brands.

Table 1: Division of region for both franchisees of Yum between KFC and Pizza
Hut
KFC Pizza Hut
Sapphire Foods Devyani International Sapphire Foods Devyani International
Chhattisgarh Andhra Pradesh Andhra Pradesh NCR
Delhi Bihar Chhattisgarh Bihar
Gujarat Delhi NCR (ex-Delhi) Goa Haryana
Haryana Goa Gujarat Himachal Pradesh
Madhya Pradesh Himachal Pradesh Karnataka Jammu & Kashmir
Maharashtra Jammu & Kashmir Kerala Jharkhand
Puducherry Jharkhand Madhya Pradesh North-East
Punjab Karnataka Maharashtra Odisha
Tamil Nadu Kerala Tamil Nadu Punjab
Uttar Pradesh (partially) North-East Telangana Rajasthan
Uttarakhand Odisha Uttar Pradesh
Rajasthan Uttarakhand
Telangana West Bengal
Uttar Pradesh (partially) Pizza Hut Delivery
West Bengal Goa All States
Tamil Nadu (ex- Tamil Nadu and Goa)
Source: Company, I-Sec research

As its clear from the above table that the division of states within both the franchisees
is not concentrated in a particular region and are not necessarily adjacent to each other
unlike McDonalds. However, we believe the synergies in supply chain due to operating
in a particular region is limited to state level as most of the supplies of raw materials are
regional. Therefore, such a division of states does not reduce the competitiveness of
both the franchisees as compared to other QSR players.

One of the key point to note here is that even though Devyani International has got the
rights to open Pizza Hut Delivery stores in some of the states where Sapphire operates
with Pizza Hut stores, it does not restrict Sapphire to open a Pizza Hut store and deliver
to consumers from those stores. Further, there is a trading area restriction of ~2km in
these regions implying that both the players cannot open and operate a new store within
~2km range of an existing store of the other franchisee. Further, management of
Sapphire has been very clear about their strategy that even though they have the rights
for Pizza Hut Delivery stores in Goa and Tamil Nadu, they would still be preferring to
open a Pizza Hut store with dine-in facility as that provides a better Average Daily Sales
(ADS) and store economics due to omni-channel opportunity. Also, per our

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
understanding Sapphire can undertake delivery through food aggregators (which are
counted as takeaway as per the contract).

One of the consensus’ narratives about Devyani and Sapphire has been that Devyani
has a larger share of non-veg population in its regions and Sapphire has the larger share
of GDP in its regions.

Adjusting for both GDP and non-veg population, we reckon the market opportunity is
broadly similar for both players - Sapphire having ~47% of GDP of non-veg population
and Devyani with ~53% of GDP of non-veg population.

Table 2: GDP share of non-veg population for Sapphire territories

GDP of Non-
FY19 GDP Non-veg Sapphire Sapphire
State Veg Population
(Rs bn) Population (%) Presence Share (%)
(Rs bn)
Maharashtra 26,328 59.80 15,744 1.0 47
Uttar Pradesh@ 16,682 52.90 8,825 0.5
Tamil Nadu 16,302 97.65 15,919 1.0
Karnataka 15,444 78.90 12,185 0.0
Gujarat 15,029 39.05 5,869 1.0
West Bengal 10,899 98.60 10,746 0.0
Rajasthan 9,426 25.10 2,366 0.0
Andhra Pradesh +
8,630 98.50 8,501 0.0
Telangana
Madhya Pradesh 8,096 49.40 3,999 1.0
Kerala 7,817 97.00 7,582 0.0
Delhi 7,749 60.50 4,688 1.0
Haryana@ 7,342 30.75 2,258 0.5
Bihar 5,304 92.45 4,904 0.0
Punjab 5,264 33.25 1,750 1.0
Odisha 4,922 97.35 4,792 0.0
Chhattisgarh 3,041 82.05 2,495 1.0
Jharkhand 2,972 96.75 2,875 0.0
Uttarakhand 2,459 72.65 1,786 1.0
Himachal Pradesh# 1,538 72.65 1,117 0.0
Jammu and Kashmir 1,560 68.55 1,069 0.0
Goa* 732 79.40 581 0.0
North-East* 5,272 79.40 4,186 0.0
Source: RBI, Media reports, Company, I-Sec research
*North East includes Assam, Tripura, Meghalaya, Arunachal Pradesh, Manipur, Mizoram, Nagaland and Sikkim;
Non-veg population (%) of North-East and Goa is assumed to be similar to Assam
#
Non-veg population (%) of Himachal Pradesh is assumed to be similar to Uttarakhand
@
Partial presence in Uttar Pradesh and Haryana

Difference in Margins
If we compare the store level margins for both the brands between Sapphire Foods and
Devyani International, we find that the margins of Sapphire foods are lower by ~140bps
and ~ 170bps for KFC and Pizza Hut respectively in 9MFY22. Similarly, company level
EBITDA margins are lower by ~390bps (Pre-Ind AS 116) and ~420bps (Post-Ind AS
116) as compared to Devyani in 9MFY22. Some of the key reasons for such difference
in margins are:

Minimum wages: Devyani has a higher concentration of operation for both the brands
in eastern region. Minimum wages of eastern states are comparatively lower as
compared to rest of India leading to overall higher employee cost for Sapphire.

Rentals: Rental deals of eastern states are also comparatively better (similar to
minimum wages) as compared to rest of India also leading to higher rental costs for
Sapphire.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Efficiency: Apart from better rental deals and lower minimum wages, we do believe
that Devyani has got better efficiencies in some of the cost items.

ESOPs cost: Sapphire Foods being a private equity driven company has a fairly
democratic ESOPs plan in its company leading to higher cost for Devyani. ESOPs cost
has been 1.3%, 2.7%, 0.3% of sales for FY21, 9MFY22, 3QFY22.

We believe, lower employee and rental cost will continue to be there for Devyani due to
difference in operating region; however, difference due to efficiency may potentially
reduce as Sapphire becomes more efficient. Further, ESOPs cost will also have a
minimal impact of ~30-50bps on margins assuming no new ESOPs plan is introduced
by the company.

Table 3: Comparison of margins between Sapphire and Devyani

KFC Pizza Hut
Sapphire Devyani Difference Sapphire Devyani Difference
FY20
Gross Margin 65.4% 64.8% 60 bps 76.2% 74.9% 130 bps
EBITDA Margin 13.2% 16.0% -280 bps 7.3% 10.5% -320 bps

FY21
Gross Margin 67.9% 67.7% 20 bps 76.1% 74.2% 190 bps
EBITDA Margin 14.0% 18.3% -430 bps 5.0% 12.9% -790 bps

9MFY22
Gross Margin 68.5% 69.2% -70 bps 75.8% 75.6% 20 bps
EBITDA Margin 19.7% 21.1% -140 bps 14.1% 15.8% -170 bps
Source: Company, I-Sec research

Table 4: Comparison of company level margins of Sapphire and Devyani

Sapphire Devyani Difference (bps)
(as of a % of sales)
FY20 FY21 FY20 FY21 FY20 FY21
Gross Margin 68% 70% 70% 70% (184) (3)
Less:
Employee Expenses 17% 19% 15% 14% 220 558
Rent 3% 2% 5% 0% (198) 233
Electricity expenses 7% 7% 6% 6% 100 90
Royalty 6% 6% 6% 6% 85 4
Marketing and Advertisement expenses 4% 4% 5% 6% (156) (201)
Commission Charges 4% 6% 3% 7% 39 (90)
Distribution and warehousing charges 2% 2% 1% 2% 53 42
Miscellaneous expenses 10% 11% 11% 9% (26) 141
Total Operating Expenses 54% 57% 53% 50% 116 777
EBITDA 14% 12% 17% 20% (300) (780)
Source: Company, I-Sec research

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

New Store Expansion Model

Yum Brands entered India by operating its stores for Pizza Hut and KFC by themselves,
Devyani, Dodsal and some smaller franchisees in India which was a different model as
compared to other QSR players. Later on YUM realised that having small franchisees
was inefficient and having a larger franchisee is better.

This led to the evolution of Sapphire foods in 2015 which was a consortium of private
equity investors led by Samara Capital at that time. Sapphire started working with YUM
Brands to consolidate their smaller franchisees. Currently, YUM Brands operate in India
with two franchisees (similar to McDonalds) – Sapphire Foods and Devyani
International. Sapphire Foods acquired ~220 stores at that time from smaller
franchisees of Yum.

However, the stores that were acquired by the company were inefficient. Sapphire
Foods has been experimenting various store formats to get the model right. We believe
Sapphire has been able to get the store model right for both Pizza Hut and KFC in last
few years and is in a position to expand stores aggressively.

Focus on smaller size omni-channel stores

The focus for the last couple of years has been to reduce the store size and trying to
maintain the similar ADS (Average Daily Sales per store) levels driven by omni-channel
(delivery and takeaway) making the business model more efficient with better store
economics.

The average store size of KFC in India was 2,736 sq. ft. in FY19. However, the stores
opened in FY20 and FY21 have an average store size of 1,645 sq. ft. which was ~40%
lower. This also led to a reduction of capex per store by ~18% from Rs21mn per store
to Rs17mn per store. Despite the reduction in store size, ADS levels were maintained
at similar levels driven by delivery sales. Contribution of delivery increased from 17% in
FY19 to 38% in FY21. Management expects the store size going forward for KFC to be
~1,400-1,500 sq. ft. with capex outlay of ~Rs17-18mn per store.

Table 5: KFC’s key operating and financial metrics in India

FY19 FY20 FY21
Total Store Count (nos) 158 187 203
Number of Stores in Top 10 Cities (nos) 111 126 135
Total No. of Cities Where Present (nos) 47 55 56
Average Daily Sales per Restaurant (in Rs'000) 125 130 106
SSSG (%) 13.9 5.4 (30.0)
Delivery as % of Restaurant Sales (%) 17 20 38
Restaurant Related Revenue (in Rs mn) 6,584 7,753 5,897
Gross Margin (%) 65.1 65.4 67.9
Restaurant EBITDA (in Rs mn) 836 1,021 828
Restaurant EBITDA (%) 12.7 13.2 14.0
Source: Company, I-Sec research

Similarly, for Pizza Hut India, the average store size was 2,427 sq. ft. in FY19 which
was reduced by ~39% to ~1,480 sq. ft. in FY20-21. Capex outlay per store also reduced
from ~Rs16mn per store to ~Rs13-14mn per store with similar ADS levels driven by
delivery. Delivery contribution for Pizza Hut also increased from 33% in FY19 to 53% in
FY21. Management expects the store size for new stores to be ~1,200-1,300 sq. ft. with
similar capex outlay.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Table 6: Pizza Hut’s key operating and financial metrics in India
FY19 FY20 FY21
Total Store Count (nos) 153 174 162
Number of Stores in Top 10 Cities (nos) 127 141 129
Total No. of Cities Where Present (nos) 29 31 32
Average Daily Sales per Restaurant (in Rs 000) 61 58 48
SSSG (%) 5.0 (5.2) (35.4)
Delivery as % of Restaurant Sales (%) 33 35 53
Restaurant Related Revenue (in Rs mn) 3,071 3,343 2,217
Gross Margin (%) 73.9 76.2 76.1
Restaurant EBITDA (in Rs mn) 229 244 111
Restaurant EBITDA (%) 7.5 7.3 5.0
Source: Company, I-Sec research

KFC – A Dominant Player in Chicken category

KFC is the only national player focused on chicken category with a dominant share of
~35% among chicken focused foodservices chains. National burger players like
McDonald’s and Burger King have broader offerings with a focus on burgers;
McDonald’s (Westlife) has recently focused in the chicken category with launch of fried
chicken in south India. There are regional players like Five Star Chicken, ChicKing India,
MB Chicken etc. with limited presence and scale.

We believe, KFC is one of the strongest brands in India among all QSR players. One of
the important features that differentiate it with other QSR players is that the products in
KFC are prepared freshly at the store as compared to most of the other QSRs who use
frozen products for their final products. Consumers to some extent do understand this
due to the difference in the taste.

When we compare the store economics of KFC as compared to other burger QSR
players i.e. Burger King India (BKI) and McDonalds (Westlife; WLDL), we find that the
EBITDA margins of Sapphire operated KFC of ~13.2% is very similar to other burger
QSR players. This is despite store throughput of KFC is being 27% / 8% lower than
WLDL / BKIL. Gross margins of all these brands are ~64-65%.

Table 7: Store economics comparison of KFC with WLDL and BKIL

KFC S* KFC D* WLDL BKIL WLDL BKIL
(Rs mn)
(2020) (2020) (2014) (2019) (2020) (2020)
Number of stores (year end) 203 172 184 187 319 260
Number of stores (year beginning) 187 134 161 88 296 129
Average number of stores 195 153 173 138 308 195

Revenue 7,753 6,091 7,403 6,327 15,473 8,412

Gross profit 5,070 3,950 4,252 4,027 10,091 5,397
Store-level EBITDA 1,021 973 918 476 2,264 591

Gross margin (%) 65.4 64.8 57.4 63.6 65.2 64.2

Store-level EBITDA margin (%) 13.2 16.0 12.4 7.5 14.6 7.0

Store economics (Rs mn / store)

Revenue 39.8 39.8 42.9 46.0 50.3 43.3
Gross profit 26.0 25.8 24.6 29.3 32.8 27.8
Store-level EBITDA 5.2 6.4 5.3 3.5 7.4 3.0
Source: Company, I-Sec research * KFC S = KFC operated by Sapphire, KFC D = KFC operated by Devyani

Some of the trends in the chicken market witnessed have been that Asian countries
prefer chicken over other meat products. And as per capital income increases, protein
consumption (chicken is considered as one of the sources of protein) of the population

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
also increases. Therefore, KFC should perform well in territories having higher GDP and
non-veg population in India. When we compare territories of Sapphire and Devyani, we
find that Sapphire covers ~47% (as per our calculation) of GDP of non-veg population
in India. We believe that Sapphire has a significant portion of GDP in its territories which
should provide ample opportunity for growth.

