Company Update

Institutional Research
India I Retail
11 December, 2023

Sapphire Foods BUY

Price: Rs1,421
Growth will be fueled by solid operational pillars Target Price: Rs1,520
Forecast return: 7%
We recently met senior management of Sapphire Foods to understand current demand Market Data
trend & progress on Pizza Hut. Management opined that demand trend remains at Bloomberg: SAPPHIRE IN
similar level like seen in Q2, albeit better YoY. SF expects KFC’s ADS to improve 52 week H/L: 1,568/1,102
sequentially driven by value layer ‘Snackers at Rs99’ and double down burger. SF Market cap: Rs91.4bn
believes once macro turn positive driven by, (1) Improving ticket size by frictionless
Shares Outstanding: 63.7mn
customer experience, (2) transaction volume, (3) affordable value layer creating all day
Free float: 57.6%
menu, and (4) 5-7% SSSG growth. That said revenue growth to reflect in sustainable
Avg. daily vol. 3mth: 1,58,783
EBITDA margin ~20%. Though RM prices have corrected YoY, SF intends to spend more Source: Bloomberg
on ad-spends in consultation with YUM to create consumption occasion for the
consumer. Even though stress in PH continued despite drop in prices, SF believes Omni Changes in the report
Rating: Unchanged
channel strategy is working well, yet investments in TV commercials to improve brand
Target price: 1520:Unchanged
visibility and awareness. SF maintained store addition of 130-160. We maintain BUY
FY24E: Rs19.5:Unchanged
rating with DCF-based TP 1,520 (implying EV/EBITDA of 13.6x avg. FY25E/26E). EPS:
FY25E: Rs27.5:Unchanged
Pizza demand continues to check slackness, while strong execution hold KFC Source: Centrum Broking
Our interaction with the management indicate KFC executing with grace, recently added SAPPHIRE relative to Nifty Midcap 100
value for money product Chizza & ‘Snackers at Rs99’ gaining traction & customize order 160 NIFTY Midcap 100
through digital kiosks will help to increase ASP. Though pain in PH is not over, consumer 140
down trading to value pizzas, yet rising competition lead to negative SSSG. SF believes 120
its Omni-channel strategy helped to deliver belter SSSG as compared to No1 player. Sri
100
Lanka's macroeconomic conditions are improving, tax laws are still slightly pressuring
80 SAPPHIRE
demand. SF sets key brand priorities: (1) innovation to retain craveable taste, (2) built
60
value proposition, (3) develop seamless customer experience, (4) improve operational Dec-22 Feb-23 Apr-23 Jun-23 Aug-23 Oct-23 Dec-23
excellence & accessibility, (5) build brand salience, and (6) strengthen home services. Source: Bloomberg
Raw material prices cooling off, though margins expected to improve modestly
Shareholding pattern
SF said, inflationary pressure now easing out as milk and cheese prices saw correction Sep-23 Jun-23 Mar-23 Dec-22
given that its focus on promotions and ad-spends operating margins may rise modestly. Promoter 41.7 44.9 44.9 44.9
Management stated sustainable margin for KFC will be ~20% & focus will on steady FIIs 23.7 18.7 15.5 16.5
revenue growth. KFC ticket size is expected to improve with transaction volume. In PH DIIs 26.6 27.7 25.5 22.9
margin remains constantly under pressure due to pricing pressure. SF expect some Public/other 8.0 8.7 14.1 15.7
improvement in operating margins for Sri Lanka led by SSSG in the near term. Source: BSE
Valuation and risks – retain BUY, with DCF-based target price of Rs1,520
As argued in our recent QSR Thematic report, with strong management, besides sharp
improvement in its execution capabilities we expect turnaround in SF’s performance. However
weak demand, incremental competition in QSR pose short term challenges in our view. We
reckon despite soft demand management held store expansion target with mid-single digit
SSSG led by strong menu innovation, enhancing accessibility by increased marketing spend &
brand salience. We maintain BUY rating with DCF-based TP 1,520 (implying EV/EBITDA of
13.6x avg. FY25E/26E). Key risks to our call prolonged weakness in demand, rising inflation in
key RM/PM and severe competition in chicken portfolio from organized/ unorganized players.

