Target: ₹1,500
CMP: ₹1,107.45
Sapphire Foods (Sapphire) operates nearly 37 per cent of Yum Brands’ KFC/Pizza Hut (PH) stores in India and 100 per cent of PH stores in Sri Lanka (SL). India has a lower: QSR penetration at about 8 per cent in Food Services vs. 20-40 per cent in US/China/Brazil; and per capita consumption of chicken at around 3kg p.a. vs. global avg. of 17kg. Thus, we expect continuation of a mid-teen revenue CAGR for the Indian QSR industry over next 10-15 years.
Sapphire has optimised the size of its new stores and ramped up its delivery channel, to tap into the consumption demand tailwinds; the company aims to double its network in the next 3-4 years (23-28 per cent store CAGR), and reduce the extant 40 per cent ADS gap in PH vs. JUBI with innovations and improved affordability. Sapphire’s SSG target is 6-7 per cent for PH/KFC.
We initiate coverage on Sapphire with a Buy rating and a Jun’24 TP of Rs1,500, based on 22x Jun’24E EBITDA, derived from a two-stage growth model. Our TP multiple implies a 40 per cent valuation discount vs. DIL, justified by: challenges in SL; a smaller PH opportunity; lower RoICs; and lower liquidity amid lock-up expiry on certain pre-IPO shares.
Faster improvement in PH margins and SL revival may reduce valuation discount to 20 per cent.