Table 8: GDP share of non-veg population for Sapphire territories

GDP of Non-
FY19 GDP Non-veg Sapphire Sapphire
State Veg Population
(Rs bn) Population (%) Presence Share (%)
(Rs bn)
Maharashtra 26,328 59.80 15,744 1.0 47
Uttar Pradesh@ 16,682 52.90 8,825 0.5
Tamil Nadu 16,302 97.65 15,919 1.0
Karnataka 15,444 78.90 12,185 0.0
Gujarat 15,029 39.05 5,869 1.0
West Bengal 10,899 98.60 10,746 0.0
Rajasthan 9,426 25.10 2,366 0.0
Andhra Pradesh +
8,630 98.50 8,501 0.0
Telangana
Madhya Pradesh 8,096 49.40 3,999 1.0
Kerala 7,817 97.00 7,582 0.0
Delhi 7,749 60.50 4,688 1.0
Haryana@ 7,342 30.75 2,258 0.5
Bihar 5,304 92.45 4,904 0.0
Punjab 5,264 33.25 1,750 1.0
Odisha 4,922 97.35 4,792 0.0
Chhattisgarh 3,041 82.05 2,495 1.0
Jharkhand 2,972 96.75 2,875 0.0
Uttarakhand 2,459 72.65 1,786 1.0
Himachal Pradesh# 1,538 72.65 1,117 0.0
Jammu and Kashmir 1,560 68.55 1,069 0.0
Goa* 732 79.40 581 0.0
North-East* 5,272 79.40 4,186 0.0
Source: RBI, Media reports, Company, I-Sec research
*North East includes Assam, Tripura, Meghalaya, Arunachal Pradesh, Manipur, Mizoram, Nagaland and Sikkim;
Non-veg population (%) of North-East and Goa is assumed to be similar to Assam
#
Non-veg population (%) of Himachal Pradesh is assumed to be similar to Uttarakhand
@Partial presence in Uttar Pradesh and Haryana

We expect Sapphire to increase its footprint for KFC from 250 stores as of Dec’21 to
410 stores by FY24E. The company has already increased its pace of opening new
stores by opening 16 KFC stores in 1HFY22, 31 stores in 3QFY22 as compared to 16
stores in FY21. This is despite the market disruptions. We expect revenue for KFC to
grow at a CAGR of ~34% from Rs10.6bn to Rs18.9bn during FY22-24E driven by store
expansion and higher store throughput.

In terms of margins, we expect gross margins for KFC to improve by ~90bps from 67.9%
in FY21 to 68.8% in FY24E. We expect EBITDA margins to improve by ~560bps from
14.0% in FY21 to ~19.6% in FY24E driven by 1) operating leverage and 2) better
margins of new omni-channel stores.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Chart 1: Store footprint – KFC Chart 2: Brand Revenue – KFC

18,845
410
450
20,000
400

14,419
338
18,000
350 16,000

268

10,573
300 14,000
(# of stores)

12,000

203
250

(Rs mn)
187

7,753
10,000

6,584
158

200

5,897
8,000
150
6,000
100
4,000
50 2,000
- -
FY19 FY20 FY21 FY22E FY23E FY24E FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research Source: Company, I-Sec research

Chart 3: Gross Margin – KFC Chart 4: EBITDA Margin – KFC

70.0 25.0
68.8
68.5

19.6
19.4
68.3

18.5
69.0
67.9

20.0
68.0

14.0
13.2
12.7
15.0
67.0
(%)

(%)
65.4

66.0
65.1

10.0

65.0
5.0
64.0

63.0 -
FY19 FY20 FY21 FY22E FY23E FY24E FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research Source: Company, I-Sec research

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Pizza Hut, India – Turnaround opportunity

Pizza Hut India has had a relatively weak performance in India. This performance has
been weak due to several reasons. One of the most important reasons has been the
brand positioning. Pizza Hut was positioned as a premium dine-out destination for
family. Pizza as a category in India has higher contribution coming from in-home
consumption. Secondly, Domino’s which is the main competitor of Pizza Hut has
positioned itself as an in-home consumption brand and has successfully ramped up its
store presence to 1,495 stores, as compared to 500 Pizza Hut stores (Sapphire: 209
stores; Devyani: 391 stores) as of Dec’21.

Sapphire over the last couple of years has attempted to transform the overall positioning
of Pizza Hut in India. Some of the key steps taken by them have been:

Value Positioning: Sapphire implemented a strategic reset on pricing in April’19

through Every Day Value which is now in par with other QSR brands where in a meal
for 2 is available under Rs400. They have further strengthened the menu by adding
several value meal layers.

Omni Channel Strategy: Sapphire has increased focus on delivery to strongly

supplement the dine-in sales. One of the focus areas has been improving overall
operational execution through focus on improving the customer experience and
implementing faster delivery of orders. They have also partnered with Food Aggregators
(FAs) with joint business plans to drive delivery sales. Further, they have launched their
revamped app with user friendly platform and strong value offers to build their own
delivery channel.

Tighter Format: As discussed earlier, it has implemented ~39% reduction in average

store size of new stores in FY20-21 leading to capex reduction from Rs20mn to Rs14mn.
This has helped achieve right level of rentals and other operating expenses.

Cost optimisation: Revisited all cost structures including labour, rental and other opex
bringing long term efficiencies.

We believe that the financial turnaround through optimising store size for better store
economics has been done already and will benefit the overall brand to expand faster.
However, we believe the brand turnaround for Pizza Hut India is very important for the
business. Now that the operating model has been optimised, the focus of the company
will be more towards brand positioning turnaround. The initial response has been good
with increase in delivery share of Pizza Hut in India. We believe, Pizza Hut will have to
expand aggressively (faster than Domino’s) to increase its penetration which will help
them deliver pizza in 30 minutes (at least par with Domino’s) which is a pre-requisite for
the consumer to consider delivery from Pizza Hut over Domino’s. Anecdotally,
consumer reviews of Pizza Hut have been good in terms of quality; however, given the
mindshare that Domino’s has, it will not be easy to overcome without higher penetration.

Further, we also note that Pizza Hut has performed significantly well in Asian countries.
If we compare the number of stores of Pizza Hut and Domino’s in Asian countries, Pizza
Hut is significantly higher for a lot of countries. Therefore, we believe there is a scope
of expansion for Pizza Hut in India as well.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
When we compare the store economics of Pizza Hut India as compared to Domino’s in
India we find that Sapphire operated Pizza Hut’s current throughput per store is almost
~65% of Domino’s current throughput. This indicates there is significant opportunity for
the brand to increase its throughput. In terms of gross margins, both the brands have
very similar margins in the range of ~75%. Further, we do see a significant gap of
~1,120bps in store level EBITDA margins which is largely due to operating leverage in
favour of Domino’s.

Table 9: Store economics comparison of Pizza Hut India with Domino’s

Pizza Hut D
(Rs mn) Pizza Hut S (2020) JUBI (2010) JUBI (2020)
(2020)
Number of stores (year end) 162 269 306 1,335
Number of stores (year
174 268 241 1,227
beginning)
Average number of stores 168 269 274 1,281

Revenue 3,343 4,174 4,239 39,273

Gross profit 2,547 3,126 3,190 29,438
Store-level EBITDA 244 439 1,266 7,270

Gross margin (%) 76.2 74.9 75.2 75.0

Store-level EBITDA margin (%) 7.3 10.5 29.9 18.5
Store economics (Rs mn /
store)
Revenue 19.9 15.5 15.5 30.7
Gross profit 15.2 11.6 11.7 23.0
Store-level EBITDA 1.5 1.6 4.6 5.7
Source: Company, I-Sec research * Pizza Hut S = Pizza Hut operated by Sapphire, Pizza Hut D = Pizza Hut
operated by Devyani

We expect Sapphire to increase its footprint for PH India from 209 stores as of Dec’21
to ~342 stores by FY24E. The company has already increased its pace of opening new
stores by opening 26 PH stores in 1HFY22, 21 stores in 3QFY22 as compared to 21
stores in FY20. This is despite market disruptions. We expect revenue for PH India to
grow at a CAGR of ~33% from Rs4.1bn to Rs7.2bn during FY22-FY24E driven by store
expansion and higher store throughput.

In terms of margins, we expect PH India to maintain its gross margins at 76.1% in

FY24E. We expect EBITDA margins to improve by a steep ~890bps from 5.0% in FY21
to 13.9% in FY24E driven by 1) operating leverage and 2) better margins of new omni-
channel stores.

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Chart 5: Store footprint – Pizza Hut India Chart 6: Brand Revenue – Pizza Hut India

7,206
400 8,000

342
350 7,000

5,596
282
300 6,000

4,100
222
250 5,000
(# of stores)

3,343
(Rs mn)
174

3,071
162
200 4,000
153

2,217
150 3,000

100 2,000

50 1,000

- -
FY19 FY20 FY21 FY22E FY23E FY24E FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research Source: Company, I-Sec research

Chart 7: Gross Margin – Pizza Hut India Chart 8: EBITDA Margin – Pizza Hut India
76.2

76.1

76.1

76.5 16.0

13.9
13.7
13.5
75.8
75.5

76.0 14.0

75.5 12.0

75.0 10.0
7.5

7.3
(%)

(%)

74.5 8.0
73.9

5.0
74.0 6.0

73.5 4.0

73.0 2.0

72.5 -
FY19 FY20 FY21 FY22E FY23E FY24E FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research Source: Company, I-Sec research

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Pizza Hut, Sri Lanka – Growing and Profitable Business

Sapphire is the largest international QSR chain in Sri Lanka in terms of revenue for
FY21 and number of restaurants operated as of March 31, 2021. In FY21, its revenue
from Pizza Hut restaurants in Sri Lanka comprised ~35% of the total revenue of
international QSR chains in Sri Lanka, and as of March 31, 2021, it operated 68 Pizza
Hut restaurants in Sri Lanka, comprising 39% of the total number of restaurants
operated by international QSR chains in Sri Lanka.

Table 10: Key financial and operating metrics for Sri Lanka
FY19 FY20 FY21
Total store count (nos) 63 64 70
Number of stores in top 10 cities (nos) 37 32 36
Total No. of Cities Where Present (nos) 36 42 44
Average Daily Sales per Restaurant (Rs '000) 92.9 86.5 90.2
SSSG (%) 8.0 -1.0 1.0
Delivery as % of Restaurant Sales (%) 38.6 38.7 54.9
Restaurant Related Revenue (in Rs mn) 1,984 2,038 1,965
Gross Margin (%) 65.9 66.7 68.6
Restaurant EBITDA (in Rs mn) 317 329 384
Restaurant EBITDA (%) 16.0 16.2 19.5
Source: Company, I-Sec research

QSR chains have significantly increased the number of their outlets in Sri Lanka in
recent years. International and domestic restaurants are expanding their operations.
Various new-to-market restaurant brands continue to explore opportunities and make
investments.

Table 11: Key International Chain QSR Players in Sri Lanka

Number of Stores (as of Revenue (Rs bn)
Brand Operated By
March 31, 2021) (FY 2021)
Pizza Hut 68 1.9 Gamma Lanka, Subsidiary of Sapphire
KFC 42 1.65 Cargills
Dominos 26 0.36 Jubilant Foodworks
McDonalds 11 0.71 Abans Restaurant Systems
Burger King 21 0.48 Softlogic Restaurants
Source: Secondary Data, Primary Research

While Sapphire has a profitable and scalable operating model for Pizza Hut in Sri Lanka,
there is an opportunity to expand Pizza Hut into more cities. We believe, being the
largest player QSR player in Sri Lanka, Pizza Hut will be focusing on increasing the
penetration of international QSRs into smaller cities.

We expect Sapphire to increase its footprint for PH SL from 89 stores as of Dec’21 to

114 stores by FY24E. We expect revenue for PH SL to grow at a CAGR of ~22% from
Rs3.0bn to Rs4.4bn driven by store expansion and higher store throughput.

In terms of margins, we expect gross margins for PH SL to decline by ~160bps from

68.6% in FY21 to 67.0% in FY24E. We expect EBITDA margins to improve by ~180bps
from 19.5% in FY21 to ~21.3% in FY24E driven by operating leverage.

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Chart 9: Store footprint – Pizza Hut SL Chart 10: Brand Revenue – Pizza Hut SL

114

4,411
120 5,000

102

3,734
4,500
100

90
4,000

2,964
3,500
80

70
64
(# of stores)

63

3,000

2,038
(Rs mn)

1,984

1,965
60 2,500
2,000
40
1,500
1,000
20
500
- -
FY19 FY20 FY21 FY22E FY23E FY24E FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research Source: Company, I-Sec research

Chart 11: Gross Margin – Pizza Hut SL Chart 12: EBITDA Margin – Pizza Hut SL
68.6

22.0
69.0 25.0

21.3
21.2
19.5
68.5
68.0 20.0

16.2
16.0
67.0

67.5
66.8
66.7

15.0
66.5

67.0
(%)

(%)

66.5
65.9

10.0
66.0
65.5 5.0
65.0
64.5 -
FY19 FY20 FY21 FY22E FY23E FY24E FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research Source: Company, I-Sec research

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Store footprint to potentially double by FY26E

With over six years of operations, Sapphire has developed extensive operating
experience in the India, Sri Lanka and the Maldives markets.

