Broker’s call: Sapphire Foods (Buy)

Target: Rs 1,570

CMP: INR 1,393.95

The QSR opportunity in India remains very attractive and provides faster growth in consumption space. The key factor is execution on the critical aspects – portfolio, price-value equation, multi-channel presence and unit economics. In this report, we highlight Sapphire’s improved performance in key metrics across a larger time frame (FY19-23), rather than looking at a quarterly picture.

In KFC, despite being in countries with low non-vegetarian consumption, the store count CAGR was good and the SSSG/ADS CAGR during fiscal 2019-23 was higher compared to Devyani, providing assurance on opportunities in its territory. In PH, although it does not have rights to delivery stores, the store count CAGR and SSSG/ADS CAGR are not materially different from Devyani’s.

Another key advantage was profitability that was much better, as can be seen from the significant reduction in the gap in restaurant operating margins (ROM) versus Devyani over the past five years for both formats. In fact in FY ’23, despite inflation, Sapphire saw expansion in ROM for both KFC/PH versus lobbying in Devyani.

With execution still strong, we think there’s room for the discount to Devyani (35 percent) to narrow it down over time.