Financial and valuation summary

YE Mar (Rs mn) FY22A FY23A FY24E FY25E FY26E
Revenues 17,216 22,656 27,429 32,255 38,824
EBITDA 3,050 4,284 5,198 6,279 7,656
EBITDA margin (%) 17.7 18.9 19.0 19.5 19.7
Adj. Net profit 460 2,332 1,240 1,745 2,556
Adj. EPS (Rs) 7.7 36.7 19.5 27.5 40.2
EPS growth (%) nm 376.4 (46.8) 40.7 46.4
PE (x) 183.8 38.6 72.6 51.6 35.2
EV/EBITDA (x) 28.9 20.6 16.4 13.0 9.9
PBV (x) 8.4 7.2 6.5 5.8 5.0
Retail

RoE (%) 6.2 20.6 9.4 11.9 15.2 Shirish Pardeshi

RoCE (%) 14.5 14.9 15.9 18.3 21.4 Research Analyst, Retail
Source: Bloomberg, Centrum Broking +91-4215 9634
[email protected]

Please see Disclaimer for analyst certifications and all other important disclosures.
Sapphire Foods 11 December, 2023

Thesis Snapshot
Estimate revision Valuations
FY24E FY24E FY25E FY25E As argued in our recent QSR Thematic report, with strong management,
YE Mar (Rs mn) % chg % chg
New Old New Old besides sharp improvement in its execution capabilities we expect
Revenue 27,429 27,429 0.0 32,255 32,255 0.0 turnaround in SF’s performance. However weak demand, incremental
EBITDA 5,198 5,198 0.0 6,279 6,279 0.0 competition in QSR pose short term challenges in our view. We reckon
EBITDA margin % 19.0 19.0 0bp 19.5 19.5 0bp despite soft demand management held store expansion target with mid-
single digit SSSG led by strong menu innovation, enhancing accessibility
Adj. PAT 1,240 1,240 0.0 1,745 1,745 0.0
by increased marketing spend & brand salience. We maintain BUY rating
Diluted EPS (Rs) 19.5 19.5 0.0 27.5 27.5 0.0 with DCF-based TP 1,520 (implying EV/EBITDA of 13.6x avg. FY25E/26E).
Source: Centrum Broking Key risks to our call prolonged weakness in demand, rising inflation in key
RM/PM and severe competition in chicken portfolio from organized/
Sapphire Foods versus NIFTY Midcap 100 unorganized players.
1m 6m 1 year Valuations Rs/share
SAPPHIRE IN 9.4 4.1 2.5 DCF-based target price Rs1,520
NIFTY Midcap 100 9.8 31.0 38.2 WACC (%) 11.8
Source: Bloomberg, NSE
Terminal growth (%) 5.2
Key assumptions
EV/EBITDA mean and standard deviation
Y/E Mar FY24E FY25E
24
No. of store 863 998
22
Gross Margin% 67.0 67.5
20
Store Margin (%) (Pre-INDAS) 17.4 17.7
18
Store Margin (%) (Post-INDAS) 24.5 24.9
16
EBITDA (%) (Pre-INDAS) 11.9 12.3
14
EBITDA (%) (Post-INDAS) 19.0 19.5
12
Source: Centrum Broking Jun-22

Dec-23
Jun-23
Dec-21

Dec-22
Sep-22

Sep-23
Mar-22

Mar-23
EV/EBITDA Mean
Mean + Std Dev Mean - Std Dev
Mean + 2 Std Dev
Source: Bloomberg, Centrum Broking

Peer comparison
Mkt Cap CAGR (FY23-25E) % EV/EBITDA(x) Pre-INDAS EV/EBITDA (x) - Post RoE(%)
Company
(Rs Bn) Sales EBITDA EPS FY23 FY24E FY25E FY23 FY24E FY25E FY23 FY24E FY25E
Jubilant Foods 329.7 17.8 19.9 41.2 39.6 30.4 24.2 31.8 26.8 21.9 19.0 23.4 25.1
Devyani International 222.6 20.5 22.2 3.3 46.8 36.9 27.8 31.1 25.1 19.3 34.1 22.3 22.0
Westlife Foodworld 126.3 17.9 22.2 48.4 49.2 40.4 31.5 37.6 31.0 24.7 24.2 25.9 29.4
Sapphire Foods 83.8 19.3 21.1 (13.5) 31.6 23.0 18.4 19.2 15.2 12.0 20.6 9.4 11.9
RBA 58.3 31.9 53.3 NA 166.9 60.4 32.3 36.2 22.8 15.1 (3.7) (1.4) 1.2
Source: Company, Centrum Broking

