Sapphire Foods Sees 98% Profit Fall, Yet Brokerages Maintain Buy Calls

Despite a 98% drop in annual profit, Sapphire Foods, the operator of Pizza Hut and KFC, has seen its profit fall to ₹2.39 crore for the quarter ending March 31, marking its fourth consecutive quarterly profit decline.

KFC's revenue experienced a 16% increase year-over-year, despite a substantial 26% growth in store count. Pizza Hut's revenue declined by 3% year-over-year. No new Pizza Hut stores were opened during the quarter due to Sapphire's conservative expansion strategy. Sapphire plans to open a single-digit number of Pizza Hut stores in the fiscal year 2025.

Sapphire Foods India experienced a 3.89% decline, reaching ₹1363.80, following a 98.2% drop in the company's consolidated net profit to ₹2.39 crore in Q4 FY24 compared to ₹135.59 crore in Q4 FY23. The company's profit before tax (PBT) in the March quarter fell by 93.2% to ₹0.84 crore from ₹12.28 crore in the same period a year ago. EBITDA for the fourth quarter of FY24 reached ₹110.23 crore, reflecting a 7% growth compared to ₹103.04 crore in Q4 FY23. However, the EBITDA margin decreased to 17.5% in Q4 FY24 from 18.4% in the corresponding quarter of the previous year. 

Sapphire Foods anticipates a doubling of Pizza Hut stores in approximately four years, rather than a tripling, as the emphasis lies in fostering growth at current locations and rejuvenating the brand through enhanced marketing efforts. The company established 23 additional KFC restaurants in Q4 FY24, resulting in a total of 872 restaurants as of 31 March 2024.

"The QSR industry continues to experience weakness in unit economics; dine-in is seeing more pressure than delivery. KFC has shown resilience in managing the headwinds more effectively, while Pizza Hut has been struggling due to weak unit economics and intense competition," said Motilal Oswal. The brokerage kept its buy rating on the counter with a target price of ₹1,650 per share.

Nuvama Institutional Equities has stated that Quick Service Restaurants (QSRs) are expected to recover gradually, and Sapphire continues to be their top choice due to KFC's scalability and valuation. The company maintained its buy recommendation, with a target price of ₹1,812 per share. 

India's quick-service restaurants faced challenges attracting customers throughout the fiscal year due to reduced spending prompted by persistent inflation. The nation's food inflation, constituting approximately 50% of the total consumer price index, has maintained elevated levels during the current year.

Sapphire Foods' share price has appreciated by approximately 11% over the last year. During the same period, the Nifty 50 index, which serves as a benchmark for the Indian stock market, has experienced a gain of roughly 22%. Despite facing challenges in consumer demand, Sapphire KFC has consistently maintained strong performance. The company reported a solid quarter with restaurant sales growth of 16% year-over-year, despite a 3% decline in same-store sales growth (SSSG). Restaurant EBITDA stood at 18.7%, representing a decrease of 40 basis points year-over-year.

As of May 12, 2024, analyst recommendations reveal that out of 19 analysts monitoring the company, 1 analyst advises a Sell rating, 1 analyst proposes a Hold rating, 9 analysts endorse a Buy rating, and 8 analysts advocate a Strong Buy rating.