Sapphire Foods is YUM’s largest franchisee operator in the Indian subcontinent. The company’s association with Yum started in 2015 and they presently have the non-exclusive rights to operate restaurants under 3 of YUM’s leading brands, namely, the KFC, Pizza Hut, and Taco Bell brands in the Territories.
The QSR market in India is expected to grow at 23% from INR 188 bn to INR 534 bn over FY20-25. The QSR market is at a nascent stage of growth in India and hence can sustain the high growth over the next couple of decades. At the OFS price of INR 1,180 per share the stock of Sapphire is valued at 17.6X FY24 EV/EBITDA which is at a significant discount of 8.8% to YUM’s sister franchisee Devyani International Ltd. (19.3X FY24 EV/EBIDTA), and other QSR peers 23.8% Westlife (23.1X FY24 EV/EBIDTA), and 37.1% Jubilant Foodworks (28.0X FY24 EV/EBIDTA). We initiate with a Subscribe for the long term with a 24-month target of 1,502 per share (208.1X FY24 earnings) representing an upside potential of 27.2%. Sapphire, leveraging its brand, innovative product offerings, wide footprint, digital and delivery capabilities, and a seasoned senior management team, is well-positioned to take advantage of this opportunity.
The QSR market in India is expected to grow at 23% from INR 188 bn to INR 534 bn over FY20-25. The QSR market is at a nascent stage of growth in India and hence can sustain the high growth over the next couple of decades. At the OFS price of INR 1,180 per share the stock of Sapphire is valued at 17.6X FY24 EV/EBITDA which is at a significant discount of 8.8% to YUM’s sister franchisee Devyani International Ltd. (19.3X FY24 EV/EBIDTA), and other QSR peers 23.8% Westlife (23.1X FY24 EV/EBIDTA), and 37.1% Jubilant Foodworks (28.0X FY24 EV/EBIDTA). We initiate with a Subscribe for the long term with a 24-month target of 1,502 per share (208.1X FY24 earnings) representing an upside potential of 27.2%. Sapphire, leveraging its brand, innovative product offerings, wide footprint, digital and delivery capabilities, and a seasoned senior management team, is well-positioned to take advantage of this opportunity.
We expect Sapphire to roll out 306 additional stores over the next 3 years taking its total tally to 788 stores by FY24. This store expansion should support a robust revenue CAGR of 39.6% to INR 2,774 cr. Due to operating leverage, EBITDA is expected to grow at a faster CAGR of 51.3% to INR 431 cr and EBITDA margin to expand to 15.5% (+330 bps). Net earnings are expected to turn positive by FY24 and scale to INR 46 cr (vs INR 98 cr loss in FY21) with net margin expanding by 1,130 bps to stand at 1.7%. Return ratios ROE and ROCE are expected to expand by 3,500 bps and 760 bps to 5.0% and 12.2% respectively.
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- Sapphire Foods is an omni-channel player, leveraging the brick-and-mortar restaurants and digital stores to
provide dine-in, delivery and take-away services. The wide footprint of restaurants provides superior
accessibility, creates brand awareness and visibility, and improves customer retention in a competitive food
service market.
- The company monitors the quality of their customer experience through a sophisticated Guest Experience
Survey (GES) system, a third party tool, to give them customer feedback on taste of food, speed of service,
hygiene and overall satisfaction for all of their restaurants across their various channels. This allows them to
reward high performing restaurants, improve restaurants with issues and replicate best practices across
restaurants.
- Sapphire Foods has made significant investments in the operations and has a well-defined process that helps
the restaurant teams to consistently deliver great tasting products, food safety, hygiene, and guest experience.
The company has multiple levels of supervision and quality control for their restaurant operations including
third-party audits. The company has invested in specialty equipment and technology to enhance food safety and
reduce human error.
- Food services are the key segment in the Indian economy, with a market size of US$26.8 billion in FY21. The
increase in the quality of education, rising income levels of the younger demographic groups, rising
urbanization, growing working age population and increase in the number of middle-class households, among
other factors, are expected to continue to stimulate growth in per capita consumption. Together with increasing
market proliferation of brands, these factors are expected to boost the growth of the food services sector in
India. The organized market, consisting of chain and organized standalone outlets, is expected to increase its
share in the food services market in India from 37.8% in FY20 to 51.3% in FY25, thereby surpassing the
unorganized market.
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