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Sapphire Foods 11 December, 2023

Management meet – key takeaways

 Management stated that there is no significant impact of events like world cup,
demand remains at similar level, slight improvement compare to previous year.
 Inflationary pressure on key raw material is stabilise, even though prices are at inflated
level. Management believes there will not be material impact on margins & additionally
anticipate a modest increase in margin.
 KFC remains outlier with the top line growth and sustainable margin maintaining steady
state store expansion.
 Management added value layer by introducing d Chicken roll/Snackers priced at Rs99+
as permanent SKU and Cheeza , double down burger as LTO.
 Value layered products has improved transaction volume while customise order via
digital kiosks expected to lead ASP.
 ADS will improved on quarterly basis for Q3 while SSSG expected to be in range of 5%-
7% in medium to long term period.
 Management set key brand priorities led by, (1) enhance relevance for fried chicken
category, (2) innovation to retain craveable taste, (3) built value proposition, (4)
develop seamless customer experience, (5) operational excellence, and (6) improve
accessibility.
 Pain is not over in Pizza hut as SSG is negative & profitability is not improving largely
due to competition along with structural shift from Pizza to other category has been
dragging the sales, macro environment also not favourable & inflated key raw material
prices.
 Management believes Omni channel is way to grow in Pizza category.
 PH brand priorities would be – improved accessibility , product innovation, build brand
salience.
 Company invested in intelligent kitchen tool ‘dragon tail’ unable them to serve hot and
fresh pizzas as quickly as possible.
 Sri Lanka's macroeconomic conditions are improving, tax laws are still slightly
pressuring demand, while Slight improvement in Sri Lanka business operating margin.
 Store expansion will be in range of 130-160, with upped media spend & reduce capital
expenditure.

Centrum Institutional Research 3

Sapphire Foods 11 December, 2023

Exhibit 1: Quarterly consol. net revenue growth – YoY

Revenue -KFC Revenue -PH Revenue -Srilanka Revenue -Company
7000

6000

5000

Rsmn
4000

3000

2000

1000

0
Q421 Q122 Q222 Q322 Q422 Q123 Q223 Q323 Q423 Q124 Q224

Source: Company Data, Centrum Broking

Exhibit 2: Quarterly Store Growth trend

Stores -KFC Stores -PH Stores -Srilanka Stores -Company
900
800
700
600
Number

500
400
300
200
100
0
Q421 Q122 Q222 Q322 Q422 Q123 Q223 Q323 Q423 Q124 Q224
Source: Company Data, Centrum Broking

Exhibit 3: Brand wise SSSG on a declining trend

SSSG -KFC SSSG -PH SSSG -Srilanka
80%

60%

40%

20%

0%

-20%

-40%
Q421 Q122 Q222 Q322 Q422 Q123 Q223 Q323 Q423 Q124 Q224
Source: Company Data, Centrum Broking

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Sapphire Foods 11 December, 2023

Exhibit 4: Brand wise Gross Margin – PH on higher side while KFC expanded steadily
Gross Margin -KFC Gross Margin -PH
Gross Margin -Srilanka Gross Margin -Company
80%

75%

70%

65%

60%

55%

50%
Q421 Q122 Q222 Q322 Q422 Q123 Q223 Q323 Q423 Q124 Q224
Source: Company Data, Centrum Broking

Exhibit 5: EBITDA margin trend , Employee & Other expenses as a % on sales

Employee Cost % on sales Other exp % on sales
40% EBITDA Margin -Pre EBITDA Margin -Post

35%

30%

25%

20%

15%

10%

5%

0%
Q421 Q122 Q222 Q322 Q422 Q123 Q223 Q323 Q423 Q124 Q224
Source: Company Data, Centrum Broking

Exhibit 6: Restaurant EBITDA trend YoY

Restaurant EBITDA -KFC Restaurant EBITDA -PH
30% Restaurant EBITDA -Srilanka Restaurant EBITDA -Company

25%

20%

15%

10%

5%

0%
Q421 Q122 Q222 Q322 Q422 Q123 Q223 Q323 Q423 Q124 Q224
Source: Company Data, Centrum Broking

