Q2FY24 Review: Sapphire Foods: Persistent demand headwind

3 Nov 2023 , 11:11 AM

Sapphire Foods reported Q2FY24 results with a broadly in-line sales and 3% beat in EBITDA primarily driven by better restaurant EBITDA margins in KFC and Sri Lanka business while Pizza hut was a drag. The company has guided that doubling of Pizza Hut stores would happen over a 4 year period (vs 3 years earlier). Analysts of IIFL Capital Services believe broad based consumption slowdown would continue to impact the demand trajectory and recovery would be more gradual. Analysts of IIFL Capital Services downgrade theirw adj. EBITDA estimates by 5%/7%/9% for FY24/25/26 considering the above and maintain ADD rating with a target price of Rs1,450. 

Slight beat: 

Sapphire Foods delivered a broadly in-line top-line performance while pre IND AS EBITDA was 6% above analysts of IIFL Capital Services estimates. KFC margin improvement was on account improved gross margins while Pizza hut margins were under pressure owing to weak demand. The company has added 23 stores in KFC, 9 stores in Pizza Hut India and 4 stores in Sri Lanka in Q2FY24. SSS growth in KFC/Pizza Hut was 0%/-20%) respectively for the quarter. 

KFC holding, Pizza Hut disappoints: 

ADS in KFC was down 9% QoQ, impacted by higher number of veg. festive days, with an additional month of Shravan. Pizza hut delivered a weak quarter impacted by tough macro conditions and intensified competition. In Sri Lanka, the company delivered a strong quarter primarily led by easing inflation and favorable FX impact. While management has laid out certain initiatives to better Pizza hut performance, Analysts of IIFL Capital Services believe it would be more fruitful in the longer term. 

Cut adj EBITDA by 5-9%: 

Analysts of IIFL Capital Services downgrade theor adj. EBITDA estimates by 5%/7%/9% for FY24/25/26 factoring the weakness in Pizza hut performance in Q2, while broadly maintain estimates for KFC and upgrade Sri Lanka business numbers on back of easing macroeconomic situation in Sri Lanka leading to better growth. Analysts of IIFL Capital Services build in 19%/24%/38% cagr in sales/Ebitda/pat over FY24-26 post their cuts and maintain ADD rating on the stock with a target price of Rs1,450.