Buy Sapphire Foods; target of Rs 1650: Emkay Global Financial

Emkay Global Financial's research report on Sapphire Foods

Sapphire’s Q2 EBITDA was 3-7% lower than our estimates, owing to lower KFC margins. While KFC SSG at 15% was similar to DIL’s at 13%, the PH SSG was relatively better at 23% vs. 3% for DIL. In our view, a higher dine-in focused store mix led to a better SSG performance for Sapphire. Store additions remained robust, with net adds of 42/79 stores in Q2/H1FY23, and Sapphire retained its outlook of doubling the no. of stores over the next 3-4 years. KFC’ gross-margin decline of 310bps was higher than our expectations of 150bps, but operating leverage/cost cuts helped restrict the comparable brand margin decline to 80bps. While RM prices remain elevated (YoY), Sapphire expects to recoup brand margins with operating leverage. Encouragingly, Sapphire continued to deliver Rs100mn brand contribution from SL, despite the ~40% currency depreciation and high inflation in Q2. Capex/store in H1 reduced by ~16% YoY to Rs23mn, but was higher than the ~Rs14mn/store for DIL.

Outlook

We retain our EBITDA for FY24/25E, led by retention of near-term outlook. We expect Sapphire to deliver a strong EBITDA CAGR of ~45% over FY22-25E, led by a 21% store-count CAGR, 10% SSG, and gradual margin gains. Maintain BUY with TP of Rs1,650 (21x Sep-24 EBITDA).