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Even as the near-term outlook for the quick service restaurant (QSR) industry remains muted, brokerages are positive about the prospects of Sapphire Foods India.
Their preference for the QSR chain comes on the back of the steady performance of Kentucky Fried Chicken (KFC), superior execution and reasonable valuations.
The Sapphire Foods stock is up 11 per cent since the start of November.
While the company has a franchise for both KFC and Pizza Hut (PH), the Street believes that the KFC business will do better than the PH business in the near term.
“Regional competition is not a threat in this category and no formidable No. 2 brand has emerged despite the entry of large QSR peers.
Sapphire’s execution here has been impressive, providing assurance on the runway for growth,” said analysts led by Mehul Desai of JM Financial Research.
The brokerage expects a 20-21 per cent sales/restaurant operating margins for KFC over FY23-26.
While KFC has done well, the competitive intensity, according to Antique Stock Broking, remains high in the pizza segment, impacting Domino’s and Pizza Hut’s performance.
“There has been visible down trading witnessed in the pizza segment impacting average order value.
“Companies have become aggressive with the promotion of affordable pizzas to drive higher footfalls, which could restrict margins in the near term,” says Dhiraj Mistry and Abhijeet Kundu of the brokerage.
The brokerage expects a gradual recovery for the pizza segment due to elevated levels of competitive intensity, impacting near-term recovery for Domino’s and Pizza Hut.
Strong performance in KFC (also due to lower competition) should support growth for Devyani and Sapphire over the near to medium term.
They prefer Devyani International and Sapphire Foods, driven by stable performance in KFC and favourable risk-reward.
Motilal Oswal Research believes that the December quarter will be difficult for QSR players such as Sapphire.
The shift of vegetarian periods such as Navratri and Shraadh impacted October sales and this will make it challenging for QSR players to achieve Same Store Sales Growth (SSSG) in 3QFY24.
Subsequently, margins may witness limited improvement.
Emkay Research has upgraded the QSR major, given the narrowing performance and potential upside in the company’s Sri Lanka business.
They also expect it to fare better than peers in the December quarter.
Despite the extended weak demand trend, the brokerage expects Sapphire to deliver a relatively better quarter with flattish SSG in KFC (vs. decline for peers).
Performance is better despite the Chennai floods (Sapphire-specific), which resulted in 4-5 days of complete loss in sales.
From a medium-term perspective, Devanshu Bansal and Vishal Panjwani of the brokerage believe the company will see similar growth prospects (versus Devyani) and has re-rating potential, given the narrowing margin gap with peers and bottoming out headwinds in the Sri Lanka operations.
While there are near-term concerns, the company has maintained its guidance of doubling the store count within the next 3-5 years, while also doing the same with a high single-digit SSSG.
Sapphire is aiming to improve the revenue and operating profit by 25 per cent and 30 per cent, respectively.
Amidst a challenging situation, JM Financial Research is positive about Sapphire’s format strategy.
This is on the back of fortifying KFC’s presence in the chicken segment through aggressive store expansion, calibrating store expansion in Pizza Hut and taking steps to improve brand recall and drive transactions and cost efficiencies, and bridging portfolio gaps (KFC Snackers, late-night delivery in PH).
