sapphire foods india ltd share price Management discussions

Economy Overview India:

India continues to be among the fastest-growing economies in the world. The Indian economy continues to show strong resilience to external shocks and its real GDP is estimated to grow at 7.0% in FY 2022-23 compared to 9.1 % in FY 2021-22. Indias per capita income at current prices is estimated to have increased 14.6% from Rs 1.50 lakh in 2021-22 to Rs 1.72 lakh in FY 2022-23. The IMF projects the Indian economy to expand at 5.9% in FY 2023-24 before rising to 6.3% in FY 2024-25.

Sri Lanka:

The economy of Sri Lanka is facing its worst economic crisis ever. The countrys real GDP contracted by 7.8% (Y-o-Y) in 2022 due to sharp contractions in Q3 and Q4 2022. Sri Lanka has been facing macroeconomic challenges on account of high inflation, a debt crisis, depletion of forex reserves, and depreciation of Sri Lankan currency (LKR). Plowever, the forex rates have stabilised and seen some appreciation during the quarter that ended on 31st March 2023. Further, the recent IMF bailout package would result in an improvement in economy and expected to overcome macro challenges in year 2023.

Global Economic Growth: Actual and Projections (%)


2022 2023 (Estimate) 2024 (Estimate)

Global Economy

3.4 2.9 3.1

Advanced Economies

2.7 1.2 1.4

Emerging Markets and Developing Economies (EMDEs)

3.9 4.0 4.2

(Source: International Monetary Fund)

Y-O-Y GDP growth of the top five major economies:

Major economies

2020 2021 2022

United States

(3.4) 5.7 2.1


2.3 8.1 3.0


(4.8) 1.7 0.4


(4.9) 2.9 1.8


4.2 (7.3) 9.1

(Source: BEA, IMF, CEIC, European Commission)

Indian Food Services Market Overview

The food services industry in India has witnessed a paradigm shift in the recent decade due to economic development, young and working population, urbanisation, changing lifestyles, and consumption pattern. The Indian food services market was valued at Rs 3,630 billion in 2022 and is projected to reach Rs 8,720 billion by 2027, growing at an impressive CAGR of 19%. The organised chain market under the organised food services market is expected to grow by 23% till 2027, whereas the unorganised segment is expected to grow by ~ 4%. The market growth can be attributed to factors including the rising trend of dining out and online food delivery, the emergence of a branded food service ecosystem, growing fast food chains, and exposure to non-native cuisines, among others.

Food Services Market CAGR (%)


CAGR FY 2010-15 CAGR FY 2015-20 CAGR FY 2020-27 Projected

Unorganised Market

7% 5% 4%

Organised Standalone Market

13% 13% 17%

Chain Market

21% 18% 23%

Restaurant in Hotels

10% 8% 10%

Indian QSR sector review

The quick service restaurant (QSR) market growth in India is fostered by factors such as significant expansion in the food and beverage industry, the widespread adoption of franchise business models by popular restaurant chains, rising penetration of e-commerce channels and continuous focus on affordable offerings. Further, the availability of organised retail space aids the industry in encouraging the growth of local and international brands across different formats.

Chain food services market CAGR (%)


CAGR FY 2010-15 CAGR FY 2015-20 CAGR 2020-27 Projected Market Share FY 2027

Quick service restaurants

29% 19% 23% 48%

Casual dining restaurants

18% 19% 23% 36%


16% 8% 14% 4%

Frozen dessert / Ice cream

15% 16% 20% 5%

Pub, bar, cafe, and lounge market

25% 22% 26% 7%

Fine dining restaurants

5% 3% 12% 1%

The eight largest cities (Delhi, Mumbai, Kolkata, Bengaluru, Chennai, Hyderabad, Pune, and Ahmedabad) of India have been development hubs for the organised food services market. KFC and Pizza Hut restaurants operated by Sapphire Foods are present in five and six of these top eight cities respectively. While these 8 cities contributed ~ 43% of the total revenue of food services market in India in FY22, they contributed 83% of the chain food service market in India during the same period. The demand in these cities is primarily driven by increased economic activity and rising incomes. Further, large food service chains have deepened their reach in Tier II and III cities as there is a huge consumer market for QSR brands in these cities.

