Buy Sapphire Foods; target of Rs 1585: Motilal Oswal

Motilal Oswal's research report on Sapphire Foods

SAPPHIRE’s revenue grew 13% YoY (7% miss), led by both KFC and Pizza hut formats. However, revenue in Sri Lanka declined due to the depreciation of LKR. EBITDA declined 2% YoY (8% miss), owing to low SSG, and therefore, negative operating leverage. 2HFY23 for PH was weak. The company’s SSSG was weak, with KFC experiencing a growth of 2% and PH declining by 4%, due to the challenging business environment (v/s est. 1% in KFC/ a decline of 6% for PH). As a result of cooling off of inflation, the company experienced a sequrential improvement of 90bp in margins. Further, KFC has taken a price hike of 3.5%, which could lead to margin accretion going forward.

Outlook

We reiterate our BUY rating with a TP of INR1,585, given SAPPHIRE’s healthy earnings growth trend and relatively inexpensive valuations v/s QSR peers.