Sapphire Foods India Limited (SAPPHIRE) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Sapphire Foods Q1 FY '27 Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Purohit from Sapphire Foods. Thank you, and over to you, Mr. Sanjay.

\ Welcome to the Sapphire Foods Quarter 1 FY '27 business performance highlights. Let me jump in. You should have the presentation already available with you. Quarter 1 FY '27 was our second consecutive quarter of strong performance with 15% revenue growth, best in the last 11 quarters and 32% adjusted EBITDA growth, best in the last 15 quarters. This was led by positive SSSG across all 3 brand verticals, KFC India, Pizza Hut India and Sri Lanka businesses. Our quarter 1 revenue was INR 888 crores, up 15%, as I said. We added 16 KFC restaurants, 5 Pizza Hut in India, 1 Pizza Hut in Sri Lanka. Our total restaurant count was 1,074 as of 30th June 2026. Consolidated restaurant EBITDA was up 23% year-on-year. Margin was 13%, up 80 basis points. Consolidated adjusted EBITDA came in at INR 75 crores, up 37% year-on-year and margin was 8.4%. Consol EBITDA, which is post Ind AS was INR 140.6 crores or 15.8%, up by 24% year-on-year or up by 120 basis points. Consolidated adjusted PBT was INR 27.3 crores or 3.1% and consolidated PBT was INR 16.2 crores or 1.8%, up 200 basis points. Let me now take you straight to the KFC highlights. KFC delivered 5% SSSG and 17% system growth, with very strong dine-in and takeaway contribution, largely because of our two-pronged strategy to drive consumer recruitment. I called about -- I've called this out in my last investor presentation also. At one level, we've got strong everyday value, the INR 99 chicken crisper burger meal accompanied by advertising that enables new consumer recruitment. And last -- and we had also shared a YouTube clip of the new advertising. So we believe that it's a combination of advertising and this everyday value that is driving change of consumer behavior and moving people to start -- moving new consumers to start considering KFC as part of their repertoire. Apart from that in more evolved chicken markets, we also have a disruptive abundant value strategy on select base ideally perhaps once a month, where we offer buy one, get one on our hot and crispy buckets backed by localized advertising. These offers are only present on the dine-in and takeaway channel, and this has enabled very strong growth on these channels. Our innovations for the quarter include KFC Shawarma. This is Slide #21 and the Double Chicken Dynamite, which is really -- and both products are fantastic products. Double Chicken Dynamite is 2 fills of chicken. And in between, you've got a layer of noodles and cheese. Our digital kiosks are implemented on about 75% of stores. We launched 16 new stores last year. Vijay, could you take the numbers, please?

Yes. I'm on Slide #24, channel-wise sales mix. Dining and takeaway sales for KFC improved from 57% to 59%. This is on basis of the strong dine-in takeaway value campaigns. KFC SSSG came at 5% for the quarter and the overall revenue grew by 17%. Gross margin improved by 160 basis points over last quarter. This was a combination of lower discounts compared to last year as well as price increase of 2% during the quarter. This, combined with improved dining and takeaway mix, better operating leverage meant that the restaurant EBITDA improved by 120 basis points over last year. And this is despite the challenges in terms of the -- and the pricing pressures which we faced on the energy cost, especially in the -- in terms of gas cost. The overall restaurant EBITDA came at very healthy 16.9%. Slide #27 gives you the 4 year and 5-quarter trend. As can be seen from the last 3 quarters, the performance on the brand is improving, and this is quite encouraging as we move into the next quarter.

From a Pizza Hut perspective, we had 1% SSSG after 5 quarters. Both dine-in and delivery channels were similar SSSG. We launched new products, the new crafted flats product, baked chicken wings, a new line of masala beverages. And our TN continues to do well, especially the dine-in business. And really that I've said this now for the last 10, 12 -- 8 quarters at least, that this gives us a template that a clear strategy that is differentiated from the #1 from first, the customer experience rooted in dine-in with strong omnichannel execution, great product backed by innovations and then heightened marketing spends allow us to be a strong #2 in the market and for the brand to do well.