Company Overview

Sapphire Foods is one of the largest franchisees of Yum! Brands Inc. in the Indian subcontinent, with a track record of successfully operating more than 700 KFC, Pizza Hut and Taco Bell restaurants across India, Sri Lanka, and the Maldives. The Company started operations in September 2015, following the acquisition of around 270 KFC and Pizza Hut restaurants in India and Sri Lanka by a group of leading Private Equity firms and managed by a team

of professionals. As of March 31,2023, the Company owned and operated 341 KFC and 286 Pizza Hut restaurants in India, 105 Pizza Hut and 9 Taco Bell restaurants in Sri Lanka and 1 KFC and Pizza Hut each in Maldives. The Company introduced compact omni-channel restaurants and expanded its footprints across over 135 cities in India. It opened total 164 new restaurants in FY 2022-23 (78 KFC, 67 Pizza Hut in India and 15 Pizza Hut and 4 Taco Bell in Sri Lanka).


The table below provides our key financial and operating metrics for KFC in India:


March 31,2021 March 31,2022 March 31,2023 : Growth YoY

Total store count

203 263 341 30%

Number of restaurants in top 10 cities

135 165 214

Total cities where present

56 75 90

Average daily sales per restaurant (in ? thousand)

106 130 135

Same store sales growth (%)

(30.0) 52.0 15.0

Delivery as % of restaurant sales (%)

38.1 44.0 36.0

Restaurant related revenue (in Rs million)

5,897 10,349 14,529 40%

Gross margin (%)

67.9 68.4 66.6

Restaurant EBITDA (in Rs million)

828 2,016 2,819

Restaurant EBITDA (%)

14.0 18.7(l) 19.4 70 bps

(l) Restaurant EBITDA% is normalised for additional incentives of 0.8% in that period and YoY comparison is with normalised numbers of FY22

Sapphire Foods operates 341 restaurants of KFC in 10 states of India which constitutes -56% of Indias GDP. KFC is the leading brand in the chicken QSR segment in India by a significant margin across peers.

Despite the headwinds, KFCs overall revenue grewY-o-Y by 40% with same-store sales growth (SSSG) of 15% in FY 2022-23. While the inflation was in Mid-teens, we took a price increase of - 9% only to minimise the impact on transaction growth. Despite gross margin drop of 180 bps due to inflation, It delivered healthy restaurant EBITDA of 19.4% (up 70 bps YoY)(l) on account of operating leverage and continued cost efficiencies.

In the first half of the fiscal year, inflation impacted the gross margins adversely but due to double digit SSSG, robust restaurant margins were delivered. In the second half, while inflation

cooled off and we saw partial recovery of gross margins, the macroeconomic conditions impacted consumer demand adversely leading to low single digit SSSG in H2.

Our omni-channel (dine-in, take away, and delivery channels) strategy and compact store size (average size of -1,600 sq. ft.), enabled us to accelerate the pace of expansion. The Company opened 78 new KFC restaurants in India in FY 2022-23. It is the highest-ever store launch for the KFC brand by Sapphire Foods.

In tough macro-economic environments, consumers generally tend to gravitate towards the leading brands in a category. We see this as a big opportunity for our brands. Hence, our increased emphasis on marketing, innovation and frictionless customer experience will enable us to drive differential growth momentum in the coming years.

Pizza Hut

The table below provides our key financial and operating metrics for Pizza Hut in India:


March 31,2021 March 31,2022 March 31,2023 : Growth YoY

Total store count

162 219 286 31%

Number of restaurants in top 10 cities

129 149 194

Total cities where present

32 52 66

Average daily sales per restaurant (in ? thousand)

48 57 58

Same store sales growth (%)

(35.4) 42.0 12

Delivery as % of restaurant sales (%)

53.0 57.0 50.2

Restaurant related revenue (in Rs million)

2,218 3,710 5,214 41%

Gross margin (%)

76.1 75.5 74.7

Restaurant EBITDA (in Rs million)

111 497 691

Restaurant EBITDA (%)

5.0 11.4? 13.3 190 bps

(2) Restaurant EBITDA% is normalised for additional incentives of 2.0% accrued in that period and YoY comparison is with normalised number of FY22

Sapphire Foods operates 286 restaurants of Pizza Hut in 11 states of India which constitutes 57% of Indias GDP. Pizza Hut is the number two brand in the Indian pizza market with a variety of menu offerings from meals to snacking. Over the years, Sapphire Foods transformed its Pizza Hut business model by focussing on four factors:

• Differentiated dine-in experience

• Strong value proposition (Flavour Fun pizza range and attractive meal options)

• Omni-channel strategy with tighter store formats (-1,200 sq. ft.)

• Optimising cost to improve the long-term efficiency of our business

Higher inflation presented challenges for Pizza Hut restaurants in FY 2022-23 especially in Dairy segment. The Company took a measured approach during the financial year to raise prices - 9% (while inflation touched mid-teens) across 4 tranches to minimise impact on consumer demand. Further, to drive transactions, a new entry level value layer was introduced with the launch of "Flavour Fun Pizzas" starting at Rs 79/-. This enabled us to grow transactions through the year. The first half of the fiscal recorded highest ever restaurant margins due to double digit SSSG. However, the second half was impacted by soft consumer demand, high raw material costs which reduced gross margins and led to lowered restaurant margins. However, transaction growth continued to remain positive even in H2.