Chart 13: Sapphire Foods’s restaurant footprint

KFC India PH India Sri Lanka Business Other Business

600 550
2
500 437 89
427
376 2 2
400 64 70
2
(# of stores)

63 209
300 162
174
153
200

250
100 187 203
158

0
FY19 FY20 FY21 Dec'21
Source: Company, I-Sec research

Chart 14: Geographical spread of restaurants

Source: Company, I-Sec research

As discussed earlier, Sapphire Foods has been focused on finalising a right operating
model for all the brands and has been able to achieve the right operating model for all
three brands. Sapphire Foods plans to double its store footprint from current ~550 stores
as of Dec’21 in 3-4 years. It has recently signed in a new development program with
Yum Brands wherein they have agreed to double the store footprint in 3-4 years.

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Pursue inorganic growth to create house of brands

Sapphire has built its organisation and developed its human resources to grow brands
and drive consumption, deliver great operations and customer experience. To achieve
this, it has built back-end organisation systems and processes to handle significant
scale. It also has an organisational culture that fosters an entrepreneurial approach and
count, among investors, professional financial sponsors who have the experience and
skillset in pursuing and completing acquisitions and other methods of growing
inorganically. Sapphire Foods has cash balance of ~Rs4,350mn (net of debt) as of
Dec’21. It intends to actively explore opportunities to acquire high quality and scalable
QSR and food brands in complementary categories in existing or new geographies.

We believe that the aggressive expansion of food aggregators in India has also led to
an aggressive launches of new restaurants brands in various cuisines. Some of these
new brands have been able to create their own consumer base. However, various
reasons including covid have led to significant stress to some of these brands and they
have not been able to scale up their brands beyond a certain consumer base. We
believe, Sapphire could potentially acquire some of these stressed brands in the near
term and scale them up.

"As part of the expansion strategy, besides organic, we would actively look for the
opportunity for acquisition for high-quality scalable QSR brand, which is relevant to the
market and has customers appeal. This could be either in a complementary category in
either existing geographies or new geography," Sapphire Foods India Group CEO
Sanjay Purohit.

Strong Industry Tailwinds to drive SSSG and store expansion

Due to covid, consumers have become more cautious towards hygiene and safety
issues. Such change in habit of consumers is being leveraged by chain restaurants,
primarily chain QSRs. Chain QSRs and CDRs aim to meet the requirements of
consumers in the new normal, from high food quality and service standards to superior
processes or delivery capabilities.

The chain market in India is estimated at Rs398bn in FY20 and is projected to grow at
a CAGR of 20% to Rs993bn by FY25. Growth in the chain market is expected to be
driven in the next five years by increased presence of international brands, stronger
back-end infrastructure, acceptance of new cuisines, changing lifestyles and aspirations
and the emergence of entrepreneurial ventures in these segments.

Revenue of organized QSR restaurants is expected to grow at a CAGR of 20% between

financial year 2020 and FY25, which is the highest across all formats in the organized
market.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Table 12: Chain Food Services Market
CAGR Market Share
Format
FY10-15 FY15-20 FY20-25P FY10 FY15 FY20 FY25P
QSRs 29% 19% 23% 33% 45% 47% 54%
CDRs 18% 19% 19% 37% 32% 34% 32%
Café 16% 8% 10% 12% 10% 6% 4%
Frozen Dessert / Ice Cream 15% 16% 17% 7% 6% 5% 5%
PBCL 25% 22% 16% 4% 5% 6% 5%
FDRs 5% 3% 2% 6% 3% 2% 1%
Source: Technopak BoK

Growth Drivers in Food Services Market

Casual dining players moving into QSR space. International brands are expected to
dominate the QSR space. Market leaders such as Domino’s and McDonald’s have
reinforced their leading position and leading players such as Pizza Hut are pivoting their
strategy towards QSR.

Store Rationalization. In recent years, leading brands such as Pizza Hut have moved
away from being dine-in focused restaurants towards becoming omni-channel players
in the QSR space. This is reflected in their decreasing number of dine-in focused stores
and their increasing number of QSR-based stores. Tighter kitchen and front of house
(FOH) areas are enabling brands to open compact stores, which in turn increase store
level profitability of the brands.

Table 13: Store Level Information of Pizza Hut

2015 2018 2020
Size of Stores Opened (in sq. ft.) 2,000-2200 1,600 – 1,970 1,200-1,300
Number of Concept Stores (as % of total number of stores) 66% 50% 26%
Number of QSR-based Stores (as % of total number of stores) 34% 50% 74%
Sales from Concept Stores (as % of total sales) 83% 51% 37%
Sales from QSR-based stores (as % of total sales) 17% 49% 63%
Source: Brand’s website, Technopak research

Channel mix getting optimized for a higher throughput. QSR market leaders such
as Domino’s and McDonald’s have increased takeaway and delivery services of their
own apps. Other market leaders such as Pizza Hut have also recognized the importance
of activating their own app and takeaway services.

Table 14: Channel Mix of Key QSR Brands

FY18 FY19 FY20
Dine Own Take- Dine Own Take- Dine Own Take-
Aggregator Aggregator Aggregator
in App away in App away in App away
Dominos 42% 15% 20% 23% 39% 15% 23% 23% 35% 15% 25% 25%
McDonalds 67% 15% 3% 15% 65% 12% 3% 20% 55% 15% 5% 25%
Pizza Hut 46% 3% 24% 26% 42% 11% 22% 25% 50% 26% 8% 16%
KFC 59% 5% 6% 30% 61% 12% 5% 22% 60% 16% 4% 21%
Source: Brand’s website, Technopak research

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
APC getting sharply defined for QSR players. In recent years, players such as Pizza
Hut have ventured into the QSR space from the CDR space, as their Average Per
Customer (APC) have become aligned with QSR players.

Table 15: APC of key QSR players (Rs)

Brands 2015 2018 2020
Dominos 220 - 235 220 – 235 200 – 220
McDonalds 225 – 240 235 – 250 240 – 260
Pizza Hut 212 - 248 228 - 250 250 – 275
KFC 220 - 230 213 - 240 220 - 230
Burger King 210 - 230 200 - 225 200 - 225
Source: Brand’s website, Technopak research

Increasing availability of retail space leading to food services expansion. The

sustained growth of online shopping has resulted in brick and mortar retailers
rationalizing their retail space, thereby increasing availability for food services players
in the organized retail environment. Thus, malls are leasing prime floor space to
increase the number of food services players in their premises due to high revenues
generated from the food services sector.

Shift from unorganized to organized market. Revenue from the food services market
amounted to Rs1,843bn in FY10, with 26% of such revenue generated by the organized
market and 74% by the unorganized market. Due to growing demands for hygiene and
safety and the presence and popularity of international food chains, the share of the
organized market increased to 41% in FY20, and is expected to surpass the share of
the unorganized market in FY25.

Chart 15: Shift from unorganized to organized market

Organised Unorganised

100%
90%
80% 46
70% 59
74 68
60%
50%
40%
30% 54
20% 41
26 32
10%
0%
2010 2015 2020 2025
Source: Technopak BoK

Sapphire intends to accelerate conversion from unorganized food

services to its own brands
The current covid pandemic, while having a negative impact on the food services
industry, has also provided opportunities to brands that can assure consumers of
consistent great tasting products, food safety, hygiene, great value and easy
accessibility across dine-in, takeaway and delivery channels. Over the next few years,
Sapphire intends to accelerate growth through the following strategies:

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
 Continuously enhance relevance of its current brands: It plans to continue to
strengthen the relevance of KFC and Pizza Hut as full meal options in addition to
snacking, thereby straddling all parts of the day. It anticipates that the menu
innovation, abundant value meal options at entry and premium price points,
emphasis on superior food safety and hygiene standards and freshness of
ingredients to meet evolving consumer preferences will enable its brands to appeal
to a wide secular consumer audience across age groups, leading to new consumer
acquisition and increased ordering frequency and ticket size.
 Leverage its omni-channel strategy: Sapphire’s brands are accessible through
dine-in, takeaway and delivery. It intends to leverage its enhanced digital ecosystem
and CRM program to improve the understanding of the relevant drivers of guest
experience of each of these channels and maximize revenue opportunity.
 Leverage strength on cost efficiencies, manage unit economics and achieve
economies of scale through operational leverage: Sapphire demonstrated cost
efficiency in FY21 when it made permanent structural changes to costs, such as
reducing restaurant employee and operating costs, as a result of the covid
pandemic. This is an area of continuous focus which will help the company stay
ahead of the curve and mitigate challenges.
 Fast-paced restaurant expansion to capitalize on growth opportunities:
Restaurant chains have a low penetration rate in India, especially in lower-tier cities,
with ~18 chain QSR restaurants per million people in urban areas in CY19 compared
to ~765 in the United States. Given the rapidly expanding middle class and dining-
out population, we believe that KFC and Pizza Hut are well-placed to capitalize on
this opportunity.

Growth of meal-based QSR players. Over the last five years, several players have
emerged in the snacks category, such as Wow Momo and Goli Vada Pav.

Table 16: APC Meals / Snacks based QSR players

Time Frame Meals Based QSR Snacks Based QSR
Dominos, McDonald’s, KFC, Pizza Wow Momo, Goli Vada Pav, Rolls King, Kathi
Players
Hut Junction
Ticket Size (2015) Rs675- 700 Rs150-75
Ticket Size (2020) Rs750 –775 Rs200–225
Growth Rate
2.10% 2.90%
(CAGR 2015-20)
Source: Technopak research and analysis

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Improving Delivery Channel

We believe that covid has led to a permanent change in consumer behavior where there
has been a significant adoption of delivery in overall consumption (due to convenience).
Similar trends have also been visible across restaurant business as well. Busy lifestyles,
rising smartphone users and growing disposable income will continue to drive the
growth of the Indian food space. The number of Internet users in India is expected to
exceed 975mn by FY25. Smartphone penetration is also growing at a similar pace, with
the user base estimated at 340mn in FY18 and projected to reach 920mn by FY25.

Chart 16: Online Food Delivery Market in India

Restaurant to Consumer Platform to Consumer

20
18
16
14 8.4
12 7.6
($ bn)

10
8 4.8
6 0.3
8.8 9.7
4
4.4 5.4
2
0
2016 2020 2025 (pre-covid) 2025 (pre-covid)
Source: Statista, Technopak research and analysis
The restaurant-to-consumer delivery segment includes the delivery of meals carried out directly by the
restaurants. The order may be made via platforms or directly through a restaurant website or app (e.g., Domino’s,
Pizza Hut).
The platform-to-consumer delivery segment focuses on online delivery services that provide customers with
meals from partner restaurants that do not necessarily have to offer food delivery themselves. In this case, the
platform (e.g., Zomato, Swiggy) handles the delivery process.

During covid, the marketing and advertising campaigns focused on safety, health and
hygiene largely through digital media, with a significant push on enhancing delivery and
takeaway sales through contactless ordering and payment and targeted meal bundles.
To continuously improve the digital restaurant experience and in-house delivery
capability, Sapphire uses an analytics-based CRM program to gather data on orders
placed on its own website, app and call centre.

Delivery salience for Sapphire has increased significantly post-covid as consumers

preferred to eat at home with dine-in restrictions. However, delivery salience for
Sapphire was lagging the rest of industry. Delivery salience for KFC has increased from
17% in FY19 to 38% in FY21 (45% in 9MFY22). Similarly, delivery salience for Pizza
Hut increased from 33% in FY19 to 53% in FY21 (60% in 9MFY22). Such steep increase
in delivery salience is due to 1) increasing consumer preference to convenience and 2)
impact of covid. We believe that the delivery salience for FY22 is likely to be in the
similar range or slightly high as FY21. However, assuming no more covid impact on
FY23, we expect delivery salience to moderate slightly to ~45-47% for PH India and
~35% for KFC. Moderation in delivery salience is largely due to return of dine-in sales
as most of the QSR companies have been witnessing absolute delivery sales to hold
despite dine-in sales return. This will lead to higher overall store throughput.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Chart 17: Improving delivery salience for KFC and PH India

KFC Pizza Hut

70%
60%
60% 53%

50% 45%
38%
40% 35%
33%
30%
20%
17%
20%

10%

0%
FY19 FY20 FY21 9MFY22
Source: Company, I-Sec research

Strong relationship with YUM

The Franchisee Arrangement provides Sapphire with rights to YUM’s system and
system property covering all aspects of business operations, as well as the flexibility to
undertake, with YUM’s approval, local or regional promotions. It provides Sapphire with
flexibility to operate and manage in-house supply chain and have direct relationships
with vendor partners who go through YUM’s approval process.

Sapphire benefits from the ‘One System’ commercial negotiations where it negotiates
with suppliers, jointly with YUM and its other franchisee in India, to procure key raw
materials and equipment. It also benefits from YUM’s extensive global marketing and
advertising concepts, product development capabilities and cooking techniques to drive
sales and generate increased restaurant footfalls.