Slide #34, channel-wise sales mix. Dining and takeaway mix remained same as the previous year at 50%. Pizza Hut had SSSG of 1%, as mentioned by Sanjay, after 5 quarters of positive SSSG. In terms of revenue growth, overall 3% and gross margin improved by 80 basis points, again, here as well on basis of lower discount and a price increase of 2% taken towards the end of the quarter. However, higher energy cost impacted the restaurant EBITDA, which came at loss of 3.6%, down by 110 basis points. Slide 37 gives you 4-year and 5-quarter trend. Positive 1% SSSG, including more importantly, dining and takeaway positive SSSG is encouraging as we move forward.

Our Sri Lanka business had another quarter of strong SSSG. However, profitability remained an issue because of inflationary pressures and all around inflationary pressures. So cost of sales because of the depreciation of the Sri Lankan rupee, minimum wage increase and cost of utilities and fuel increasing because of the geopolitical crisis in the Middle East.

Slide #42 gives channel-wise sales mix. The dining and takeaway mix came in at 60%, almost similar to last year. SSSG was very healthy at 9% and overall revenue grew by 14% in LKR terms. Gross margin improved by 220 basis points. And while gross margin improved, as mentioned by Sanjay, the higher energy cost, wage inflation impacted the overall restaurant EBITDA, which came in at 12%. Slide 46 gives 4-year and 5-quarter trend. The current quarter has been challenging in terms of profitability. However, just like previous challenges, whether it in terms of COVID or the political turmoil experienced by the country, our business has been resilient, and we have always bounced back strongly. We expect this impact to also be short term in nature. And in the long term, we remain quite positive about the business.

Finally, we had our Annual General Body Meeting on the 21st, a couple of days ago, and we are happy to release our annual report for FY '25, '26 I would urge you to go through the same. That's it from Vijay and me, and now we'll open it up for questions.

The first question is from the line of Avi Mehta from Macquarie Capital.

I just wanted to check 2 things. One, wanted to get your thoughts on how should we look at the demand environment we've seen in KFC same-store sales growth is like similar-ish. We saw 6% in last quarter, if I remember adjusted for the festive in 4Q and now we've seen 5%, while Pizza Hut has moved to positive. So I wanted to get your thoughts on how things are -- how do you see demand in the last quarter and trending as we speak? It would be useful to get your comments on that.

Yes. So I don't think there's been any material improvement in the demand environment. I would say it has remained similar. Some of the KFC upside that we are seeing is as a direct outcome of the work that we have done in the work that we have done to improve data sales. I think the same thing is with Pizza Hut. Also Pizza Hut as dine-in sales has improved, the overall brand has done well.

Okay. And has this changed as we exited the quarter or any kind of comments that you would like to make about how things are trending as we speak?

So it's really tough to trend on a month-on-month basis. April, May were good. June was not so good. July is good because of the difference of Shravan starting in North earlier last year to this year. So I think it's a little tough to say.

Okay. Got it, sir. Got it. And sir, the second bit was, I mean, I understand the profitability performance and it's kind of kudos to you on that. But on Sri Lanka, how should we look at the equation now? Is there -- what measures can be taken to move that up? And that would be the only thing because on the other businesses, I think you're on the path to improving profitability or maintaining profitability. But here, I'm not very clear. So any clarity on that would be helpful.

So again, first of all, on India, if SSSG comes, then profitability improves. So that's the simple added. On KFC, SSSG improved, we were able to deliver better profitability. And even in spite of pressures on fuel costs, which actually hit everyone quite hard. In Sri Lanka, I think it's a little more susceptible to shocks. Having said that, our business there is absolutely incredibly strong. Our team there is incredibly strong. The way that we execute is head and shoulders above everyone else. So through COVID, through when the earlier protests had happened in the country, I think we put our head down and we said we've got to continue to drive transaction growth. And if we do that, over a period of time, we will get back profitability because we'll be able to either take pricing or input costs will come down and so on and so forth. So that continues to remain our focus that drive transactions, if there is a short-term impact on, say, because of cost of sales, grin and bear it, but don't lose out on momentum in driving sales and revenue because everything else we can recover.