The overall revenueof Pizza Hut grew by 41 % and SSSG by 12%. In spite of Gross margin pressure, operating leverage along with the cost efficiency measures resulted in healthy Restaurant EBITDA of 13.3% (up 190 bpsYoY)<2). The Company added 67 new Pizza Hut restaurants in FY 2022-23. It is the highest-ever new store expansion for the Pizza Hut brand by Sapphire Foods.

The brand offers a differentiated proposition to consumers in the form of superior product, omni-channel capabilities, entry value offerings, meal options and accessibility which will enable the next phase of growth. Sapphire Foods is also committed to investing higher marketing spends in the near future to create greater awareness and consideration for the Pizza Hut brand.

Sri Lanka operations

The table below provides our key financial and operating metrics for Sri Lanka:


March 31, 2021 March 31, 2022 : March 31, 2023 : Growth YoY

Total store count

70 95 114 20%

Number of restaurants in top 10 cities

36 36 37

Total cities where present

44 49 67

Average daily sales per restaurant (in LKR thousand)

236 298 322

Average daily sales per restaurant (in ? thousand)

94 108 72

Same store sales growth (%) (in LKR terms)

1.0 42.0 22.0

Delivery as % of restaurant sales

54.9% 56.0% 38.0%

Restaurant related revenue (in LKR million)

5,145 8,229 12,166 48%

Restaurant related revenue (in Rs million)

1,965 2,983 2,716

Gross margin (%)

68.6% 66.2% 58.1%

Restaurant EBITDA (in LKR million)

1,003 1,810 1,801 -1%

Restaurant EBITDA (in Rs million)

384 691 402

Restaurant EBITDA (%)

19.5 22.0? 14.8% -720 bps

(3) Restaurant EBITDA% is normalised for additional incentives of 1.2% accrued in that period and YoY comparison is with normalised numbers of FY22

Sapphire Foods India, through its 100% subsidiary Gamma Pizzakraft Lanka (Pvt) Ltd, continued to be a market leader in terms of the number of restaurants with 105 Pizza Hut restaurants and 9 Taco Bell restaurants as on March 2023. Pizza Hut enjoyed 40% market share in terms of outlet count and 37% by QSR sector revenues in FY 2022-23.

The financial year started with severe macro and political challenges that impacted the operating conditions adversely for all businesses in Sri Lanka. As a result, shortages of raw material, disruption in supply of utilities and depreciation of local currency caused inflation to sky-rocket over the year. To mitigate the inflationary impact, we increased prices, however, the increase was at a level below the inflation impact which impacted the gross margin and restaurant margins adversely. Despite the challenging conditions, given the strength of the brand, our operating teams, support from Sapphire Foods India on supply chain and our digital & delivery capabilities enabled us to deliver healthy SSSG and maintain our QSR leadership in the country.

In the second half of the fiscal, operating conditions stabilised, however high inflation and increase in personal taxation impacted consumer wallets, resulting in double-digit SSTG decline.

While same-store transactions declined, overall revenue grew by 48% in LKR terms (down 9% in ? terms) with SSSG of 22% in LKR terms in FY 2022-23. The restaurant EBITDA dropped to 14.8% (down by 720 bps) entirely on account of adverse gross margin impact. However, absolute EBITDA largely remained flat YoY. The macro turbulences have not deterred Sapphire Foods from expanding its business reach in Sri Lanka with 19 new restaurant additions (15 Pizza Hut and 4 Taco Bell) in FY 2022-23.

Sapphire Foods is optimistic about the future in Sri Lanka. Economies which have gone through similar turbulent times have taken 12-24 months to attain positive GDP growth. While our focus on execution and cost efficiency continues, we are calibrating our store expansion strategy for the next 12 months in Sri Lanka.


Sapphire Foods is poised to deliver strong growth in the years ahead on the back of economic development and growth of the organised QSR segment in India. We are also optimistic about the demand revival in Sri Lanka in 2023 with the gradual improvement in the countrys economy and IMF bailout. The Company is focussed on delivering profitable growth along with its commitment to maintaining a strong presence in both India and Sri Lanka.

The following are the key elements of our growth opportunities:

• Continuously enhance the relevance of our brands: We

will continue to strengthen the relevance of KFC and Pizza Hut as full meal options in addition to snacking and straddling all parts of the day. We continue to focus on menu innovation, abundant value meals options at entry and premium price points, emphasis on superior food safety, hygiene standards, and freshness of ingredients to meet evolving consumer preferences this will enable our brands to appeal to consumers across different age groups, leading to new consumer acquisition, increased ordering frequency and ticket size.