Chart 18: Strong relationship with YUM Brands

Source: Company, I-Sec research

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Efficient supply chain
Sapphire has an in-house supply chain function and works with its vendor partners for
food ingredients, packaging, warehousing and logistics with the goal of providing
restaurants with the optimum level of inventory at the highest level of quality in a
standardised and cost efficient manner. It operates warehouses across five cities in
India to service restaurants in India, and has invested in building technology solutions
including a restaurant-level SAP ERP system and POS software solutions in the
restaurants. It has also adopted YUM’s global online and digital channel solutions to
enhance customer experience in both its physical and digital restaurants and achieve
operating efficiency and financial controls within the organization.

Sapphire has a dedicated supply chain management team comprising 34 employees

with an average experience in similar roles of between 10 to 12 years. It has detailed
specifications for each food ingredient and consumable procured. As of June 30, 2021,
it had 67 suppliers, all of whom are required to enter into a quality assurance
arrangement with Sapphire and YUM to ensure that all supplies and their quality
assurance programs fully comply with its technical standards and relevant food laws
and regulations.

Extensive menu of local offerings

Sapphire is expected to benefit from the increased consumption of protein in the form
of meat such as chicken in India. It does not offer beef or pork products in its restaurants
and has separated the cooking and preparation of vegetarian and non-vegetarian meals
in the kitchens to build trust with customers. Its menu is built through extensive taste
testing in order to appeal to the local palate and the tastes of the customers. It is
selective in choosing where it purchases the ingredients and only purchases only from
approved suppliers for quality purposes. In addition, it has instituted extensive standards
and procedures with respect to quality assurance and food handling, consistent with
YUM’s global standards.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Impact of covid-19
The covid crisis has adversely affected the ability to open new restaurants and expand
the restaurant network temporarily. Despite second wave of covid impacting 1QFY22,
Sapphire has opened 113 new stores in 9MFY22. Jubilant Foods and Devyani have
been the most aggressive players in opening new stores.

Chart 19: Brand-wise sales store openings in 9MFY22

160

135
140
120

94
(# of stores)

100

75
80

47
47

60

29
40

20
11
20
-

PH D

Domino's
PH SL*
PH S*
KFC D

Mcdonald's
KFC S*

Burger
King

*
Source: Company, I-Sec research * KFC S and PH S is for Sapphire operated stores while KFC D and PH D are
Devyani operated stores, PH SL = Pizza Hut Sri Lanka and McDonald’s is for Westlife Development

In terms of revenue, 3QFY22 and 9MFY22 witnessed a revenue growth of 41% and
21% respectively over 3QFY20 and 9MFY20. In terms of ADS, all three business KFC
India, Pizza Hut India and Pizza Hut Sri Lanka have crossed pre-covid levels.

Chart 20: Brand-wise average daily sales recovery for Sapphire

1QFY22 2QFY22 3QFY22

130%
140%
118%
109%

105%
103%

102%

120%
99%
84%

100%
81%

80%

60%

40%

20%

0%
KFC S* PH S* PH SL*
Source: Company, I-Sec research * KFC S and PH S is for Sapphire operated stores, PH SL = Pizza Hut Sri Lanka

As a result of covid, the behaviour of consumers has changed regarding hygiene and
safety standards of restaurants, and it is expected that even after the end of the covid,
consumers will prefer places with hygienic kitchens and seating areas; there will be
increased demand for safe, hygienic and clean places for eating out provided by QSR
chains.

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Competition
Key Players in Chained Restaurant Business
International players such as Domino’s, McDonald’s, Subway and Burger King have
also increased their presence across various high footfall destinations such as malls,
high streets, office complexes, airports and highways to capture increased consumer
traffic through different formats.

Table 17: Growth of Key Brands in India (No. of Outlets)

Brands Year of Market Entry (FY) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Domino’s 1996 378 465 576 726 876 1,026 1,127 1,134 1,227 1,335 1,360
Subway 2001 248 330 414 476 476 568 613 638 NA 671## 556
McDonald’s* 1996 250 282 316 369 369 393 424 447 464 489 481
KFC 2004# 151 221 299 328 352 310 310 342 380 443 488
Pizza Hut 1996 - - - - 278 293 316 359 427 452 440
Burger King 2015 - - - - 12 49 88 129 187 260 265
Source: Technopak research and analysis
*Indicates consolidated outlet count of both McDonald’s operators in India
## Store count as of December 31, 2019
# KFC re-entered in India in 2004 after its initial entry in 1996

Table 18: Format, Operational Model and Presence of Key Chain Players in India
Total Outlet
Revenue Cities (as
Count (as of
Brands Market Entry Operating Partner in India Operating Model (Rs bn) of March
March 31,
FY20 31, 2021)
2021)
Quick Service Restaurants
Domino’s 1996 Jubilant Food Works Master Franchisee 1,360 ~34 293
Sapphire Foods & Devyani
Pizza Hut 1996 Regional Franchisee 440 7.36 120
International
Subway 2001 Multiple Micro Franchisee 556 ~11.20 85+
Sapphire Foods & Devyani
KFC Re-entry in 2004 Regional Franchisee 488 17.12 146
International
Westlife Development and
McDonald’s 1996 Franchisee 481 ~23.60 93
Connaught Plaza Restaurants
Goli Vada Pav No. 1 2004 Goli Vada Pav Pvt. Ltd. Own + Franchisee 209 0.26* 50+
Burger King 2014 Burger King India Ltd. Joint Venture 265 8.4 57
Jumbo King 2001 Jumbo King Foods Pvt. Ltd. Own + Franchisee 134 0.03 7
Source: Brands’ websites, Technopak research and analysis
*Indicates financial year 2019 numbers

The chain QSR sub-segment is led by Domino’s Pizza with ~19% share of the chain
QSR market in terms of number of outlets. The Indian market has positively reacted to
American cuisine, as evidenced by the rising market share of burger, chicken and
sandwich players such as McDonald’s, Subway, KFC and Burger King. Along with
Domino’s and Subway, other large chains such as McDonald’s, Burger King, Pizza Hut
and KFC have increased their presence in Tier II and Tier III cities.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Table 19: Key QSR Brands Outlet Presence (as of March 31, 2021)
% of Total
Revenue % of Total % of Total
Total Outlet % of Total Outlets Outlets in Tier II
Brands (Rs bn) - Outlets in Mini Outlets in
Count in Mega Metros Cities and
FY20 Metros Tier I Cities
Others
Domino’s ~34 1,360 25% 32% 22% 21%
Pizza Hut 7.36 440 26% 34% 20% 20%
Subway ~11.20 556 37% 41% 13% 9%
McDonald’s** ~23.60 481 37% 35% 15% 13%
KFC 17.12 488 18% 33% 26% 24%
Wow! Momo ~1.9 311 30% 60% 6% 4%
Burger King 8.4 265 40% 27% 11% 23%
Jumbo King 0.03 134 85% 10% 4% 1%
La Pino’z NA 148 22% 20% 28% 30%
Haldiram ~14.2 43* 84% 0% 0% 16%
Bikanervala ~2.6 70 68% 7% 9% 16%
Smokin Joe’s NA 38 74% 11% 0% 16%
Taco Bell NA 55 35% 56% 10% 0%
Street food by Punjab Grill NA 35* 27% 55% 9% 9%
Source: Brands’ websites, restaurant discovery platforms, Technopak BoK
City type wise mix of brands is rounded off
*Indicates December 31, 2020 outlet numbers
**Indicates consolidated outlet count of both McDonald’s operators in India

Table 20: Benchmarking of Key Players

BBQ The Great
Heads Domino’s McDonald’s* KFC Subway Burger King Pizza Hut Chilli’s
Nation Kebab Factory
Format QSR QSR QSR QSR QSR QSR CDR CDR FDR
Master Master Multiple Micro Multiple Regional Own + Own +
Business Model Joint Venture
Franchisee Franchisee Franchisee Franchisee Franchisee Franchisee Franchisee Franchisee
Outlet Count 1,360 305 488 556 265 440 18 147 24
APC*** (INR) 200-225 225-250 220-230 175-200 200-225 200-230 600-700 775-800 1,250-1,500
Average Ticket Value 3,500-
500-550 550-600 440-460 250-300 500-550 500-700 2,750-3,000 6,000-6,500
(INR)*** 3,750
COGS 22-23% 34-36% 33-35% 32-34% 35-36% 24-26% 29-30% 34-35%31-32%
Gross Margins 77-78% 64-66% 67-65% 66-68% 64-65% 76-74% 70-71% 65-66%68-69%
Advertisement 4-5% 5-6% 6% 4-5% ~5% 5-6.5% 3-4% NA 5-6%
Royalty 3-4% 4-5%** 7-8% 7-8% 4-5% 5.5-6% 5-6% NA 6-7%
Store EBITDA 21-23% 13-15% 15-18% 20-22% 12-14% 10-13% 20-21% 20-21%16-18%
Capex for Initial Build and
150-200 L 350-400 L 180-200 L## 40-50 L 200-250 L 130-150 L## 300-350 L 250-300 L 400-500 L
Opening
Avg. Store Size (in sq.ft.) 1400-1600 2600-3200 1400-1500# 750-1000 1300-1400 1200-1300# 3700-4300 4800-5400 4500-5000
Average Sales /Day*** 0.75-0.80 L 1.2-1.3 L 1.1-1.4 L 0.30-0.35 L 1.1-1.2 L 0.4-0.5 L 1.4-1.5 L 1.5-1.6 L 1.9-2.1 L
Average Daily
140-160 200-225 300-380 130-140 200-220 70-95 50-60 40-50 30-40
Transactions***
Source: Technopak BoK, primary research, secondary research for outlet count and APC
Store counts are as of March 31, 2021.
*Outlets of McDonald’s operated by South and West Franchisee (Westlife Development)
**The royalty fee of Westlife Development is 4 to 5% presently, but can go up to 8% as per contract beyond financial year 2025.
*** Pre COVID-19 estimates
# These numbers indicate size of KFC and PH opened recently and going forward. Earlier, KFC had store sizes of range 2400 – 2500 sq. ft. and
PH had stores of range 2000 – 2200 sq. ft.
## These numbers indicate capex of KFC and PH opened recently and going forward Earlier, KFC had capex of range 250 – 300 L and PH had
capex of range 200 – 250 L

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Table 21: Operating Brands and Financials of Key Franchise Operators and Brands in India as of and
for the financial year ended March 31, 2021
Sapphire Westlife Burger Devyani Jubilant
Foods Development King International Foods
Number of Stores 437 305 265 692 1,360
Sales (in ₹ million) 10,167 9,860 4,945 11,348 32,689
Restaurant EBITDA (in ₹ million) 1,326 763 -105 1,633 -
Restaurant EBITDA (% of Sales) 13.00% 7.70% -2.10% 14.40% -
Corporate adjusted EBITDA -
382 -24 -619 842 -
(Pre IND AS and Post-ESOP) (in ₹ million)
Corporate adjusted EBITDA –
3.80% -0.20% -12.50% 7.40% -
(Pre IND AS & Post-ESOP) (% of Sales)
Corporate adjusted EBITDA-
520 - 865 -
(Pre IND AS and Pre-ESOP) (in ₹ million)
Corporate adjusted EBITDA-
5.10% - 7.60% -
(Pre IND AS & Pre-ESOP) (in ₹ million)
Corporate EBITDA –
1,787 620 327 2,269 7,666
Post IND AS and Post ESOP (in ₹ million)
Corporate EBITDA –
17.60% 6.30% 6.60% 20.00% 23.50%
Post IND AS and Post ESOP (% of Sales)
Corporate EBITDA –
1,925 - - 2,292 -
(Post IND AS and Pre ESOP) (in ₹ million)
Corporate EBITDA –
18.90% - - 20.20% -
(Post IND AS and Pre ESOP) (% of Sales)
Source: Annual Report, MCA Reports, Devyani DRHP

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Financial performance
Expect accelerated store expansion post new development program
with YUM Brands
To recap, we expect chain market in India to grow at a CAGR of 20% to Rs993bn by
FY25E driven by strong industry tailwinds with market share of organised QSR players
increasing from 47% in FY20 to 54%in FY25E.

We expect Sapphire foods to also aggressively expand it store footprint to capture the
industry tailwinds. Sapphire recently signed a new development program with YUM
Brands to double its store footprint by FY26E. We expect it to increase its store footprint
of KFC, PH India and PH SL from 250, 209 and 89 stores as of Dec’21 to 410, 342 and
114 stores by FY24E respectively.

Chart 21: Store footprint

KFC PH India PH SL
450 410
400
338
350
300 268 342
250
(# of stores)

250 203 282

187
200 158
209 222
150
174 162
153
100
102 114
50 89 90
63 64 70
-
FY19 FY20 FY21 Dec'21 FY22E FY23E FY24E
Source: Company, I-Sec research

Expect accelerated revenue growth ahead

We expect Sapphire revenue to grow at a CAGR of 31% from Rs17.8bn in FY22E to
Rs30.7bn in FY24E driven by brand revenue CAGR of 34%, 33% and 22% for KFC, PH
India and PH SL respectively from FY22E-24E. Revenue growth is expected to be driven
by store expansion and higher store throughput. Higher store throughout to be driven
by a) shift from unorganised to organised players, and b) higher revenue from delivery
and takeaway channel.