Got it. Sanjay, so would it be fair to say that the movement to normalization in Sri Lanka might be a few quarters away? Is that how I should read this?

At least a couple of quarters away, yes.

[Operator Instructions]. The next question is from the line of [ Shubi Gupta from Tria ] Asset Managers.

Sir, my question is that we are seeing some operating leverage in play with the numbers. I wanted to understand at what SSG threshold does this leverage kick in, specifically with brands like Pizza Hut...

Irrespective of the brand, typically at a 3% to 5% SSSG when you start comparing with the last year's number, it takes care of the inflation in terms of the wage cost, the other costs in the P&L. So that's normally neutral for the P&L. Having said that, because we were able to get efficiencies this year on various cost lines that has helped us create leverage even at 3% to 5% SSSG. But the general matchmark is in the range of 3% to 5%. If you're below that, you will typically end up losing restaurant percentage margin. And if you are above that, you will start gaining the percentage margin. I think what has helped us over the last 1 year in terms of generating leverage is also on the gross margin front. The reduction in the discounts, which happened especially starting October of last year has helped us greatly. And we have taken a small amount of price increase in this particular quarter, which has helped gross margin and thereby it has helped bottom line as well.

[Operator Instructions]. The next question is from the line of Mandeep from Samaya Advisors LLP.

Sir, I had 3 questions. One was with Yum! -- looking to sell Pizza Hut globally, how does that impact our master interest agreement with Yum related to Pizza Hut, if you could share some light there. Okay. Second question was you alluded to SSG being a key driver for margins, and that's quite intuitive. If you could also give us some sense on where the ADS needs to be for us to come back to that about 18%, 20% restaurant level margins because we had 2.5 years of soft SSSG. So I'm not able to sort of reconcile the SSSG and ADS both at what levels they need to be. And the final question again was from your perspective, despite driving a strong value sort of offering, our SSSG at 5% seems low in context of 2, 2.5 years of very low base quarters. So if you could share some light on whether why is that the case? Or maybe that is what you had expected when you launched the value offering? Those are my questions.

So on the first part, the -- we mentioned in the previous call as well that the global sale at the parent level of the Pizza Hut brand doesn't really impact us. Our current agreements in terms of the franchisee arrangement continues. In fact, if anything, we consider this as positive because the new brand owner who comes in will come with a renewed focus because that person is putting money on the table, and I'm sure they would work towards the upliftment of the brand, and it augers only well for the brand as we move forward. On the second question on ADS levels for KFC. In actually typical year, the ADS level would actually remain constant. How does it work is when you're trying to grow restaurants by 10% to 15% in terms of new store count, those new restaurants come in at 80%, 85% of ADS levels of the brand average. At the same time, we are looking for a 5%, 6% SSSG, which will improve the ADS level by 5% to 6%. These 2 lines actually neutralize each other. What has happened over the last 2, 2.5 years is that we kept adding new restaurants, which brought the ADS levels down. Unfortunately, at the same time, we were not getting positive SSSG. So that is what has happened. Currently, the focus is not to get back to right now on an immediate basis, the 18%, 17%, 19% margin. I think the entire focus over the last few quarters has been to get the SSSG back. As long as we are able to get the SSSG back, the first thing it helps is not help us slip further on terms of restaurant EBITDA margin. Even a 16% margin right now for the brand or a 16.9% margin is a very strong and healthy margin. And the focus in the near term would be to drive SSSG and not try and take the margin towards 18% -- the third point was on the value offering, that value offering in terms of giving you still SSSG of 5%. I think SSSG of 5% in a really tough conditions, we are quite happy with. Of course, we would love to have a higher SSSG. But it's the start 3 quarters ago, we were not able to generate SSSG. In fact, we were on negative SSSG. And we tried various campaigns, but things were not clicking. I think we have finally found a solution where using a two-pronged strategy in terms of value, both on everyday value and selective disruptive value, we are able to drive SSSG. Even currently, the inflationary pressure continues, we don't really think the external macro environment is favoring demand from a consumer sentiment point of view. We are barely out of a negative SSSG over those last 2 quarters. So I think getting a 5% SSSG is quite positive. And if we are able to hold on to that in coming quarters, we'll be quite happy.