• Rapid expansion of restaurants: The Company intends to expand the restaurant network and increase customer traffic by utilising its cluster approach and penetration strategy and leveraging the global brand appeal of KFC and Pizza Hut. The Company is focussed to maximise revenue potential through all channels, expansion of the consumer base through value options and newly-evolved compact restaurant size. We believe that KFC and Pizza Hut are well-placed to capitalise on the opportunity created by the growing middle-class population and dining-out culture.

• Leverage our omni-channel strategy: Our brands are accessible through dine-in, takeaway, and delivery channels. We remain committed to investing in technology and leveraging our enhanced digital ecosystem and CRM program to deliver frictionless customer experience maximising revenue opportunity. For the delivery channel, we are focussed to improve our own digital restaurant experience and in-house delivery capabilities through close collaboration with aggregators to continuously improve operational efficiency and drive transaction growth / size through analytics-based marketing and innovative menu offerings. Further, we continue to contemporise the design of our restaurants, menu simplification, and ease of ordering through technology to cater to continuously changing consumer tastes and preferences.

• Drive Margins through operating leverage (growth) & cost efficiencies: We have built organisational capabilities in minimising wastage and enhancing efficiencies through a combination of ERP systems, processes, and people. Restaurant-level cost benchmarking Program such as PACE SETTER have helped us improve restaurant operating margins.

• Pursue inorganic growth: We have strategically built the organisation and developed our workforce to grow our brands, drive consumption, continuously improve operations, and deliver great customer experience to become Indias best restaurant operator. We have built back-end organisation systems and processes to handle significant scale. We also have an organisational culture that fosters an entrepreneurial approach and skillset in pursuing acquisitions and other ways of growing inorganically. We intend to actively explore opportunities to acquire quality and scalable QSR and food brands in complementary categories in existing or new geographies.

Financial Overview

Summarised consolidated Profit and Loss statement:


2023 2022 %age YoY

Total income

Rs Million

22,966.66 17,595.50 30.5%

Revenue from operations

Rs Million

22,655.74 17,215.72 31.6%

Cost of materials consumed

Rs Million

7,406.76 5,277.97 40.3%

% of revenue

32.7% 30.7% 6.6%

Employee benefits expense

Rs Million

2,929.03 2,739.94 6.9%

% of revenue

12.9% 15.9% -18.8%

Finance costs

Rs Million

868.86 780.93 11.3%

% of revenue

3.8% 4.5% -15.5%

Depreciation and amortisation expense

Rs Million

2,641.74 2,135.21 23.7%

% of revenue

11.7% 12.4% -6.0%

Other expenses

Rs Million

8,036.03 6,147.60 30.7%

% of revenue

35.5% 35.7% -0.7%

Total expenses

Rs Million

21,882.42 17,081.65 28.1%

% of revenue

96.6% 99.2% -2.7%

Profit / (Loss) before tax

Rs Million

1,084.24 513.85 111.0%

% of revenue

4.8% 3.0% 60.3%

Total Tax expense

Rs Million

(1,247.67) 54.00 -2,410.5%

% of revenue

-5.5% 0.3% -1,855.7%

Profit / (Loss) after tax

Rs Million

2,331.91 459.85 407.1%

% of revenue

10.3% 2.7% 285.3%

Total Income: Our total income increased by 30.5% to Rs 22,966.66 million for the financial year 2022-23 from 17,595.50 million for the financial year 2021-22. Robust performance was due to new restaurants launched during the year and the increased level of sales from existing restaurants on account of transaction and APC growth.

Revenue from operations: Our revenue from operations increased by 31.6% to Rs 22,655.74 million for the financial year 2022-23 from Rs 17,215.72 million during the financial year 2021-22, primarily due to an increase in the sale of products by our restaurants. Our restaurant sales increased by 31.6% to Rs 22,570.64 million for the financial year 2022-23 from Rs 17,154.46 million for the financial year 2021-22. This increase was due to increase in sales by restaurants on account of opening of new restaurants during the year: 79 KFC restaurants, 72 Pizza Hut restaurants in India and 15 restaurants in Sri Lanka and Same Store Sales Growth (SSSG) of 15% for KFC, 12% for PH India and -28% (-22% in LKR) for Sri Lanka. Our other operating income increased by 38.9% to Rs 85.1 million for the financial year 2022-23 from Rs 61.26 million for the financial year 2021-22. The increase in other operating income was primarily due to an increase in sales to airport dealers / franchisees to Rs 62.43 million for the financial year 2022-23 from Rs 38.95 million for the financial year 2021-22. This increase in sale to airport dealers / franchisees was largely on account of higher traffics at airports.