Centrum Institutional Research 5

Sapphire Foods 11 December, 2023

P&L Balance sheet

YE Mar (Rs mn) FY22A FY23A FY24E FY25E FY26E YE Mar (Rs mn) FY22A FY23A FY24E FY25E FY26E
Revenues 17,216 22,656 27,429 32,255 38,824 Equity share capital 635 635 635 635 635
Operating Expense 6,163 7,407 10,439 12,116 14,570 Reserves & surplus 9,436 11,924 13,164 14,909 17,465
Employee cost 2,740 2,929 3,573 4,360 5,319 Shareholders fund 10,071 12,559 13,799 15,544 18,100
Others 5,262 8,036 8,219 9,501 11,279 Minority Interest (17) (20) (20) (20) (20)
EBITDA 3,050 4,284 5,198 6,279 7,656 Total debt 612 443 363 283 203
Depreciation & Amortisation 2,135 2,642 3,361 3,735 4,061 Non Current Liabilities 6,496 7,713 9,255 10,181 11,199
EBIT 915 1,642 1,838 2,544 3,595 Def tax liab. (net) 87 36 39 43 47
Interest expenses 781 869 1,020 1,109 1,209 Total liabilities 17,250 20,730 23,436 26,031 29,529
Other income 380 311 560 504 453 Gross block 22,799 29,671 32,891 36,336 39,091
PBT 514 1,084 1,378 1,939 2,839 Less: acc. Depreciation (8,575) (11,217) (14,577) (18,312) (22,374)
Taxes 54 (1,248) 138 194 284 Net block 14,224 18,454 18,313 18,023 16,717
Effective tax rate (%) 10.5 115.1 10.0 10.0 10.0 Capital WIP 320 550 556 561 567
PAT 460 2,332 1,240 1,745 2,556 Net fixed assets 14,224 18,454 18,869 18,585 17,284
Minority/Associates 0 0 0 0 0 Non Current Assets 314 450 495 544 599
Recurring PAT 460 2,332 1,240 1,745 2,556 Investments 1,525 659 725 798 878
Extraordinary items 0 0 0 0 0 Inventories 652 993 1,202 1,414 1,702
Reported PAT 460 2,332 1,240 1,745 2,556 Sundry debtors 141 179 150 177 213
Cash & Cash Equivalents 2,546 2,204 5,189 8,550 14,059
Ratios Loans & advances 2,131 1,578 1,731 1,962 2,249
YE Mar FY22A FY23A FY24E FY25E FY26E
Other current assets 107 203 150 177 213
Growth (%) Trade payables 1,991 2,170 2,627 3,089 3,718
Revenue 68.8 31.6 21.1 17.6 20.4 Other current liab. 2,222 2,864 3,467 4,077 4,907
EBITDA 145.2 40.4 21.3 20.8 21.9
Provisions 176 177 202 229 262
Adj. EPS nm 376.4 (46.8) 40.7 46.4
Net current assets 1,187 (53) 2,127 4,884 9,548
Margins (%) Total assets 17,250 20,730 23,436 26,031 29,529
Gross 69.3 67.3 67.0 67.5 67.6
EBITDA 17.7 18.9 19.0 19.5 19.7 Cashflow
EBIT 5.3 7.2 6.7 7.9 9.3 YE Mar (Rs mn) FY22A FY23A FY24E FY25E FY26E
Adjusted PAT 2.7 10.3 4.5 5.4 6.6 Profit Before Tax 514 1,084 1,378 1,939 2,839
Returns (%) Depreciation & Amortisation 2,135 2,642 3,361 3,735 4,061
ROE 6.2 20.6 9.4 11.9 15.2 Net Interest 781 869 1,020 1,109 1,209
ROCE 14.5 14.9 15.9 18.3 21.4 Net Change – WC (571) (669) 764 559 795
ROIC 6.7 (1.5) 9.0 12.8 19.6 Direct taxes (54) (21) (138) (194) (284)
Turnover (days) Net cash from operations 2,805 3,904 6,384 7,148 8,620
Gross block turnover ratio (x) 0.8 0.8 0.8 0.9 1.0 Capital expenditure (5,211) (3,825) (3,776) (3,451) (2,761)
Debtors 2 3 2 2 2 Acquisitions, net 0 0 0 0 0
Inventory 39 41 44 46 45 Investments (1,258) 1,656 (66) (73) (80)
Creditors 119 103 97 100 99 Others 0 133 0 0 0
Net working capital 25 (1) 28 55 90 Net cash from investing (6,469) (2,035) (3,842) (3,523) (2,840)
Solvency (x) FCF (3,664) 1,869 2,542 3,625 5,780
Net debt-equity (0.2) (0.1) (0.4) (0.5) (0.8) Issue of share capital 6,399 0 1,543 926 1,018
Interest coverage ratio 3.9 4.9 5.1 5.7 6.3 Increase/(decrease) in debt 92 (1,084) (80) (80) (80)
Net debt/EBITDA (0.6) (0.4) (0.9) (1.3) (1.8) Dividend paid 0 0 0 0 0
Per share (Rs) Interest paid (781) (864) (1,020) (1,109) (1,209)
Adjusted EPS 7.7 36.7 19.5 27.5 40.2 Others 0 0 0 0 0
BVPS 168.7 197.7 217.2 244.6 284.8 Net cash from financing 5,710 (1,948) 443 (264) (270)
CEPS 43.5 78.3 72.4 86.2 104.1 Net change in Cash 2,046 (80) 2,985 3,361 5,509
DPS 0.0 0.0 0.0 0.0 0.0 Source: Company, Centrum Broking
Dividend payout (%) 0.0 0.0 0.0 0.0 0.0
Valuation (x)
P/E 183.8 38.6 72.6 51.6 35.2
P/BV 8.4 7.2 6.5 5.8 5.0
EV/EBITDA 28.9 20.6 16.4 13.0 9.9
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Source: Company, Centrum Broking

