Sapphire Foods India Limited, a leading quick-service restaurant (QSR) operator of brands such as KFC, Pizza Hut, and Sri Lankan operations, reported its Q3 FY25 (quarter ended December 31, 2024) and nine-month FY25 earnings during a conference call on February 6, 2025. The company reported a strong performance with double-digit growth in key metrics, despite a tough demand environment. The call was initiated by Sanjay Purohit (Group CEO), Vijay Jain (CFO), and Kaushik Vankadkar (Head of Investor Relations).
Financial Highlights:
Revenue: INR 755 crores, up 14% YoY, with double-digit growth in KFC, Pizza Hut, and Sri Lanka.
Adjusted EBITDA: INR 81 crores, a YoY increase of 12%, with a margin of 10.7%.
Consolidated EBITDA: INR 140 crores, up 14% YoY, with an 18.5% margin.
Consolidated PAT: INR 12.7 crores (1.7% margin); adjusted PAT of INR 19.4 crores (2.6% margin).
Restaurant Growth: Opened 54 new restaurants (35 KFC, 16 Pizza Hut in India, 4 Pizza Hut, and 1 Taco Bell in Sri Lanka), bringing the total number of outlets to 963. Closed all 4 Maldives stores.
Brand Performance:
KFC: Revenue increased 12% YoY even as it reported a negative SSSG of -3% (up from -5% in Q1 and -8% in Q2). Same-store transaction growth (SSTG) was flat at 0%. Restaurant EBITDA margin stood at 18.2%, down 190 basis points because of operating deleverage.
Pizza Hut: Recorded 10% revenue growth and a positive SSSG of 5% (first in 8 quarters). Average daily sales (ADS) remained flat at INR 48,000, while restaurant EBITDA stood at 4.7%, a 10 basis point improvement.
Sri Lanka: Robust performance with 15% revenue growth in LKR (30% in INR), SSSG of 14%, and restaurant EBITDA at 17.8%, up 360 basis points.
Growth Strategy:
KFC:
- Prioritize adding fried chicken category relevance to enlarge the consumer universe by focusing on core variety skus (i.e., on-the-bone chicken, Zinger Burger, rolls, and boneless product).
- Raise usage frequency through day-part efforts (e.g., late-night, lunch, Wednesdays) and product innovations (e.g., Chicken Rolls).
- Introduce a 3-level value structure (INR 99 core, INR 149 individual meals, INR 399 group meals).
- Ramp up digital kiosk deployments and enhance operational excellence (e.g., dynamic kitchen planning tools).
- Sustain store growth rate at 70-80 stores per year, doubling number of stores in 3 years from December 2021.
Pizza Hut:
- Highlight taste superiority, differentiated dine-in experience, and enhanced delivery.
- Maintain increased marketing spend to fuel brand uplift, careful store expansion (20-25 stores per year) through achieving double-digit store-level EBITDA.
Sri Lanka:
- Apply operational intensity, product innovation, and value strategy to take advantage of market recovery.
- Target a 15% revenue CAGR in the medium to long term, reconciling store openings and SSSG.
Future Outlook:
KFC:
- Expects SSSG to become positive in Q1 FY26 owing to base effects, but underlying sales growth (apart from base effects) is contingent upon an improvement in consumer sentiment. Aims at stable 18% restaurant margins with 0-5% SSSG, with potential for upside from 18% if SSSG is over 5%.
Pizza Hut:
- Sees steady ADS (INR 47,000-48,000) to hold 5% margins, while double-digit margins would require higher ADS (INR 55,000). Growth will depend on continued marketing and operational upgrades.
Sri Lanka:
- Committed to long-term growth opportunities, aiming at 15% revenue CAGR with solid unit economics backing additional store growth.
Overall:
- Management is hopeful of gaining a larger market share when demand picks up, riding on strong brands and operational efficiency. No near-term capex guidance given, but per-store expense is INR 2 crores for KFC and INR 1.35-1.4 crores for Pizza Hut
Market Situation:
Consumer sentiment is still soft, and no strong pick-up is likely in Q4 FY25. Delivery remains stronger than dine-in across brands, although dine-in is likely to pick up at some point. Competitive intensity is steady with no significant rise in capacity addition. The recent budget allocation of INR 1 lakh crore to middle-class consumers is viewed as a possible positive, although its effect on consumption timing is unclear.