Cost of Materials Consumed: Cost of materials consumed increased by 40.3% to Rs 7,406.76 million for the financial year 2022-23 from Rs 5,277.97 million during the financial year 2021-22. Such an increase in the cost of materials was primarily due to an increase in purchases to Rs 7,688.57 million during the financial year 2022-23. The increase in purchases was in line with the increase in sales by restaurants primarily due to opening of new stores, compared to purchases in the amount of Rs 5,435.73 million during the financial year 2021-22. The cost of materials consumed as a percentage of revenue from operation increased to 32.7% in FY 2022-23 as against 30.7% in FY 2021-22 led by mid teen level of inflation in India and significant inflation in Sri Lanka, whereas price increase was well below inflation so that impact on consumer demand is minimised.

Employee Benefits Expense: Our employee benefits expense increased by 6.9% to Rs 2,929.03 million for the financial year 2022-23 from Rs 2,739.94 million for the financial year 2021-22. This increase in Employee Benefits Expense was primarily on account of the new restaurants opened during the year which got offset by reduced provision on account of ESOP expenses in financial year 2022-23. Elowever, as a percentage of revenue from operations, employee benefits expenses decreased to 12.9% in FY 2022-23 from 15.9% in FY 2021-22, driven by cost efficiencies and lower provision on account of ESOP granted to specified employees.

Finance Costs: Our Finance Costs increased by 11.3% to Rs 868.86 million for the financial year 2022-23 from Rs 780.93 million for the financial year 2021-22. Such an increase in finance costs was primarily due to an increase in interest on lease liabilities by 21.5% to Rs 795.14 million for the financial year 2022-23 from Rs 654.58 million for the financial year 2021- 22. The increase in interest on lease liabilities was primarily on account of new restaurants opened during the year, which was offset by a reduction in interest of lease liability on the repayment of the lease obligation of prior period lease contract.

Depreciation and Amortisation Expense: Our Depreciation and Amortisation expenses increased by 23.7% to Rs 2,641.74 million for the financial year 2022-23 from ^2,135.21 million for the financial year 2021-22, primarily due to an increase in Depreciation on property, plant and equipment by 24.4% to Rs 1,171.69 million for the financial year 2022-23 from Rs 942.25 million for the financial year 2021-22 and increase in Depreciation on right of use assets by 23.8% to ^1,276.20 million for the financial year 2022-23 from Rs 1,030.69 million for the financial year 2021-22. Led by opening of new restaurants during the year.

Other Expenses: Our Other Expenses increased by 30.7% to Rs 8,036.03 million for the financial year 2022- 23 from Rs 6,147.60 million for the financial year 2021-22.

However, as a percentage of revenue from operations, Other Expenses decreased to 35.5% in FY 2022-23 from 35.7% in FY 2021-22 on account of increased sales, operating leverage and cost efficiencies.

Reasons of increase in Other Expenses are as follows:

• Increase in royalty by 53.9% to ^1,362.55 million for the financial year 2022-23 from Rs 885.44 million for the financial year 2021-22 due to increased revenues from operations and additionally 2021-22 had higher waiver on account of Covid.

• Increase in electricity expenses by 51.4% to Rs 1,487.08 million for the financial year 2022-23 from Rs 982.10 million for the financial year 2021-22 on account of increase in consumption of energy on account of increase in revenue coupled with higher inflation on energy prices.

• Increase in marketing and advertisement expenses by 32.6% to Rs 909.77 million for the financial year 2022-23 from Rs 686.33 million for the financial year 2021-22, primarily due to increased contributions to YUM for marketing activities on account of our increased revenue.

• Increase in commission on aggregators and meal coupons by 16% to Rs 1,447.16 million for the financial year 2022-23 from ^1,247.95 million for the financial year 2021-22 due to increased aggregator sales.

• Increase in rent by 24.5% to Rs 643.48 million for the financial year 2022-23 from ^516.85 million for the financial year 2021-22 on account of an increased number of restaurants opened during the year, and increased rent on account of increased sales under our variable lease rental agreements.

Total Tax Expense: Our Total Tax Expense / (credit) was ? (1,247.67) million for the financial year 2022-23 compared to an income tax expense of Rs 54.00 million for the financial year 2021-22, primarily due to recognition of deferred tax assets on accumulated tax losses and other items in the standalone financial statement of the company.

Profit / Loss for the Year After Tax

As a result, our Group reported Profit after tax of Rs 2,331.91 million for the financial year 2022-23 as compared to Rs 459.85 million for the financial year 2021-22.

