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Sapphire Foods jumps 17% on debut. Should investors hold or book profits?

Some analysts recommend holding the stock for the long term, while others say the company’s losses are a negative.

November 18, 2021 / 04:12 PM IST
 
 
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Sapphire Foods India, an operator of KFC, Pizza Hut and Taco Bell restaurants in India, rallied as much as 17.3 percent on its stock exchange debut on November 18, exceeding analysts’ expectations of a flat-to-7 percent listing gain and the grey market premium of 5-7 percent over the issue price.

Most experts advised holding the stock for the longer term, given the company’s strong business model and growth potential along with the economic recovery.

Sapphire Foods shares opened at Rs 1,311 on the BSE, a 11.1 percent premium over the issue price of Rs 1,180. It climbed to as much as Rs 1,383.60 and also dropped to the day’s low of Rs 1,160. It traded at Rs 1,211.70, up 2.69 percent, at 14:48 hours IST.

Buy and hold

“In terms of valuations, Sapphire Foods is trading at 7.5x (FY21 enterprise value (EV)/sales), which is low compared to its peer Devyani International (FY21 EV/sales 18.1x),” said Amarjeet Maurya, AVP - mid caps, at Angel One. “Further, Sapphire Foods India has a better revenue per store compared to Devyani International. On the EBITDA front, the company is continuously showing improvement.”

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Considering the company’s business model and the discount to peers, Maurya recommends a ‘buy’ rating on the Sapphire Foods stock for the long term.

Sonam Srivastava, founder of Wright Research, advised holding the stock partially as the outlook for quick service restaurants seems exciting.

“Devyani International, Jubilant FoodWorks – these stocks are long-term profitable stocks that have had some volatility in the near term. The company has grown the top line at 15-20 percent even though the bottom line stays negative. The restaurant franchise business has also had a big threat from food delivery apps during the pandemic,” she said.

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Sapphire Foods is one of YUM’s franchisee operators in the Indian subcontinent and is the largest international QSR chain in Sri Lanka in terms of number of restaurants operated.

The company owned and operated 209 KFC restaurants in India and the Maldives, 239 Pizza Hut restaurants in India, Sri Lanka and the Maldives, and two Taco Bell restaurants in Sri Lanka, as of June 2021.

The Rs 2,073 crore public issue was completely an offer for sale by existing shareholders. The company did not get any growth capital, which could be one reason for some selling pressure in the stock at higher levels. Weak market conditions also impacted the stock.

“Sapphire Foods is a loss-making company. However, we have seen successful companies in the market from similar spaces,” said Santosh Meena, head of research at Swastika Investmart. “If we talk about the valuations then it is coming out with 7x FY21 sales while recently listed Devyani International is trading at 14x FY21. Therefore, it is coming out with attractive valuations compared to its peers and it has strong brand names under its umbrella.”

He said aggressive investors can hold the stock for the long term as the business outlook is encouraging.

Peers and earnings

Devyani International traded 5.42 percent lower at Rs 153.50 at 14:48 hours IST. Jubilant FoodWorks was down 2.35 percent at Rs 3,827.55 and Westlife Development fell 0.64 percent to Rs 573.

Sapphire Foods posted a consolidated loss of Rs 99.89 crore in FY21 against a loss of Rs 159.24 crore in FY20. Revenue from operations declined to Rs 1,019.62 crore from Rs 1,340.41 crore over the same period due to the pandemic.

The company’s consolidated loss of Rs 26.4 crore in the quarter ended June 2021 narrowed from a loss of Rs 75.17 crore a year earlier. Revenue increased significantly to Rs 303.05 crore from Rs 110.99 crore.

Some analysts don’t find the company attractive, given that it is making losses.

“We don’t recommend this counter for long-term investors as it is a loss-making company and the entire issue was an offer for sale. Long-term investors are advised to book their gains. Short-term investors can remain in this counter with a stop-loss of Rs 1,120,” said Rahul Sharma, cofounder of Equity99.

Ujjawal Kumar, a research analyst at Green Portfolio, said there are better companies in the QSR space that are more profitable with visibility of higher growth.

“In August 2021, the company made a preferential allotment to existing shareholders at Rs 505 per share. The valuation has doubled in the last three months. This is a major red flag,” Kumar said.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.
Sunil Shankar Matkar
first published: Nov 18, 2021 04:12 pm

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