Sir, can I ask one follow-up question, please?

Go ahead.

Sir, if you could also give some sense of whether the recovery on SSSG is broad-based across all our geographies? Or are there certain states which are lagging meaningfully from a demand perspective?

So over the last 2 quarters, we have seen a broad-based recovery. Having said that, we called out even in the previous quarter, we believe this SSSG is a combination of 2 things. Certainly, some amount of consumer sentiment recovery, which we saw in the last 2 quarters. But having said that, I think we are able to generate higher SSSG for the specific measures and the reasons the measures which we took, which is again, what I called out, the two-pronged strategy in case of Pizza Hut, even in case of KFC, even in case of Pizza Hut, our cost meal, buy one, get one has helped us really, really drive dining and takeaway transaction, and that's the most heartening part. So it's a combination of, I think, slight improvement in the external factors, but a lot of work which we have done over the last few quarters.

The next question is from the line of Anuj from Antique Stock Broking.

Good afternoon. These 2 questions from my end. So firstly, how are you looking at as of KFC network expansion for the full year? And secondly, given that we are starting to see inpatient peer operating costs, as mentioned about [indiscernible] taking, how will probably be on ground, I mean, sensibility do you stick -- are you seeing any sort of progression in terms of tax essentially on account of the price hike? Or I mean transaction growth, how is that faring? These are 2 questions from my side.

I was not able to clearly understand your first query, you can come again. The voice was echoing.

The first question is on store expansion for the full year? I think earlier guidance is around 60 to 80 stores is the year.

Remains the same. The earlier guidance for KFC in terms of 60 to 80 stores in a year remains the same. That continues. No change in that particular guidance. On Pizza Hut, we have called out that we will be quite cautious in terms of store expansion. That was the case for calendar year '25. That will remain the case for even calendar year '26. And I'm calling out calendar year because that's how we operate with Yum! -- in terms of store expansion plans. That's on a calendar year basis. The second query in terms of price hike and how that's impacting the on-ground customer sentiment and the demand. we have been quite careful in terms of how we have approached this particular price hike. We have taken it over 2 installments. 1% was taken in April, 0.5% to 1% was taken in June. Same thing for Pizza Hut, it was taken across 11% in 2 installments. So we have been quite cautious on how to approach the price hike. And again, when we do a price hike, it's not a flat price hike across the entire menu. We try and see which are the lines which will be -- where the demand will be slightly more inelastic in terms of price hike. And so far, we have not seen any major impact because of the price hike on our customer -- on our SSSG or the consumer demand. Does that answer?

Yes. That answer my question.

The next question is from the line of Pratik from M3 Investments.

So I just wanted to understand how the demand environment is in the new stores of KFC, the ones that you may have opened in the smaller cities in India. So you and Devyani together would be having around 1,300 KFC stores. So you would have expanded into the smaller cities. Could you give us an idea how the unit economics work in the smaller cities?

So from a profitability point of view, the smaller city stores versus, let's say, a Tier 1 metro stores and the payback point of view, it works similarly. However, what's different is the ADS levels and the cost of operating that store. So while the ADS are lower, let's say, the ADS will be 20% lower in a smaller town compared to a Tier 1 metro but the cost will also be significantly lower. As a result, from a profitability perspective as well as the payback perspective, it works similar to my Tier 1 stores. So there is no difference. And in terms of the performance over the last 1 year, the stores which we have opened continues to perform reasonably well. And that's the reason we continue with our expansion plan of 60 to 80 stores. We have always called out that our expansion is based on looking at the metrics in terms of how the new store performs on a continuous basis. And if we feel those strike rates are dropping, we would immediately drop our store expansion or reduce our store expansion plan. But the last 2 years, 3 years for KFC, we continue to perform reasonably well. As a result, we continue to expand 60 to 80 stores per year.

Also, I would like to understand if you think that KFC in India has the potential to have about 4,000, 5,000 stores in a fairly long period of time, maybe, let's say, 10, 15 years or so? And that -- does that depend on how the smaller cities are doing and if you think that those cities can so many stores?