Key Balance Sheet Items


2023 : 2022 %age YoY

Capital employed

12,981.83 10,666.70 21.7%

Net Worth

12,539.14 10,054.49 24.7%

Equity share capital

635.43 635.43 0.0%


442.69 612.21 -27.7%

Property, Plant and Equipment

7,705.87 5,461.53 41.1%

Cash and bank balances including fixed deposit and current investment

3,065.92 4,605.82 -33.4%

Current Assets

4,926.00 5,906.37 -16.6%


993.04 651.64 52.4%

Current Liability

5,337.11 4,471.52 19.4%

Trade Payable

2,169.91 1,991.15 9.0%

Trade Receivable

179.49 140.71 27.6%

The strength of the Balance Sheet improved in FY 2022-23 primarily on account of an improvement in revenues from operations, post-tax profit, and a reduction in total borrowings. Cash, net of debt, as on 31st March 2023 was Rs 2,623.23 million.

Key Financial Ratios

Key ratios

2023 : 2022

Return on Capital Employed % (RoCE)

20.3% 7.2%

Return on Net Worth % (RoNW)

20.6% 6.2%

Return on Equity % (RoE)

20.6% 6.2%

Basic Earnings per Share (?)

36.7 7.8

Net profit %

10.3% 2.7%

Debt Equity Ratio

- 0.1

Interest Service Coverage Ratio

50.6 20.4

Debt Service Coverage Ratio

13.4 4.5

Current Ratio

0.92 1.3

Debtor Turnover Ratio

141.51 157.6

Inventory Turnover Ratio

11.04 11.8

a) Return on capital employed % (RoCE) = RoCE indicates the ability of a Companys management to generate returns for both the debt holders and the equity holders. It measures a Companys profitability and the efficiency with which its capital is used. It is calculated by dividing profit or (loss) before exceptional item and tax + finance cost (excluding interest on lease liabilities) by average of total equity and total borrowing.

b) Return on net worth % (RoNW) = RoNW is a measure of profitability of a Company expressed in percentage. It is calculated by dividing net profit or (loss) after tax/average total equity.

c) Return on equity % (RoE) = RoE measures the companys financial performance on shareholders equity. It is calculated by dividing net profit or (loss) after tax attributable to equity shareholders by average shareholders equity.

d) Net profit % = The net profit margin is equal to how much net profit is generated as a percentage of revenue from operations. It is calculated by dividing profit or (loss) after tax by revenue from operations.

e) Debt equity ratio (D/E) = D/E is used to evaluate a Companys financial leverage. It is a measure of the degree to which a Company is financing its operations through debt versus wholly owned funds. It is calculated by dividing total borrowings by total equity.

f) Interest service coverage ratio = The interest service coverage ratio measures how many times a Company can cover its current interest payment with its available earnings. It is calculated by dividing net operating income by total finance cost paid.

Net operating income: Profit/ (loss) before tax + depreciation and amortisation expense + finance cost excluding interest cost on lease liabilities - other income + rent waiver due to COVID.

g) Debt service coverage ratio = Debt service coverage ratio is used to analyse the firms ability to pay-off current interest and loan instalments. It is calculated by dividing earnings available for debt service by debt service i.e. net operating income/total finance cost paid and repayment of borrowings.

Net operating income: Profit/ (loss) before tax + depreciation and amortisation expense + finance cost - finance cost on lease liabilities - other income + rent waiver due to COVID.

h) Current ratio = The Current ratio indicates a Companys overall liquidity position. It measures a Companys ability to pay short-term obligations or those due within one year. It is calculated by dividing current assets by current liabilities.

i) Debtors turnover ratio = Debtors turnover measures the efficiency at which the firm is managing the receivables. The ratio shows how well a Company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid. It is calculated by dividing turnover by average trade receivables.

j) Inventory turnover ratio = Inventory turnover measures the efficiency with which a Company utilises or manages its inventory. It establishes the relationship between cost of goods sold and average inventory held during the period. It is calculated by dividing the cost of goods sold by the average inventory.

Internal Controls and their Adequacy

Your Company has aligned its current systems of internal financial control with the requirement of Companies Act 2013. The Internal Control Framework is intended to increase transparency and accountability in an organisations process of designing and implementing a system of internal control. Your Company has successfully laid down the framework and ensured its effectiveness. The internal controls are commensurate with the size of the Company and the nature of its operations. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorised use, executing transactions with proper authorisation and ensuring compliance with corporate policies.

M/s. S R B C & Co LLP, Statutory Auditors of the Company have audited the financial statements included in this annual report and have issued an attestation report on our internal control over financial reporting (as defined in section 143 of Companies Act 2013).