27
 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Chart 22: Sapphire revenue to grow at a CAGR of 31%

35 KFC PH India PH SL Maldives

30.7
30
4.4
24.0
25
3.7 7.2
20 17.8

(Rs bn)
5.6
13.4 3.0
15
11.9
2.0 10.2 4.1
10 2.0
3.3 2.0 18.8
3.1 14.4
2.2
5 10.6
6.6 7.8 5.9
-
FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research

Margin expansion will be led by a mix of operating leverage and improving mix of
new smaller stores

We expect Sapphire’s EBITDA margin to expand by 990bps from 12.2% in FY21 to

22.1% in FY24E. This implies EBITDA growth CAGR of 37% from Rs3.6bn to Rs6.8bn.

We expect marginal gross margin expansion by 40bps from 69.6% from FY21 to 70%
in FY24E. We expect ~90bps gross margin expansion in KFC and ~160bps decline in
gross margins of PH SL while PH India business will maintain its gross margins at
76.1%.

Chart 23: Gross margins

Sapphire Foods KFC PH India PH SL

77.0
76.0
75.0 76.2 76.1 75.8 76.1
74.0 75.5
73.0 73.9
72.0
71.0 69.6 69.6 70.0
70.0 69.2
(%)

69.0 67.8 68.3 68.5 68.8

68.6
68.0 66.9
67.0 66.7 67.9 66.5 67.0
66.0 65.9 66.8
65.0
64.0 65.1 65.4
63.0
FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research

28
Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
We expect EBITDA margin expansion to be driven by brand’s EBITDA margin
expansion. We expect store-level EBITDA margin expansion by 560bps, 890bps and
180bps for KFC, PH India and PH SL business from FY21 to FY24E. Store level EBITDA
margin expansion is expected to be driven by operating leverage due to better store
throughput. Further, we expect EBITDA margin expansion of Sapphire due to operating
leverage benefit on corporate overheads and lower ESOPs cost going forward.

Chart 24: Store-level EBITDA Margin

KFC PH India PH SL
25.0
22.0 21.3
21.2
19.5
20.0 19.4 19.6
16.0 16.2 18.5

14.0 13.5 13.7 13.9

15.0 13.2
12.7
(%)

10.0 7.5 7.3

5.0
5.0

0.0
FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research

Chart 25: EBITDA and EBITDA Margin

8,000 EBITDA EBITDA Margin (RHS) 25

21.5 22.1
7,000 20.2
20
6,000

5,000 13.8
15
12.2 12.2
(Rs mn)

(%)
4,000

3,000 10

2,000
5
3,596

6,780
1,856

5,149

1,000
1,460

1,244

0 0
FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company, I-Sec research

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Valuation
We value Sapphire Foods on DCF basis with 12% WACC and 5.5% terminal growth
assumptions. We initiate coverage on the stock with an BUY rating based on a DCF-
based target price of Rs1,800, which implies ~25% upside potential.

DCF assumptions
We value Sapphire Foods on DCF based on the following three stages:

 Stage 1 (FY22E-FY32E): During this period, we estimate 18% revenue CAGR and
21% EBITDA CAGR
 Stage 2 (FY32E-FY42E): During this period, we estimate 10% FCF CAGR
 Stage 3 (FY43E onwards): We assume 5.5% terminal growth rate

Based on these assumptions, we arrive at a target price of Rs1,800.

Table 22: DCF calculations

(Rs mn, year ending Mar 31)
PV of FCF for forecasting period (FY23-FY42) 58,851
PV of terminal cashflow 51,731
EV 110,582
Net debt/(cash) (3,664)
Equity value 114,246
Number of shares (mn) 64
Target price (Rs/ share) 1,800
Source: I-Sec research

Table 23: Peer valuation

CMP M Cap EV/EBITDA (x) - Ex-INDAS116 P/E (x) EV/Sales (x)
(Rs) (Rs bn) FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E
Burger King India 135 51.9 312.5 46.4 30.2 NM NM 165.0 5.2 3.5 2.8
Jubilant Foodworks 3,080 406.5 53.2 43.1 34.2 94.1 69.2 51.7 9.1 7.7 6.5
Sapphire Foods 1,441 92.4 48.5 29.8 22.4 129.6 70.0 48.7 5.0 3.7 2.9
Westlife Development 475 74.0 87.9 34.5 25.3 NM 75.8 48.2 4.8 3.7 3.1
Source: I-Sec research

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Table 24: Valuation summary
CMP TP Upside PE (x) EV/EBITDA (x) ADTV Market Cap
Company Rating
(Rs) (Rs) (%) FY22E FY23E FY22E FY23E (US$ mn) (Rs bn) (US$ bn)
Staples
Bajaj Consumer 173 300 74 BUY 14 11 10 8 2.3 25 0.3
Britannia 3,481 3,200 (8) REDUCE 53 43 38 31 14.1 838 11.3
Colgate 1,456 1,550 6 ADD 38 35 25 23 10.1 396 5.3
Dabur 561 680 21 BUY 53 46 43 37 14.3 992 13.3
Emami 498 550 10 ADD 29 26 24 21 3.6 222 3.0
GCPL 825 1,000 21 ADD 46 38 34 29 13.0 844 11.3
HUL 2,258 2,500 11 ADD 59 50 41 35 53.0 5,305 71.3
ITC 232 260 12 ADD 19 16 15 13 63.3 2,864 38.5
Jyothy Labs 138 180 30 BUY 30 19 20 14 1.0 51 0.7
Marico 499 550 10 BUY 51 42 36 30 10.0 645 8.7
Mrs. Bector's Foods 359 430 20 ADD 28 24 15 12 0.6 21 0.3
Nestle 17,815 19,500 9 HOLD 73 60 47 39 13.5 1,718 23.1
Tata Consumer 701 925 32 BUY 64 53 37 32 20.3 646 8.7
Varun Beverages 937 1,000 7 ADD 58 46 26 22 5.7 406 5.5
Zydus Wellness 1,496 2,250 50 BUY 30 23 28 22 0.8 95 1.3
Discretionary
Avenue Supermarts 4,142 3,900 (6) SELL 163 100 113 71 35.7 2,683 36.1
Bata 1,859 1,850 (1) HOLD 206 50 145 36 14.5 239 3.2
Burger King India 135 150 11 ADD NM NM 311 46 3.2 52 0.7
Jubilant Foodworks 3,080 3,600 17 ADD 94 69 54 44 30.0 406 5.5
Kalyan Jewellers 64 100 56 BUY 22 15 10 7 1.6 66 0.9
Page Industries 39,803 46,000 16 ADD 88 64 60 46 13.3 444 6.0
Sapphire Foods 1,441 1,800 25 BUY 130 70 25 18 NM 92 1.2
Sheela Foam 3,239 4,000 23 BUY 61 38 43 29 1.7 158 2.1
Titan 2,442 2,750 13 ADD 90 66 60 46 47.3 2,168 29.1
United Spirits 844 950 13 ADD 69 52 42 34 27.1 614 8.2
Westlife Development 475 600 26 BUY NM 76 89 35 0.8 74 1.0
Paints
Akzo Nobel 1,890 2,200 16 ADD 31 26 20 17 0.3 86 1.2
Asian Paints 3,216 3,400 6 HOLD 97 73 64 49 58.5 3,085 41.5
Berger Paints 718 700 (3) REDUCE 90 72 56 46 8.6 697 9.4
Indigo Paints 1,915 2,100 10 HOLD 87 63 56 40 1.0 92 1.2
Kansai Nerolac 498 580 17 HOLD 58 44 35 27 2.8 269 3.6

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
EV/ sales (x) P/B (x) P/CEPS (x) RoE (%) RoCE (%) CAGR (FY21-23E) (%)
Company FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E Revenues EBITDA PAT
Staples
Bajaj Consumer 2.2 2.0 3 3 13 11 23 25 23 27 5 (1) (0)
Britannia 6.1 5.5 23 18 47 38 43 41 26 30 9 4 2
Colgate 7.6 7.0 30 29 33 29 87 93 104 111 7 6 5
Dabur 8.9 8.0 12 10 47 41 23 24 18 18 14 15 13
Emami 7.0 6.4 11 9 34 24 41 40 44 43 10 9 12
GCPL 7.1 6.4 8 8 41 34 19 21 18 20 11 13 12
HUL 10.4 9.3 11 11 53 45 19 22 15 17 11 14 14
ITC 4.9 4.5 5 4 17 15 25 27 27 29 15 18 15
Jyothy Labs 2.4 2.1 4 3 23 16 12 18 12 19 13 8 8
Marico 6.6 6.0 18 16 46 38 37 41 33 36 15 15 15
Mrs. Bector's Foods 2.1 1.8 4 4 18 14 15 15 17 18 15 12 9
Nestle 11.4 9.8 80 73 63 52 113 127 40 44 13 17 17
Tata Consumer 4.9 4.4 4 4 51 43 7 8 8 9 10 12 19
Varun Beverages 4.9 4.3 9 8 33 27 16 18 16 18 25 26 52
Zydus Wellness 4.8 4.3 2 2 28 22 7 8 7 8 10 13 29
Discretionary
Avenue Supermarts 8.9 6.3 19 16 131 85 13 17 16 23 34 51 51
Bata 9.5 6.7 13 11 69 32 7 24 11 34 43 140 NM
Burger King India 5.1 3.5 9 9 92 31 (13) (0) (2) 5 70 NM (92)
Jubilant Foodworks 9.1 7.8 23 18 48 39 27 29 23 25 25 48 60
Kalyan Jewellers 0.8 0.6 2 2 13 9 9 12 9 11 27 41 NM
Page Industries 11.6 9.8 42 35 78 58 52 59 36 40 26 36 42
Sapphire Foods 5.1 3.8 9 8 32 21 7 11 13 18 53 103 NM
Sheela Foam 5.2 4.5 11 8 47 32 20 25 17 24 21 23 31
Titan 7.7 6.1 23 18 77 58 29 31 32 35 28 64 83
United Spirits 6.5 5.8 12 11 53 42 19 22 25 28 17 36 60
Westlife Development 4.9 3.7 15 13 54 30 0 18 9 28 43 NM NM
Paints
Akzo Nobel 2.6 2.2 7 6 24 21 21 23 21 24 20 17 25
Asian Paints 10.6 9.1 22 19 76 60 24 28 21 25 25 14 16
Berger Paints 8.3 7.1 18 16 69 57 22 23 19 21 20 13 16
Indigo Paints 9.2 7.3 14 11 66 48 16 18 18 21 29 34 43
Kansai Nerolac 4.2 3.6 6 6 42 34 11 13 11 13 21 7 8
Source: Bloomberg, Company data, I-Sec research

32
Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Key Risks
 Covid has substantially affected and may continue to affect the business, results of
operations, financial condition, cash flows and reputation in the future.
 Concerns about food safety, foodborne illness or other negative food-related
incidents and negative publicity revolving around it could have an adverse effect on
the business.
 Sapphire operates restaurants pursuant to the Franchisee Arrangement that
imposes certain restrictions and obligations with respect to the operations, and,
which if terminated or limited, could adversely affect the business, results of
operations, cash flows and financial condition.
 A failure or deterioration in the quality control systems or protocols for the supply
chain or restaurants could lead to the termination of the Franchisee Arrangement,
and have an adverse effect on the business.
 The company may not be able to respond effectively to changes in governmental
regulation or public perception with respect to healthy eating habits, which
may have an adverse effect on the business, results of operations, cash flows and
financial condition.
 The increased competition in the QSR chain sub-segment may adversely affect
the business and financial condition.
 Sapphire’s success is tied to the continued international success and reputation
of the KFC, Pizza Hut and Taco Bell brands globally, as well as YUM’s marketing
campaigns and innovations.