Question and Answer Session Highlights
- Percy Panthaki (IIFL Securities): In KFC, the SSSG remains negative. Do you have visibility or early indications of it reversing to positive, and in what time horizon?
- Vijay Jain: The path has turned better from -5% in Q1 and -8% in Q2 to -3% in Q3. Consumer psychology is still weak, but because of base effects, we anticipate improvement in Q4. But a significant change in the environment isn’t in the cards.
- Sanjay Purohit: For KFC, both SSSG and store expansion (SG at 12%) are important. With high store additions, overall growth is robust even with negative SSSG.
- Percy Panthaki: Even considering base effects, do you expect visibility of KFC SSSG to turn positive in Q1 FY26?
- Vijay Jain: We hope so because of base effects. Contrary to certain QSR comps with steeper declines in the previous year, KFC SSSG last year was a mere -2%, hence our base effect benefit is restricted, which is an encouraging sign of resilience.
- Percy Panthaki: For Sri Lanka, what’s your top-line growth expectation for the next 3-year CAGR with stable currency?
- Vijay Jain: We expect a minimum of 15% revenue CAGR in the medium to long term.
- Sanjay Purohit: This can be roughly divided half from store additions and half from SSSG, with visibility for growth over the next 5 years as unit economics strengthen.
- Percy Panthaki: Assuming positive SSSG for KFC from FY26, what restaurant operating margins do you aim for?
- Vijay Jain: With 0-5% SSSG, margins would remain at 18% to counter inflation. Above 5% SSSG, margins can widen. Historically, we have touched 22%, but 18% is now the bottom line.
- Sanjay Purohit: We shun quarter-to-quarter targets but look for sustainable margins that match sales and competition.
- Avi Mehta (Macquarie): Have there been any recent changes in competitive intensity or aggregator trends, and how could tax relief in the budget affect SSSG?
- Sanjay Purohit: No real shift in competition intensity or capacity addition. The tax relief of INR 1 lakh crore is a good thing, but its timing on consumption is questionable. We will hope that it percolates through in the near term, though we do not have historical experience to bet on exactly.
- Saurabh Kundan (Goldman Sachs): On your core offerings strategy for KFC, what are your pilots’ learnings for frequency and footfall?
- Sanjay Purohit: We address infrequent/non-users by mainstreaming core items (e.g., chicken on the bone, Zinger Burger) through the “Taste The Epic” campaign. Pilots demonstrate promising early trends, with flat SSTG in Q3 compared to declines previously, though details aren’t provided. This is a growth driver.
- Vijay Jain: Transaction growth mirrors footfall improvement, validating the value strategy’s effectiveness.
- Saurabh Kundan: Are there margin implications from this core offerings strategy?
- Sanjay Purohit: Pilots are targeting revenue leverage. Margins might get hit a bit, but restaurant EBITDA picks up the slack. Healthy SSSG has margins on track with 18% guidance (stable in 0-5% SSSG range, scalable over 5%).
- Tejas Shah (Avendus Spark): Store expansion guidance for KFC and Pizza Hut, rental headwinds if any, and what indicators dictate expansion past SSSG?
- Sanjay Purohit: KFC is looking at 70-80 stores a year; Pizza Hut at 20-25, being cautious until double-digit EBITDA. No material rental pressure witnessed with 18-24-year leases.
- Vijay Jain: New store rentals have not jumped through the roof. Aside from SSSG, ADS and restaurant EBITDA are monitored, but strike rate (stores achieving target ADS) is the most important internal benchmark.
- Gaurav Jogani (JM Financial): When might KFC SSSG turn positive, and what’s a trackable metric like ADS for margins?
- Sanjay Purohit: Base effects may turn SSSG positive in 2 quarters, but genuine growth depends on ADS improvement. For margins, 5% SSSG keeps 18% stable; higher SSSG drives expansion.
- Vijay Jain: Unlike Pizza Hut’s ADS erosion (INR 62,000 to INR 41,000-42,000), KFC’s drop is less severe, so SSSG remains a margin guide.
- Jay Doshi (Kotak): Has the pizza QSR space changed fundamentally, with traffic moving to organized players?
- Sanjay Purohit: Slowdowns affected all players, but organized brands such as Pizza Hut bounce back sooner by doubling up on customer experience, product quality, and advertising. This cycle benefits strong brands as markets reverse, with KFC and Pizza Hut being in good shape.