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Sapphire Foods 11 December, 2023

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Centrum Institutional Research 7

Sapphire Foods 11 December, 2023

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Ratings definitions
Our ratings denote the following 12-month forecast returns:
Buy – The stock is expected to return above 15%.
Add – The stock is expected to return 5-15%.
Reduce – The stock is expected to deliver -5-+5% returns.
Sell – The stock is expected to deliver <-5% returns.
Sapphire Foods
1600

1400

1200

1000
Dec-22 Mar-23 Jun-23 Sep-23 Dec-23
Sapphire Foods India Ltd

Source: Bloomberg

Centrum Institutional Research 8

Sapphire Foods 11 December, 2023

Disclosure of Interest Statement

1 Business activities of Centrum Broking Centrum Broking Limited (hereinafter referred to as “CBL”) is a registered member of NSE (Cash, F&O and Currency Derivatives
Limited (CBL) Segments), MCX-SX (Currency Derivatives Segment) and BSE (Cash segment), Depository Participant of CDSL and a SEBI registered
Portfolio Manager.
2 Details of Disciplinary History of CBL CBL has not been debarred/ suspended by SEBI or any other regulatory authority from accessing /dealing in securities market.

3 Registration status of CBL: CBL is registered with SEBI as a Research Analyst (SEBI Registration No. INH000001469)

Sapphire Foods

4 Whether Research analyst’s or relatives’ have any financial interest in the subject company and nature of such financial interest No

5 Whether Research analyst or relatives have actual / beneficial ownership of 1% or more in securities of the subject company at the end of the month
No
immediately preceding the date of publication of the document.
6 Whether the research analyst or his relatives has any other material conflict of interest No

7 Whether research analyst has received any compensation from the subject company in the past 12 months and nature of products / services for which
No
such compensation is received
8 Whether the Research Analyst has received any compensation or any other benefits from the subject company or third party in connection with the
No
research report
9 Whether Research Analysts has served as an officer, director or employee of the subject company No

10 Whether the Research Analyst has been engaged in market making activity of the subject company. No

11 Whether it or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months; No

Whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company
12 No
in the past twelve months;
Whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage
13 No
services from the subject company in the past twelve months;

Member (NSE and BSE). Member MSEI (Inactive)

Single SEBI Regn. No.: INZ000205331

Depository Participant (DP)

CDSL DP ID: 120 – 12200
Single SEBI Regn. No.: IN-DP-537-2020

PORTFOLIO MANAGER

SEBI REGN NO.: INP000004383

Research Analyst
SEBI Registration No. INH000001469

Mutual Fund Distributor

AMFI REGN No. ARN- 147569

Website: www.centrumbroking.com
Investor Grievance Email ID: [email protected]

Compliance Officer Details:

Ajay S Bendkhale
(022) 4215 9000/9023; Email ID: [email protected]

Centrum Broking Ltd. (CIN :U67120MH1994PLC078125)

Registered and Corporate Office:
Level -9, Centrum House, C.S.T. Road,
Vidyanagari Marg, Kalina,
Santacruz (East) Mumbai – 400098
Tel.: - +91 22 4215 9000

Centrum Institutional Research 9