Q4FY23 Review: Sapphire Foods: Weak SSSG trends continue

15 May 2023 , 11:04 AM

Sapphire reported a subdued quarter with revenue growing by 13%, mainly due to 27% decline in Sri Lanka. India business growth was healthy at 23%, but came largely on store expansion. Pizza Hut SSSG continued to be negative on weak demand. KFC SSSG of 2% was also subdued due to decline in same store transactions.

Slightly below estimates: 

Q4FY23 sales grew by 12.8% YoY, slightly below estimates largely on 27% YoY decline in Sri Lanka. India business revenue growth of 23% YoY was healthy, led by KFC/Pizza Hut (PH) sales increasing by 24%/18%. Pre-IndAS Ebitda margin of 10% contracted by 280bps YoY, mainly due to fall in PH and Sri Lanka restaurant margins given gross margin pressure and negative operating leverage. The company opened 28 stores in Q4, including 16 KFC and 12 PH.

Weak demand keeps SSSG muted: 

Pizza Hut SSSG continued to remain negative at -4%, reflecting weak consumer demand. Same store transaction growth was positive due to flavour fun pizzas. The company launched 10 new pizzas in PH to revive SSSG in the format. KFC SSSG was also weak reducing to 2% from 3% in Q3, impacted additionally because of Navaratri in March; but 3yr Cagr SSSG was healthy at 7%. For FY23, restaurant margin for KFC and Pizza Hut expanded by 70bps/130bps YoY to 19.4% and 13.3% respectively. 

FY24/25 Ebitda cut by 3%/1%: 

Analysts of IIFL Capital Services estimates are cut marginally on margin miss in Pizza Hut and Sri Lanka in Q4. As highlighted in their QSR downgrade note, once demand slowdown kicks in it takes few quarters to recover. Considering this, we have a cautious view on the sector. Having said that, Sapphire is still trading at undemanding valuations of 18x FY25 EV/pre-IndAS Ebitda vs 31x for Devyani. 

Analysts of IIFL Capital Services maintain ADD rating on the stock with TP of Rs.1,400.