Buy Sapphire Foods; target of Rs 1420: Motilal Oswal

Motilal Oswal's research report on Sapphire Foods

SAPPHIRE offers an exciting investment opportunity in the Indian Quick Service Restaurant (QSR) space on account of the following factors: The Indian Food Service Industry (FSI) is expected to clock 9% CAGR in the coming years, with QSRs likely to grow faster at 23% CAGR over FY20-25. SAPPHIRE's new scalable Restaurant economic model is a game-changer. Its omnichannel strategy and reduction in store sizes, along with other elements of the model, have led to a big shift in SAPPHIRE's unit economics. KFC India's business is on a strong footing, with a healthy ADS and profitability. We expect it to register 31% sales CAGR over FY22-24E driven by rapid store additions and strong SSSG aided by a smart recovery post-Covid. PH's India business is seeing a turnaround, with a higher focus on delivery, while retaining its dine-in edge. We expect it to register 35% sales CAGR over FY22-24E with a resultant improvement in its Restaurant EBITDA margin. Overall, SAPPHIRE is poised to deliver strong growth with 29%/43% sales/EBITDA (pre-Ind AS 116) CAGR over FY22-24E. SAPPHIRE's valuations are at a considerable discount to peers.

Outlook

We initiate coverage with a Buy rating and TP of INR1,420 per share (27x/17x FY24E EV/EBITDA for KFC/PH) which is at a significant discount to the target multiples for DEVYANI's KFC/PH at 45x/35x.