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Financial summary
Table 25: Profit and Loss statement
(Rs. mn, year ending Mar 31)
FY19 FY20 FY21 FY22E FY23E FY24E
Net Revenue 11,938 13,404 10,196 17,836 23,960 30,682

Less:
Cost of goods sold 3,946 4,317 3,099 5,491 7,278 9,211
Employee cost 2,063 2,288 1,956 2,854 3,354 4,295
Royalty 805 857 656 1,070 1,438 1,841
Other expenses 3,664 4,086 3,241 4,826 6,740 8,555
Total operating expenses 10,479 11,548 8,952 14,241 18,811 23,902

EBITDA 1,460 1,856 1,244 3,596 5,149 6,780

Less: D&A 1,547 1,913 2,091 2,191 2,981 3,687

EBIT (88) (57) (847) 1,405 2,168 3,093

Less: Gross Interest 720 722 756 882 1,108 1,341

Add: Other Income 125 113 616 257 427 432

Recurring PBT (683) (666) (987) 779 1,487 2,184

Less: Taxes 11 (17) 12 78 178 306

Less: Minority Interest 14 17 14 5 - -

Net Income (Reported) (680) (1,575) (985) 706 1,309 1,878

Extraordinary items - (944) - - - -

Recurring Net Income (680) (631) (985) 706 1,309 1,878

Source: Company data, I-Sec research

34
Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Table 26: Balance sheet
(Rs. mn, year ending Mar 31)
FY19 FY20 FY21 FY22E FY23E FY24E
ASSETS
Current Assets, Loans & Advances
Inventories 381 444 474 684 918 1,175
Sundry debtors 224 46 78 122 164 210
Cash and bank balances 1,865 392 500 4,103 4,159 4,580
Other current assets 72 76 68 118 159 204
Loans and advances 75 54 49 85 115 147
Total Current Assets 2,617 1,012 1,168 5,113 5,515 6,316

Current Liabilities & Provisions

Current Liabilities 1,142 1,307 1,440 1,955 2,639 3,396
Provisions and other liabilities 3,868 592 608 836 979 1,117
Total Current Liabilities & Provisions 5,009 1,898 2,048 2,790 3,618 4,513

Net Current Assets (2,392) (887) (879) 2,323 1,897 1,803

Investments - 155 267 267 267 267

Fixed assets
Gross block 6,661 7,821 8,157 10,877 13,680 16,656
Less: Accumulated depreciation 2,008 2,787 3,675 4,847 6,482 8,480
Net Block 4,653 5,034 4,483 6,031 7,198 8,176
CWIP 210 215 304 304 304 304
Right of use assets 4,859 4,953 4,739 4,739 4,739 4,739
Goodwill 2,539 1,622 1,622 1,622 1,622 1,622
Other non-current assets 797 816 906 1,551 2,069 2,637

Total Assets 10,665 11,908 11,442 16,838 18,096 19,549

LIABILITIES AND SHAREHOLDERS' EQUITY

Shareholders' fund
Equity share capital 431 502 528 635 635 635
Reserves and surplus 3,585 4,742 4,271 9,610 10,918 12,421
Total Shareholders Fund 4,016 5,245 4,799 10,245 11,554 13,056

Borrowings 959 712 757 707 657 607

Lease Liability 5,455 5,744 5,692 5,692 5,692 5,692
Minority Interest 11 3 (12) (12) (12) (12)
LT Provisions 224 205 206 206 206 206

Total Liabilities and shareholders' equity 10,665 11,908 11,442 16,838 18,096 19,549
Source: Company data, I-Sec research

35
 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Table 27: Cash flow
(Rs. mn, year ending Mar 31)
FY19 FY20 FY21 FY22E FY23E FY24E
Cash flow from operating activities
PBT (683) (1,610) (987) 779 1,487 2,184
Add: Depreciation 1,547 1,913 2,091 1,172 1,636 1,998
Add: Interest 720 722 756 118 108 98
Add: Other Operating activities 1 950 (437) (252) (427) (432)
CFO before change in NWC 1,585 1,975 1,423 1,817 2,804 3,848

(Inc)/dec in debtors (177) 179 (28) (44) (42) (46)

(Inc)/dec in inventories (50) (93) (34) (210) (234) (257)
(Inc)/dec in other current assets 144 (61) 29 (733) (587) (645)
Inc/(dec) in trade payables 10 165 133 515 684 757
Inc/(dec) in current liabilities/provisions 26 (8) 47 228 143 137
Change in NWC (46) 182 147 (245) (36) (53)
Less: Taxes Paid 38 27 30 78 178 306
Net Cash flow from Operating Activities 1,501 2,130 1,541 1,494 2,590 3,489

Capital Commitments (1,796) (1,431) (740) (2,720) (2,803) (2,976)

Free Cashflow (295) 699 801 (1,226) (213) 513

Cashflow from Investing Activities

Other non-operating income 21 84 9 257 427 432
Others (1,576) 1,474 54 - - -
Net Cashflow from Investing Activities (1,556) 1,558 63 257 427 432

Cashflow from Financing Activities

Increase in reserves 2,321 (561) 422 4,740 - -
Inc (Dec) in Borrowings 646 (218) 61 (50) (50) (50)
Interest Paid (164) (93) (122) (118) (108) (98)
Dividend paid including tax and others - - - - - (376)
Others (1,035) (1,209) (877) - - -
Net Cashflow from Financing Activities (e) 1,767 (2,081) (515) 4,572 (158) (524)

Total Increase / (Decrease) in Cash (83) 176 349 3,603 55 421

Source: Company data, I-Sec research

36
Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Table 28: Key ratios
(year ending Mar 31)
FY19 FY20 FY21 FY22E FY23E FY24E
Per Share Data (Rs)
EPS (15.0) (12.6) (19.0) 11.1 20.6 29.6
Cash EPS 19.1 25.5 21.4 45.6 67.5 87.6
Dividend per share (DPS) - - - - - 5.9
Book Value per share (BV) 88.3 104.4 92.8 161.2 181.8 205.5

Growth (%)
Net Sales 12.3 (23.9) 74.9 34.3 28.1
EBITDA 27.2 (33.0) 189.0 43.2 31.7
PAT (7.2) 55.9 (171.7) 85.3 43.5
DPS NM NM NM NM NM

Valuation Ratios (x)

P/E NM NM NM 129.6 70.0 48.7
P/CEPS 75.6 56.5 67.3 31.6 21.3 16.4
P/BV 16.3 13.8 15.5 8.9 7.9 7.0
EV / EBITDA 44.9 39.0 59.9 25.5 17.8 13.5
EV / Sales 5.5 5.4 7.3 5.1 3.8 3.0

Operating Ratios
Raw Material / Sales (%) 33.1 32.2 30.4 30.8 30.4 30.0
Employee cost / Sales (%) 17.3 17.1 19.2 16.0 14.0 14.0
Other exps / Sales (%) 37.4 36.9 38.2 33.1 34.1 33.9
Other Income / PBT (%) (18.2) (17.0) (62.4) 33.0 28.7 19.8
Effective Tax Rate (%) (1.6) 2.6 (1.2) 10.0 12.0 14.0
Working Capital (days) (35.7) 25.0 32.2 23.4 18.0 14.7
Inventory Turnover (days) 11.6 12.1 17.0 14.0 14.0 14.0
Receivables (days) 6.9 1.3 2.8 2.5 2.5 2.5
Payables (days) 34.9 35.6 51.5 40.0 40.2 40.4
Net D/E (x) (0.2) 0.0 (0.0) (0.4) (0.3) (0.3)

Profitability Ratios (%)

Net Income Margins (5.7) (4.7) (9.7) 4.0 5.5 6.1
RoACE (1.4) (1.0) (14.7) 17.0 18.7 23.9
RoAE (14.4) (13.6) (19.6) 9.4 12.0 15.3
Dividend Payout - - - - - 375.6
Dividend Yield - - - - - 0.4
EBITDA Margins 12.2 13.8 12.2 20.2 21.5 22.1
Source: Company data, I-Sec research

37
 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Appendix - 1
About the Company
Vision
Company aspires to be India’s best restaurant operator by serving customers great food
with great experience at great value. It operates its restaurants in high traffic and high
visibility locations in key metropolitan areas and cities across India and develop new
restaurants in new cities as part of the brand and food category expansion.

Business
Franchisee arrangement with YUM allows Sapphire operate, on a non-exclusive basis,
under the KFC brand in several states in India and across the Maldives, the Pizza Hut
brand in several states in India and across Sri Lanka and the Maldives, and the Taco
Bell brand across Sri Lanka, while leveraging YUM’s system and system property.
Further, it also provides them with a right to use YUM’s system and system property
covering all aspects of business operations, as well as the flexibility to undertake, with
YUM’s approval, local or regional promotions, while meeting YUM’s global quality
assurance standards.

Sapphire has a wide variety of vegetarian and non-vegetarian value offerings at entry
and premium price points, both enabling it to drive new customer acquisition across
different income classes and, at the same time, upsell products through the use of meal
combos and add-ons.

Table 29: Brief business snapshot of Sapphire Foods

FY19 FY20 FY21
Store count
KFC India 158 187 203
PH India 153 174 162
Sri Lanka Business 63 64 70
Other Business 2 2 2
Total 376 427 437
Restaurant Related Revenue
KFC India 6,584 7,753 5,897
PH India 3,071 3,343 2,217
Sri Lanka Business 1,984 2,038 1,965
Other Business 179 162 88
Total 11,818 13,296 10,167
% contribution
KFC India 55.7 58.3 58.0
PH India 26.0 25.1 21.8
Sri Lanka Business 16.8 15.3 19.3
Other Business 1.5 1.2 0.9
Total 100.0 100.0 100.0
Restaurant EBITDA
KFC India 12.7% 13.2% 14.0%
PH India 7.5% 7.3% 5.0%
Sri Lanka Business 16.0% 16.2% 19.5%
Other Business 5.7% 4.8% 3.2%
Source: Company, I-Sec research

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Key brands
Sapphire’s association with Yum started in 2015 and it presently has the non-exclusive
rights to operate restaurants under three of YUM’s leading brands, namely, the KFC,
Pizza Hut and Taco Bell brands in the select territories.

KFC: Sapphire operated 204 KFC restaurants in India and the Maldives as of March 31,
2021. KFC was the largest QSR chain serving chicken in India in terms of restaurant
count, with 488 restaurants in India as of March 31, 2021. Founded in Corbin, Kentucky,
in the U.S. by Colonel Harland D. Sanders in 1939, KFC opened its first restaurant in
India in 1996. KFC in India and the Maldives has an extensive menu featuring chicken
on the bone, boneless chicken and other chicken products, burgers, rice dishes, wraps,
beverages and desserts.

Table 30: KFC’s key operating and financial metrics in India

FY19 FY20 FY21
Total Store Count (nos) 158 187 203
Number of Stores in Top 10 Cities (nos) 111 126 135
Total No. of Cities Where Present (nos) 47 55 56
Average Daily Sales per Restaurant (in Rs'000) 125 130 106
SSSG (%) 13.9 5.4 -30.0
Delivery as % of Restaurant Sales (%) 16.7 19.8 38.1
Restaurant Related Revenue (in Rs mn) 6,584 7,753 5,897
Gross Margin (%) 65.1 65.4 67.9
Restaurant EBITDA (in Rs mn) 836 1021 828
Restaurant EBITDA (%) 12.7 13.2 14.0
Source: Company, I-Sec research

Pizza Hut: Sapphire operated 231 Pizza Hut restaurants in India, Sri Lanka and the
Maldives as of March 31, 2021. Pizza Hut was the second largest pizza chain in India
in terms of revenue in FY20, and the market leader in Sri Lanka in terms of revenue for
FY21 and number of restaurants in as of March 31, 2021. The first Pizza Hut restaurant
was opened in Wichita, Kansas, in the U.S. in 1958. Pizza Hut in India and Sri Lanka
has an extensive menu for all parts of the day, offering a broad variety of pizzas, pasta,
appetizers, beverages and desserts. Pizza Hut was the first international QSR chain to
enter the Sri Lankan food and beverage sector in 1993.

Table 31: Pizza Hut’s key operating and financial metrics in India
FY19 FY20 FY21
Total Store Count (nos) 153 174 162
Number of Stores in Top 10 Cities (nos) 127 141 129
Total No. of Cities Where Present (nos) 29 31 32
Average Daily Sales per Restaurant (in Rs 000) 61 58 48
SSSG (%) 5.0 -5.2 -35.4
Delivery as % of Restaurant Sales (%) 32.5 34.8 53
Restaurant Related Revenue (in Rs mn) 3,071 3,343 2,217
Gross Margin (%) 73.9 76.2 76.1
Restaurant EBITDA (in Rs mn) 229 244 111
Restaurant EBITDA (%) 7.5 7.3 5.0
Source: Company, I-Sec research

Taco Bell: Sapphire operated two Taco Bell restaurants in Sri Lanka as of March 31,
2021.Taco Bell was the largest Mexican-inspired restaurant chain in the world in terms
of store count as of December 31, 2020. The first Taco Bell restaurant was opened in
1962 in Downey, California. Taco Bell specializes in Mexican-inspired food products for
multiple dayparts, including breakfast, lunch, snacks and dinner. Taco Bell in Sri Lanka
has various types of tacos, chalupas, burritos and other related items.

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Restaurant Network
With over six years of operations, Sapphire has developed extensive operating
experience in the India, Sri Lanka and the Maldives markets.

Chart 26: Sapphire Foods’s restaurant count

KFC India PH India Sri Lanka Business Other Business

600 550
2
500 437 89
427
376 2 2
400 64 70
2
(# of stores)

63 209
300 162
174
153
200

250
100 187 203
158

0
FY19 FY20 FY21 Dec'21
Source: Company, I-Sec research

Chart 27: Geographical spread of restaurants

Source: Company, I-Sec research

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Restaurant Expansion Process
Using a cluster strategy, Sapphire launches its brands from flagship locations in high
traffic and high visibility locations in key metropolitan areas and cities across India and
then develops new restaurants within that cluster. It also develops new restaurants in
new cities as part of the brand and category expansion. The restaurants operate
primarily in high street locations, which typically have high impact and high visibility
locations for brand awareness, shopping malls and food courts, which are both ready
catchments to drive footfalls and drive thrus in areas with high traffic of personal
vehicles.

Since opening the first restaurant in 2015 until March 31, 2021, Sapphire has taken 90
permanent restaurant closures which took place due to business viability and decreased
footfalls, as well as the non-fulfilment of obligations by the landlords. Of those
permanent closures, 26 occurred during FY21, a few of which were related to the impact
of covid.

Marketing and communication strategy

Sapphire designs its national-level marketing campaigns jointly with YUM. Franchisees
of YUM contribute expenses for the annual marketing campaign which is executed by
YUM’s team in India, allowing Sapphire to focus on its operations. It uses an integrated
marketing and communication approach to increase brand awareness and
consideration amongst Indian consumers. This approach targets a broad consumer
base with frequent and inclusive messaging at multiple touch points, through digital
media and mass media channels such as regular TV commercials, big ticket and high
impact media events such as Indian Premier League. The marketing and
communication strategy is focused on improving relevance of its brands across age
groups, increasing consumption occasions and tactical activations for sales upliftment.

