Q3FY24 Review: Sapphire Foods: In-line quarter, outperforms Devyani

12 Feb 2024 , 04:01 PM

Sapphire reported an in-line quarter, with revenue growth of 11.6% YoY and pre Ind AS Ebitda margin of 10.8% vs analysts of IIFL Capital Services estimate of 10.7%. KFC continues to support the overall growth while Pizza hut (PH) continues to be a drag and Sri Lanka stabilises. On an overall basis, Sapphire outperformed Devyani (DIL) in Q3 led by KFC, however DIL performed better in PH. Also, DIL had an additional headwind of Nigerian currency devaluation. Analysts of IIFL Capital Services have cut their adj Ebitda by 2-6% for FY24-26 factoring weak PH performance and moderating KFC growth expectations, however they continue to believe that steep valuation discount relative to Devyani is not justified as the performance gap has lowered over the years and remains analysts of IIFL Capital Services top pick. Maintain BUY with a PT of ₹1,600 (16% upside). 

In-line Quarter: 

Q3FY24 revenue grew 11.6% YoY supported by KFC which grew 16% YoY and came broadly in line, Pre Ind AS Ebitda came in at 10.8%, broadly in line with analysts of IIFL Capital Services estimate of 10.7% supported by better gross margins. Gross margins came in 68.9% vs 67.1% YoY and IIFLe of 68.6%. During Q3, company added 25/8/3 stores in KFC/PH/Srilanka, totalling to 36. Pizza hut had another challenging quarter and management re-iterated there lower store opening stance. 

Sapphire outperforms DIL on an overall basis: 

Sapphire outperformed DIL in KFC where revenue grew by 16%/14% for Sapphire and DIL whereas margins came in at 20.1%/19%. SSSG was -2%/-5% respectively. DIL performed better in PH where revenue declined by 2%/4% for DIL and Sapphire, margins came in at 6.1%/4.6% respectively while SSSG was -13%/-19%. Even in Q2FY24 YoY basis, the trend has been the same where Sapphire outperformed DIL in KFC and DIL fared better in PH. 

2-6% downgrade in adj Ebitda: 

Analysts of IIFL Capital Services cut for Ebitda estimates by 2%/6%/6% for FY24-26 factoring in lower store openings and margins expectations in PH and moderate KFC growth expectations. While overall demand sentiment is yet to pick up, analysts of IIFL Capital Services build in gradual recovery going forward reflecting in their 22% FY24-26 Ebitda Cagr. Maintain BUY.