The internal audit department along with the external partners/ consultants carry out internal audit of the Companys business/ functional activities. The audit is based on an internal audit plan, which is reviewed each year in consultation with and approved by the audit committee. The audit committee reviews reports submitted by the internal auditor, internal audit partner and statutory auditor. Basis inputs received from the audit committee, suggestions for improvement are considered and the audit committee follows up on corrective action.

Based on the framework of internal financial controls and compliance systems established and maintained by the Company, the work performed by the internal auditor, statutory auditors and external partner/consultant, including the audit of internal financial controls over financial reporting by the statutory auditors and the reviews performed by management and the relevant board committees, including the audit committee, the Board is of the opinion that the Companys internal financial controls were adequate and effective during the financial year ended March 31, 2023.

Risk Management Framework

Risk management is integral to Sapphire Foods operations and embedded in its day-to-day business operations and activities. The framework enables risk identification, risk assessment, risk response planning and actions, risk monitoring and overall risk governance. The approach is based on the assessment of several factors and associated risks covering strategic, operational, compliance, financial risks and providing a holistic approach towards informed decision-making. Risks are assessed and managed at various levels with a top-down and bottom-up approach covering the organisation and the respective business functions. Your Company has constituted a Risk Management Committee of the Board to monitor and review the risk management plan and ensuring its effectiveness.

Key Risks

Definition / Impact on the Company

Mitigation Plan

Risks arising from industry and economic factors

• Business impact due to changes in industry, and economic factors including global factors impacting the above.

• Collaboration with YUM to proactively assess and address various industry and economic factors impacting YUM Brands.

• Proactive tracking of market factors leading to changes in cost of operations to either hedge against the rising costs / secure benefit from declining costs

• Maintaining competitiveness through:-

- Optimising Cost

- Driving Sales

- Value proposition (Value for money to the customers)

- Promotional Offers

- Customer connect

- Representation through Industry Associations to take up the industry-wide issues with the government for resolution

Macro-economic and Geo-Political Risks relating to

Potential impact on business due to forex shortage, high inflation, fuel shortages, restaurant shutdowns.

Our strength of business in terms of highest number of stores thereby providing accessibility, our own digital and delivery capabilities, price increase and supply chain management with support from parent company in India can help us mitigate the impact to some extent in the short run. We continue to expand stores and in the long run, we believe this would help us further consolidate market leadership position.

Offshore Subsidiary

This is further impacted at time of forex translation for consolidation at India level due to currency depreciation.

• Strong emphasis on maintaining and preserving secured IT systems and database through adequate IT policies and processes

IT Risks

• Risks arising from breakdown of / unauthorised access to the IT systems

• Periodic review and upgradation of IT systems and processes in line with the business requirements

• Threats from virus attack/hacking

• Continuous tracking and monitoring of IT systems to prevent / remediate security breach

Risks arising from changing Laws & Regulations

The Company has to comply with various regulations covering areas

• Operationalising regulatory requirements through adequate business policies and processes

such as Food Safety, Employment and Labour, Taxation, Environment, Health and Safety, and so on.

• Regular training and awareness sessions for restaurants and other employees on the evolving food safety and other regulations

The laws and regulations are continuously evolving that result in enhanced greater compliance risk and cost of compliance for the company. The fast pace of changes in the regulatory environment requires quick understanding of their implications and adaptation in business operations. Failure to comply could result in penalties, reputational damage, and criminal prosecution.

• Periodic food safety and quality assessments at Restaurants, Supply Chain Centres, Vendors

• Emphasis on fostering ethical and compliance culture

• Adequate and effective internal controls to comply with regulations and to keep a check on unlawful and fraudulent activities and internal audits to provide assurance

• Adequate governance at Board, executive and management level

Operational Risks

Business impact due to:

• Robust business processes with regard to business plan evaluation, implementation and monitoring

• Sales variations

• Robust, multi-layered and data-driven approach to site selection for new restaurants

• Delayed pay backs on new restaurants

• Improved payback through compact omni-channel format

• Disruption in supply chain

• Effective business / marketing strategies through collaboration with YUM to foster brand awareness and combat competitor actions

• High attrition of restaurant staff

• Enhancing supply chain and distribution systems and processes to ensure uninterrupted supplies

• Other business uncertainties

• Strategic resource planning across all levels and effective hiring processes

• Regular review of remuneration, recognition and training model to ensure retention and development of talent

• Proactive approach to BCP processes to deal with business uncertainties

Human Resources People Agenda

Sapphire Foods is dedicated to fostering a comprehensive People Agenda that prioritises purposeful and meaningful employment. We understand the importance of addressing various aspects crucial for the growth of our employees, including learning and development, a values-driven culture, and fair recognition. We provide employees with opportunities that align with our organisations values, enabling them to find fulfilment and achieve personal and professional growth. At Sapphire Foods, we place great importance on performance and actively strive to create a culture that recognises and celebrates excellence. Our core values, including Excellence, Courage, Integrity, Empathy, and Accountability, form the bedrock of our culture and serve as guiding principles for promoting the growth and well-being of our people. We consistently uphold these values in all aspects of our operations, ensuring that our People Agenda remains at the forefront of our organisational culture.