Supply chain
Sapphire has a dedicated supply chain management team comprising 34 employees
with an average experience in similar roles of between 10 to 12 years. It has detailed
specifications for each food ingredient and consumable procured. As of June 31, 2021,
it had 67 suppliers, all of whom are required to enter into a quality assurance
arrangement with Sapphire and YUM to ensure that all supplies and their quality
assurance programs fully comply with the technical standards and relevant food laws
and regulations. For poultry, one of the major food ingredients, Sapphire only works with
suppliers who have established end-to-end breeding capabilities from hatcheries to the
farms, poultry feed to processing plants, all in accordance with global YUM standards.

Warehousing and logistics

Sapphire works with third-party warehousing and logistics providers who operate
warehouses in the cities of Hyderabad, Bangalore, Chennai, Mumbai and Gurgaon to
service restaurants in India. It requires three different temperature storage and
transportation solutions, namely: frozen at –18 to –21 degrees Celsius, chilled at 1 to 4
degrees Celsius and dry at ambient temperatures. Sapphire has detailed service level
agreements and operating metrics with its third party logistics partners that cover
aspects of supply assurance, inventory management and accuracy, and quality
compliance at the most optimal cost.

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Monitoring of Restaurant Operations
The restaurant management structure varies among restaurant brands and by
restaurant size. Generally, each restaurant is led by a restaurant general manager
(“RGM”), together with one or more assistant or shift managers. RGMs are skilled and
highly trained, with most having a college-level education. The performance of RGMs is
regularly monitored and coached by area managers.

In addition, senior operations leaders regularly visit restaurants to promote adherence

to system standards and mentor restaurant teams. Each restaurant brand issues
detailed manuals, which may then be customized to meet local regulations and customs.
The restaurant management team is responsible for the day-to-day operation of each
restaurant and for ensuring compliance with operating standards. Each RGM is also
responsible for handling guest complaints and emergency situations.

Employee count
As of March 31, 2021, Sapphire had 7,453 permanent employees and 37 consultants
and contractual employees, a majority of whom work under the finance function.
Sri Lanka operations
Sapphire is the largest international QSR chain in Sri Lanka in terms of revenue for
FY21 and number of restaurants operated as of March 31, 2021. In FY21, its revenue
from Pizza Hut restaurants in Sri Lanka comprised ~35% of the total revenue of
international QSR chains in Sri Lanka, and as of March 31, 2021, it operated 68 Pizza
Hut restaurants in Sri Lanka, comprising 39% of the total number of restaurants
operated by international QSR chains in Sri Lanka.

Table 32: Key financial and operating metrics for Sri Lanka
FY19 FY20 FY21
Total store count (nos) 63 64 70
Number of stores in top 10 cities (nos) 37 32 36
Total No. of Cities Where Present (nos) 36 42 44
Average Daily Sales per Restaurant (Rs '000) 92.9 86.5 90.2
SSSG (%) 8.0 -1.0 1.0
Delivery as % of Restaurant Sales (%) 38.6 38.7 54.9
Restaurant Related Revenue (in Rs mn) 1,984 2,038 1,965
Gross Margin (%) 65.9 66.7 68.6
Restaurant EBITDA (in Rs mn) 317 329 384
Restaurant EBITDA (%) 16.0 16.2 19.5
Source: Company, I-Sec research

Maldives operations
In the Maldives, Sapphire operates one KFC restaurant and one Pizza Hut restaurant
in the city of Malé, through the indirect subsidiary, Gamma Island Food Private Limited.
Company’s direct subsidiary, Gamma Pizzakraft (Overseas) Private Limited, holds a
majority interest of 51.0% of the equity in Gamma Maldives, with the remaining 49.0%
held by Island Food Private Limited.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Appendix - 2
Promoters and management profile
Table 33: Board of directors
Name Designation Experience Description
He had pursed mechanical engineering from Mangalore University and is an
Over 30 years of alumnus of The Indian Institute of Management Bangalore. Before joining
Whole Time
work experience Company, he was the Managing Director for Levi Strauss & Co India, and was
Sanjay Purohit Director and Group
across consumer also associated with Cadbury India Limited, Mobile Peevs Company Limited,
CEO
product categories Asian Paints (India) Limited Aristocrat Marketing Limited, International Medical
Company, and Goodlass Nerolac Paints Limited.
He holds a bachelor’s degree in commerce from University of Mumbai, and an
honours diploma in systems management from the National Institute of
Information Technology. He is also an associate of the Institute of Chartered
Chairman and
Sunil Rewachand Has experience of Accountants of India. Prior to joining Company, he was associated with S.R.
Independent
Chandiramani over 29 years Batliboi & Co. LLP as a partner from April, 1996 to March, 2001 and with Ernst
Director
& Young LLP as a partner from April, 2001 to September, 2014. He is also the
founder of NYKA Advisory Services and currently manages its business affairs
as the proprietor.
He holds a bachelor’s degree of engineering in the field of mechanical
engineering from University of Roorkee and has completed his master’s in
business administration from Harvard University and has also pursued a post
Has over 16 of
Sumeet Subhash Non-Executive graduate diploma in management from Indian Institute of Management
years of working
Narang Director Society, Lucknow. Further, he has been awarded the John L. Loeb Award,
experience
from the MBA Financial AID and Fellowship Board, Harvard Business School.
Prior to joining Company, he was associated with Citigroup, India, He is also
the founder and managing director of Samara India Advisors Private Limited.
He holds a bachelor’s degree of engineering in the field of civil engineering
from University of Roorkee and has completed his degree of Master of Science
in transportation from Massachusetts Institute of Technology. Further, he has
Non-Executive Experience of over pursued master’s in business administration from Harvard University. Prior to
Manish Mehta
Director 17 years joining Company, he was associated with Lehman Brothers, Barclays Global
Investors, N.A., and Grove Capital US Services LLC. He is also currently
working as the managing director with Samara India Advisors Private Limited.

He holds a bachelor’s degree in commerce from Shri Ram College of

Commerce, University of Delhi and has been granted a certificate of practice
Vikram Ranjan Non- Executive Experience of over by the Institute of Chartered Accountants of India. He is also currently working
Agarwal Director 13 years as managing director and chief financial officer under dual employment with
Samara India Advisors Private Limited and Samara Alternate Investment
Management LLP.
He holds a bachelor’s degree in commerce from the University of Bombay and
is a member of the Institute of Cost Accountants of India. He has also passed
the final examination conducted by the Institute of Chartered Accountants of
India, and Institute of Cost and Works Accountants of India and has completed
Girish Manjanath Non- Executive Experience of over
the examinations of the Institute of Cost and Management Accountants.
Bhat Director 27 years
Further, he is also a chartered global management accountant and a fellow of
Chartered Institute of Management Accountants. Prior to joining Company, he
was associated with Cadbury India Limited, Cadbury Holdings Limited and,
Gammon India Limited
He holds a bachelor’s degree in commerce and a degree in Master of
Non- Executive Experience of over Management Studies from University of Mumbai. Prior to joining Company, he
Kabir Thakur
Director 14 years was associated with Chrys Capital group, and also as the managing director
and co-head of Creador Advisors India LLP.
She holds a bachelor’s degree of science from Madras University and a degree
Independent
Deepa Gopalan Experience of over of Master of Arts from Sri Venkateswara University. She served in the Indian
Director of
Wadhwa 36 years in the IFS Foreign Services (“IFS”) form July 1979 to November 2015, in the capacity of
Company
inter alia, ambassador in Stockholm, Doha and Tokyo.
She had pursued Master of Management Studies from Jamnalal Bajaj Institute
Independent Experience of over of Management Studies, University of Mumbai. She was recognised amongst
Anu Ram
Director of 14 years in the Economic Time’s ‘women ahead’ for the year 2016. Prior to joining Company,
Aggarwal
Company banking sector she was associated with Citi Bank. She is currently working as a president in
the wholesale banking division of Kotak Mahindra Bank Limited.
Source: Company, I-Sec research

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Table 34: Management profile
Name Designation Experience Description
He holds a bachelor’s degree in commerce from University of Mumbai and is
an associate of the Institute of Chartered Accountants of India. Prior to joining
Vijay Chief Financial Over 18 years in the
Company, he was associated with Shoppers Stop Limited, Hypercity Retail
Lalchand Jain Officer field of finance
(India) Limited, Nicholas Piramal India Limited and Indian Rayon and Industries
Limited.
He holds a bachelor’s degree in commerce, an LL.B. degree and LL.M. degree
from University of Mumbai. He has also passed the professional program
Sachin He has over 11
Head – Company examination conducted by the Institute of Company Secretaries of India. Prior
Tukaram years of experience
Secretary to joining Company, he was associated with RBL Bank Limited, Zensar
Dudam in secretarial work
Technologies Limited, Sutlej Textiles and Industries Limited and Raheja
Universal (Private) Limited.
He holds a bachelor’s degree in commerce from University of Delhi and holds
Over 24 years of
Deepak Chief Executive a diploma in hotel management from Bhartiya Vidya Bhavan, New Delhi. Prior
experience in
Taluja Officer of KFC to joining Company, he worked at Café Coffee Day, Domino’s Pizza India
operational functions
Limited, and Fun Multiplex Private Limited.
He holds a diploma in hotel management and catering technology from
Chief Executive National Council for Hotel Management and Catering Technology, New Delhi.
Vikrant Vohra Officer of Pizza Over 19 years Prior to joining Company, he was associated with Pune Marriott Hotel and
Hut Convention Centre, Park group hotels, Hyatt Regency, Yum Restaurants
(India) Private Limited, Indian Hotels Co Limited .
She holds a post-graduate diploma in management from the Indian Institute of
Over 23 years of Planning and Management, New Delhi. Prior to joining Company, she had
Sandhydeep Chief People experience in the worked in Denso Haryana Private. Limited, Climate Systems India Limited,
Purri Officer human resource Mudra Communication Private. Limited, Aditya Birla Retail Limited., Turner
department Morrison Limited, Satyam Computer Services Limited and Deloitte Touche
Tohmatsu India LLP.
He holds a bachelor’s degree in instrumentation engineering from Punjab
Technical University and a diploma in instrumentation & process control from
Sant Longowal Institute of Engineering & Technology, Longowal (Punjab).
Senior Vice
Over 17 years of Prior to joining company, he was associated with Hindustan Coca-Cola
Amit Sharma President and
experience Beverages Private Limited, Graviss Foods Private Limited (Baskin Robbins).,
Head of SCM
Vita Sana Foods Private Limited., Coca-Cola India Private Limited., Reckitt
Benckiser (India) Limited, Pepsico India Holdings Private Limited, Wockhardt
Life Sciences Limited, Ludhiana Beverages Private Limited
He holds a bachelor’s degree in science in computing from University of
Has over 19 years of
Sunderland. Prior to joining Company, he was associated with Hewlett-
Amar Yatin Chief Technology experience in the
Packard Services UK, Mondelez India Foods Limited, HCL Technologies
Patel Officer information
Limited, The Printers (Mysore) Private Limited and Human Factors
technology sector
International Private Limited.
He holds a bachelor’s degree in arts from University of Delhi, a diploma in
business management from the Institute of Chartered Financial Analysts of
India University, Tripura., a diploma in hotel management and catering
Vice President
technology from National Council for Hotel Management and Catering
and Head of Experience of over
Puneet Bhatia Technology and has completed the accelerated development program from
Business 19 years
Wharton School of University of Pennsylvania. Prior to joining Company, he
Development
was associated with Pizza Corner India Private Limited, Domino’s Pizza India
Limited, Adidas India Marketing Private Limited, Shopper’s Stop Limited,
Pantaloon Retail (India) Limited and others.
She holds a bachelor’s degree in architecture from Rajiv Gandhi Proudyogiki
Experience of over Vishwavidyalaya, Bhopal. Prior to joining Company, she was associated with
Vice president
Nandita Bapat 17 years of Horizon Interiors Private Limited, Design Consultants Arch Private Limited,
and Head of
Avadhoot experience in the VLCC Health Care Limited, Barista Coffee Company Limited and Café Coffee
Projects
field of architecture Day. She has experience of over 17 years of experience in the field of
architecture.
Work experience of He holds a bachelor’s degree in arts from the North Maharashtra University,
over 15 years in the Jalgaon, and LL.B. degree from Symbiosis Society’s Law College, Pune. Prior
Vice President
Niraj Patil field of legal, to joining Company, he was associated with Sahara India, Shoppers Stop
and Head of Legal
regulatory and Limited, Tata Communications Internet Services Limited, Aditya Birla Retail
finance. Limited and Bharti Airtel Limited.
Source: Company, I-Sec research

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Appendix - 3
Franchisee Agreement
Under the Franchisee Arrangement, YUM has granted Sapphire Foods the non-
exclusive right to use intellectual property, including technology and trademarks, owned
by YUM and its subsidiaries to operate under the KFC, Pizza Hut and Taco Bell brands
in the select territories and to avail of related development, promotional and support
services from YUM.

Term: The term of the Franchisee Arrangement, with respect to a particular restaurant,
expires on the 10th anniversary of the grant of rights, which may be renewed for an
additional 10-year term if it meets the requirements for renewal. The term of the KFC
Development Agreement and Pizza Hut Development Agreement expires on December
31, 2023.

