Pizza Hut, KFC operator Sapphire Foods share price down 18% so far in 2022; turnaround ahead, should you buy?

Shares of Pizza Hut, KFC operator Sapphire Foods have plunged 18% so far this year, underperforming benchmark Nifty 50 which has tumbled 8%. However, analysts at Motilal Oswal Financial Services expect the stock to rally 42% going forward on the back of growth in KFC, Pizza Hut’s business in the country.

pizza hut, kfc, sapphire foods india
Sapphire Foods shares were quoting at Rs 987, down 1% on NSE intraday.

Shares of Pizza Hut, KFC operator Sapphire Foods have plunged 18% so far this year, underperforming benchmark Nifty 50 which has tumbled 8%. However, analysts at Motilal Oswal Financial Services expect the stock to rally 42% going forward on the back of growth in KFC, Pizza Hut’s business in the country. “Sapphire Foods’ earnings growth opportunity is attractive enough to warrant an investment case,” the domestic brokerage firm said in its report while initiating coverage on the stock with a ‘buy’ rating and target price of Rs 1,420 per share. Sapphire Foods shares were quoting at Rs 987, down 1% on NSE intraday.

Net profit margin to improve

According to analysts at Motilal Oswal, with healthy SSSG and rapid store additions, Sapphire Foods is expected to deliver strong double-digit sales growth in the years ahead (29% CAGR over FY22-24). Company’s efforts on the omnichannel model, with a reduction in store sizes, have evidently led to a turnaround in its profitability, with overall EBITDA margin improving from low single-digits in FY19-21 to 11% in FY22. Going forward, the analysts forecast 43% EBITDA CAGR over FY22-24. “It has delivered a net profit in FY22 after incurring losses over FY19-21. We expect it to improve its net profit margin to 5.3% in FY24 from 2.7% in FY22,” they said.

KFC biz on strong footing, Pizza Hut on the cusp of a turnaround

Analysts believe that Sapphire Foods offers an exciting investment opportunity in the Indian Quick Service Restaurant (QSR) space as the Indian Food Service Industry (FSI) is expected to clock 9% CAGR in the coming years, with QSRs likely to grow faster at 23% CAGR over FY20-25. Company’s new scalable Restaurant economic model is a game-changer and its omnichannel strategy and reduction in store sizes, along with other elements of the model, have led to a big shift in Sapphire’s unit economics. Meanwhile, KFC India’s business is on a strong footing as well, with a healthy ADS and profitability. Pizza Hut’s India business is also seeing a turnaround, with a higher focus on delivery, while retaining its dine-in edge. “Overall, SAPPHIRE is poised to deliver strong growth with 29%/43% sales/EBITDA (pre-Ind AS 116) CAGR over FY22-24E,” the brokerage said.

Poised for strong growth on network expansion

Analysts believe that both KFC and PH are poised for strong growth due to their rapid network expansion and healthy SSSG over the next few years. “We expect KFC/PH to clock 31%/35% sales CAGR over FY22-24. There is considerable potential for an upside to our forecasts as our estimated FY24 ADS levels had already been surpassed in 3QFY22 (albeit, an outlier),” they said. Sapphire Foods’ operational profitability is likely to continue improvement going forward as well. However, the recent challenges on commodity inflation and the Sri Lanka crisis

may apply some pressure on near-term profitability.

Valuations attractive, initiate coverage with Buy

“We have assigned an FY24E EV/EBITDA (pre-Ind AS 116) multiple of 27x to the KFC business on account of its robust metrics (ADS and brand contribution margin), and 17x to the PH business. These are at a significant discount to the target multiples for DEVYANI’s KFC/PH (45x/35x) on account of the disadvantages that SAPPHIRE faces in terms of trade: a) its territorial rights in KFC are largely in states with a higher vegetarian population, and b) DEVYANI can venture into SAPPHIRE’s territories with PHD format stores, which require lower capex,” the brokerage said.

While the discount multiples are justified given the above mentioned reasons, the earnings growth opportunity is attractive enough to warrant an investment case, they said, adding that Sapphire’s valuations are at a considerable discount to peers. The brokerage assigned a ‘buy’ rating on the stock with a target price of Rs 1,420, implying 42% upside.

(The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)

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