Buy Sapphire Foods; target of Rs 1620: Emkay Global Financial

Emkay Global Financial's research report on Sapphire Foods

Sapphire’s Q3 EBITDA was largely in line with expectations. SSG performance for KFC was similar to DIL’s at 3%, but PH performance was better at (4%) vs. (6%) for DIL. Brand margin performance was better for Sapphire, which saw 80-100bps decline across formats vs. 270-330bps decline for DIL. Management’s near-term commentary was cautious, but Sapphire retained its outlook of 5-7% SSG for both formats, underpinned by a strong pipeline of new launches, brand marketing and entry into the value-pizza segment. Store additions for Sapphire were lower vs. DIL’s, but remained robust with net additions of 57/136 stores in Q3/9M. Guidance of 140-180 additions was retained. Retention of store targets and peaking of consumer-level inflation suggest anticipation of demand recovery sooner than later. Near-term demand and inflation challenges persist in SL, but operating conditions have normalized. Factoring-in brand investments and elevated cheese prices leads to a ~5% cut to FY24E/25E EBITDA. We expect Sapphire to deliver a strong EBITDA CAGR of ~35% over FY22-25E, led by a 20% store-count CAGR, 8% SSG, and gradual margin gains.

Outlook

We maintain BUY on the stock, with TP of Rs1,620/share (19x Mar-25E EBITDA - Pre IndAS-116).

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