Royalties and required expenditures: Sapphire is required to pay YUM a monthly

royalty fee of 6.0%-6.3% of its net sales from operation of the restaurants. It is also
required to spend 6.0% of net sales (including 1.0% to be spent on Local Store
Marketing (LSM)), with respect to the operations in India and 5.0% of net sales with
respect to the operations in Sri Lanka and the Maldives, to market, advertise and
promote the brands and their products.

Non-competition: YUM may not, directly or indirectly, have an interest in, or engage
in, any business involving the wholesale or retail preparation, marketing or sale of any
food products in the territories without YUM’s prior approval. YUM may withhold its
approval if one or more of the following categories of products individually constitutes
more than 20.0% of the food products: (i) pizza products, (ii) pizza and pasta products
(collectively), (iii) ready-to-eat chicken products, (iv) Mexican food products and (v) beef
burger products, in the Territories during the term of the Franchise Arrangement.

Brand Standards: Sapphire must maintain specified standards of quality set forth by
YUM. The Franchisee Arrangement provides it with a well-defined restaurant operating
model covering all aspects of business operations, as well as the flexibility to undertake,
with YUM’s approval, local or regional promotions, thereby meeting YUM’s global quality
assurance standards. It provides the flexibility to operate and manage in-house supply
chain and have direct relationships with the vendor partners who go through YUM’s
stringent approval process. YUM appoints a third party to conduct an on a periodic basis
covering the compliance with food safety, hygiene and operational and brand standards,
and conducts unannounced audits from time to time.

Transfer and Change of Control: Sapphire is required to obtain YUM’s prior consent
in the event that it transfers the rights or obligations under the Franchisee Arrangement
to a third party, or of a direct or indirect change in control of the Company.

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Appendix – 4
Site selection roll-out
Sapphire has a dedicated business development and projects team comprising 44
employees with an average of ~12 years’ experience in similar roles. Its new restaurant
roll-out process involves the following three phases:

Phase 1: Site identification, evaluation and finalisation

 Site identification. It initially identifies the new restaurant location by engaging real
estate agents to scout new locations and undertake a detailed evaluation of each
location utilising pre-defined criteria. Sapphire aims to achieve an optimal mix
across different types of restaurant formats: High street locations, shopping malls
and food courts and drive thrus.
 Site evaluation. Sapphire then conduct a site quality evaluation, which focuses on a
number of critical factors, including the trade area quality of the location, which
focuses on the demographics of the location and the businesses in the surrounding
areas, including the visibility of the location, the presence of competition, the number
of households within the location’s addressable market, the coverage of food
delivery platforms such as Swiggy and Zomato, the location’s consumer
classification and the presence of corporate and other institutions, footfall
generation, accessibility and parking.
 Site finalisation. Once a location is identified and evaluated for roll out, it undertakes
initial due diligence of the site, secure a lease for the site and seek to finalise
commercial negotiations and documentation swiftly. Each new restaurant location
requires the approval of the senior management and YUM.

Phase 2: Site development

The restaurant roll-out process is managed by experienced development teams,
dedicated project teams and empanelled contractors through which it deploys the well-
defined restaurant architecture that includes pre-defined design templates and pre-
approved standardised equipment in order to achieve roll out efficiently.

Phase 3: Pre-launch
Prior to the launch of a new restaurant, Sapphire undertakes recruitment and training of
employees and commence management of the restaurant’s supply chain requirements,
and subsequently commence restaurant opening communications.

It typically completes restaurant roll-out within 120 to 150 days from site identification to
store fit-out for the KFC and Pizza Hut restaurants.

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Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

Index of tables and charts

Tables
Table 1: Division of region for both franchisees of Yum between KFC and Pizza Hut......... 3
Table 2: GDP share of non-veg population for Sapphire territories...................................... 4
Table 3: Comparison of margins between Sapphire and Devyani ....................................... 5
Table 4: Comparison of company level margins of Sapphire and Devyani .......................... 5
Table 5: KFC’s key operating and financial metrics in India ................................................. 6
Table 6: Pizza Hut’s key operating and financial metrics in India......................................... 7
Table 7: Store economics comparison of KFC with WLDL and BKIL ................................... 7
Table 8: GDP share of non-veg population for Sapphire territories...................................... 8
Table 9: Store economics comparison of Pizza Hut India with Domino’s .......................... 11
Table 10: Key financial and operating metrics for Sri Lanka .............................................. 13
Table 11: Key International Chain QSR Players in Sri Lanka ............................................ 13
Table 12: Chain Food Services Market .............................................................................. 17
Table 13: Store Level Information of Pizza Hut .................................................................. 17
Table 14: Channel Mix of Key QSR Brands ....................................................................... 17
Table 15: APC of key QSR players (Rs)............................................................................. 18
Table 16: APC Meals / Snacks based QSR players ........................................................... 19
Table 17: Growth of Key Brands in India (No. of Outlets) .................................................. 24
Table 18: Format, Operational Model and Presence of Key Chain Players in India .......... 24
Table 19: Key QSR Brands Outlet Presence (as of March 31, 2021) ................................ 25
Table 20: Benchmarking of Key Players ............................................................................. 25
Table 21: Operating Brands and Financials of Key Franchise Operators and Brands in
India as of and for the financial year ended March 31, 2021 ....................................... 26
Table 22: DCF calculations ................................................................................................. 30
Table 23: Peer valuation ..................................................................................................... 30
Table 24: Valuation summary ............................................................................................. 31
Table 25: Profit and Loss statement ................................................................................... 34
Table 26: Balance sheet ..................................................................................................... 35
Table 27: Cash flow ............................................................................................................ 36
Table 28: Key ratios ............................................................................................................ 37
Table 29: Brief business snapshot of Sapphire Foods ....................................................... 38
Table 30: KFC’s key operating and financial metrics in India ............................................. 39
Table 31: Pizza Hut’s key operating and financial metrics in India..................................... 39
Table 32: Key financial and operating metrics for Sri Lanka .............................................. 42
Table 33: Board of directors................................................................................................ 43
Table 34: Management profile ............................................................................................ 44

Charts
Chart 1: Store footprint – KFC .............................................................................................. 9
Chart 2: Brand Revenue – KFC ............................................................................................ 9
Chart 3: Gross Margin – KFC ............................................................................................... 9
Chart 4: EBITDA Margin – KFC ............................................................................................ 9
Chart 5: Store footprint – Pizza Hut India ........................................................................... 12
Chart 6: Brand Revenue – Pizza Hut India ......................................................................... 12
Chart 7: Gross Margin – Pizza Hut India ............................................................................ 12
Chart 8: EBITDA Margin – Pizza Hut India ......................................................................... 12
Chart 9: Store footprint – Pizza Hut SL ............................................................................... 14
Chart 10: Brand Revenue – Pizza Hut SL .......................................................................... 14
Chart 11: Gross Margin – Pizza Hut SL.............................................................................. 14
Chart 12: EBITDA Margin – Pizza Hut SL .......................................................................... 14
Chart 13: Sapphire Foods’s restaurant footprint ................................................................. 15
Chart 14: Geographical spread of restaurants.................................................................... 15
Chart 15: Shift from unorganized to organized market ....................................................... 18

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 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities
Chart 16: Online Food Delivery Market in India .................................................................. 20
Chart 17: Improving delivery salience for KFC and PH India ............................................. 21
Chart 18: Strong relationship with YUM Brands ................................................................. 21
Chart 19: Brand-wise sales store openings in 9MFY22 ..................................................... 23
Chart 20: Brand-wise average daily sales recovery for Sapphire....................................... 23
Chart 21: Store footprint...................................................................................................... 27
Chart 22: Sapphire revenue to grow at a CAGR of 31% .................................................... 28
Chart 23: Gross margins ..................................................................................................... 28
Chart 24: Store-level EBITDA Margin ................................................................................. 29
Chart 25: EBITDA and EBITDA Margin .............................................................................. 29
Chart 26: Sapphire Foods’s restaurant count ..................................................................... 40
Chart 27: Geographical spread of restaurants.................................................................... 40

48
 (Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

500

100
200
300
400
600
700
800
900
1,000

Titan
0
100
200
300
400
500
600
700

600
1,100
1,600
2,100
2,600
3,100
200
1,200
2,200
3,200
4,200
5,200
1,300
1,500
1,700
1,900
2,100
2,300
2,500
2,700

200
300
400
500
600
700
Emami
Feb-19 Feb-19 Feb-19 Feb-19 Feb-19
Dec-20
Aug-19 Aug-19 Aug-19 Aug-19 Aug-19
Mar-21
Akzo Nobel

Feb-20 Feb-20 Feb-20 Feb-20 Feb-20

May-21

Mrs. Bector’s
Price charts

Berger Paints
Aug-20 Jul-21 Aug-20 Aug-20 Aug-20
Aug-20

Source: Bloomberg
Sep-21 Feb-21 Feb-21 Feb-21
Feb-21 Feb-21
Nov-21 Aug-21 Aug-21 Aug-21
Aug-21 Aug-21

Jubilant Foodworks
Feb-22 Feb-22
Feb-22 Feb-22 Feb-22 Feb-22

(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

0
50
100
150
200
250

600

300
400
500
700
800
900
1,000
1,100
1,200

0
50

200
400
600
800
100
150
200
250

1,000
1,200
1,000
1,500
2,000
2,500
3,000
3,500
4,000

GCPL

4,000
8,000
12,000
16,000
20,000
24,000
Nestle
Feb-19 Feb-19 Feb-19 Dec-20
Feb-19 Feb-19
Aug-19 Aug-19 Aug-19 Feb-21
Aug-19 Aug-19
Feb-20 Apr-21
Burger King

Feb-20 Feb-20

Jyothy Labs
Asian Paints

Feb-20 Feb-20

United Spirits
Aug-20 Aug-20 Aug-20 Jul-21
Aug-20 Aug-20
Feb-21 Feb-21 Feb-21 Feb-21 Sep-21
Feb-21
Aug-21 Aug-21 Aug-21 Aug-21 Nov-21
Aug-21
Feb-22 Feb-22 Feb-22 Feb-22 Feb-22
Feb-22
Sapphire Foods India Ltd, February 13, 2022

(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

HUL

40
50
60
70
80
90

0
200
400
600
800
1,000
1,200
1,000
1,500
2,000
2,500
3,500
4,000
4,500
1,000
1,800
3,400
4,200
5,000
5,800

3,000
2,600

1500
1800
2100
2400
2700
3000

12,000
17,000
22,000
27,000
32,000
37,000
42,000
47,000
Feb-19 Mar-21 Feb-19 Feb-19
Feb-19
Feb-19 May-21
Britannia

Aug-19 Aug-19 Aug-19 Aug-19

Aug-19 Jun-21
Feb-20 Feb-20 Feb-20 Feb-20
Feb-20 Aug-21
Aug-20 Aug-20 Aug-20 Aug-20 Aug-20
Sep-21

Page Industries
Feb-21 Feb-21 Feb-21 Feb-21

Kalyan Jewellers

Varun Beverages
Feb-21 Nov-21
Aug-21 Aug-21 Dec-21 Aug-21 Aug-21 Aug-21
Avenue Supermarts

Feb-22 Feb-22 Feb-22 Feb-22 Feb-22 Feb-22

(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

250
350
450
550
650
750

100
200
300
400
500
600
700
1,000
1,500
2,000
3,000
3,500
4,000

2,500
2,000
2,500
3,000
3,500

1,500
100
175
250
325
400

600
800
1,000
1,200
1,400
1,600
1,800
2,000

Feb-19 Feb-19 Feb-19

Colgate

Feb-21 Feb-19 Feb-19

Aug-19 Aug-19 Mar-21
Aug-19 Apr-21 Aug-19
Aug-19
Feb-20 Feb-20 Feb-20 May-21
Feb-20 Feb-20

Sheela Foam
Indigo Paints

Jun-21
Aug-20 Aug-20 Aug-20 Aug-21 Aug-20 Aug-20
Kansai Nerolac
Bajaj Consumer

Feb-21 Sep-21
Feb-21 Feb-21 Oct-21 Feb-21 Feb-21
Aug-21 Aug-21 Nov-21 Aug-21 Aug-21
Aug-21 Jan-22
Feb-22 Feb-22 Feb-22 Feb-22 Feb-22

Westlife Development
Feb-22

(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

ITC

125
175
225
275
325

350

200
250
300
400
450
500
550
600
650

0
0

500
200
400
600
800
500

1,000
1,500
2,000
2,500
3,000
1,000
1,000
1,500
2,000
2,500

200
300
400
500
600
700
Dabur

Marico

Feb-19 Feb-19 Feb-19 Feb-19 Feb-19 Feb-19

Aug-19 Aug-19 Aug-19 Aug-19 Aug-19 Aug-19
Bata India

Feb-20 Feb-20 Feb-20 Feb-20 Feb-20 Feb-20

Aug-20 Aug-20 Aug-20 Aug-20 Aug-20 Aug-20
Tata Consumer

Zydus Wellness
Feb-21 Feb-21 Feb-21 Feb-21 Feb-21 Feb-21
Aug-21 Aug-21 Aug-21 Aug-21 Aug-21 Aug-21

49
ICICI Securities

Feb-22 Feb-22 Feb-22 Feb-22 Feb-22 Feb-22

 Sapphire Foods India Ltd, February 13, 2022 ICICI Securities

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50