Learning and Development

Our Companys commitment to learning is reflected in the various training and development programmes that we offer, as well as in the regular feedback and coaching that we provide to employees. We provide rigorous on-the-job functional training programmes that equip employees with the skills and knowledge they need to succeed in their current roles and beyond. Our emphasis is on robust leadership programmes, including the Young Turks, Talent Edge, EnCap, and Sapphire Spark, aimed at nurturing managerial skills for senior positions. In addition to formal training programmes, we encourage the organic growth of our talent and provide opportunities for employees to build their careers in our Company through structured IDP process. By building a culture that values learning and development, we are able to attract and retain top talent, foster innovation and creativity, and create a culture of continuous improvement that drives our Company success.

At Sapphire Foods, we have established a variety of channels, both formal and informal, to actively promote employee feedback and gain valuable insights into their experiences. One notable platform is "Sapphire Speak", an annual employee engagement survey conducted in partnership with Gallup. Additionally, we conduct another internal survey known as the OHS survey. These surveys are integral in assessing and tracking key indicators related to employee engagement over time. By collecting this valuable data, we are able to evaluate the progress and trends in employee engagement within our organisation. These feedback mechanisms are crucial in our continuous efforts to enhance employee satisfaction and create a positive work environment.

We are delighted to share that our mean Gallup Engagement Score has shown a positive trend, increasing from 4.12 in the year 2018 to 4.41 in the year 2022. This signifies a noteworthy improvement in employee engagement within our organisation. Additionally, our Gallup global mean percentile rank has also seen significant progress, rising from 57 in the year 2018 to 75 in the year 2022. These results highlight our commitment to fostering a positive and engaging work environment for our employees. As on 31st March 2023, our Company had 10,604 permanent employees compared to 10,154 on 31st March 2022. As part of our ongoing commitment to gathering feedback and insights from our employees, we have implemented a comprehensive approach. This includes conducting regular health surveys and actively engaging in focus group discussions (FGDs). These FGDs serve as valuable platforms for employees to share their perspectives and provide additional feedback on various aspects of their experience within the organisation. This multifaceted approach ensures that we have a thorough understanding of our employees needs and enables us to make informed decisions to enhance their well-being.


In addition to conducting surveys, we prioritise employee engagement through a range of communication channels. Our Annual Executive Meeting provides invaluable opportunities for our leaders to embody and exemplify our core values. During these gatherings, our leaders actively practice active listening, demonstrating empathy and a genuine desire to understand the unique challenges faced by individuals in different roles. This fosters a culture of respect and appreciation for the diverse expertise and experiences within our organisation. Furthermore, during these events, leaders have the opportunity to share their ideas and insights, fostering collaboration and promoting excellence & growth.

Additionally, we leverage the Town Flail as a significant communication platform where our Group CEO personally engages with employees, providing updates, and addressing concerns and questions from the team. The Town Flail serves as an open and transparent platform that recognises the achievements of our employees and encourages open dialogue helping to have a trust-based organisation.

Diversity & Inclusion

We are committed to creating a workplace where individual differences are celebrated, diverse perspectives are encouraged, and people with varied abilities are included.

Our unwavering dedication lies in building an organisation that places importance on and recognises the unique qualities of

every employee, regardless of their gender, age, race, or sexual orientation. Our Code of Conduct, Human Rights Policy and Diversity and Inclusion Policy governs our actions and sets the foundation for an inclusive and equitable workplace. We firmly believe in treating each other with respect and dignity, ensuring equal opportunities for all. This means that we uphold the principle of equal pay for equal work and strive to create a work environment that is free from discrimination and harassment. We are dedicated to fostering and empowering women-led enterprises within our brand. At present, we proudly operate one KFC and one Pizza Hut store, both under the capable leadership of women.

To instil an inclusive culture within our processes, we consistently dedicate resources to enhance our infrastructure, specifically by implementing audio-visual aids to provide comprehensive support for employees with disabilities. Moreover, we actively promote the recruitment and hiring of individuals with diverse abilities.

Cautionary Statement

The statement made in this section describes the Companys objectives, projections, expectation and estimations which may be forward-looking statements within the meaning of applicable securities laws and regulations.