Sapphire Foods' KFC recovery and Pizza Hut turnaround lift Q1 FY27 growth

Investment View and Valuation

Anand Rathi Research maintains a BUY rating on Sapphire Foods following an all-round Q1 FY27 performance. The broker believes the company’s growth momentum is sustainable, supported by KFC India’s recovery, Pizza Hut’s return to positive same-store sales growth and continued strength in Sri Lanka.

Anand Rathi modestly raised its FY27E and FY28E sales and EBITDA estimates. However, it reduced its 12-month target price to Rs260 from Rs308 after lowering the valuation multiple to 12x FY28E EV/E from 15x previously.

Q1 FY27 Consolidated Performance

Sapphire Foods reported consolidated Q1 FY27 revenue of Rs8,910 million, up 15 per cent year on year and representing its highest quarterly revenue growth in 11 quarters. EBITDA increased 23.9 per cent year on year to Rs1,398 million, while EBITDA margin improved by 115 basis points to 15.7 per cent.

Gross-margin expansion of 140 basis points and staff-cost savings of 20 basis points supported profitability. These benefits were partly offset by a 45-basis-point increase in other expenses. The 22 net restaurant additions comprised 16 KFC stores, five Pizza Hut India stores and one Pizza Hut Sri Lanka store.

Brand and Regional Performance

KFC India: Recovery Drives Growth

KFC India was the principal growth driver, with revenue rising 17 per cent year on year to Rs6,183 million. Same-store sales growth was 5 per cent, compared with zero per cent in Q1 FY26.

The Rs99 Chicken Krisper Meal and value offers on Hot and Crispy buckets helped recruit consumers and increase dine-in and takeaway traffic. Dine-in and takeaway contribution rose to 59 per cent from 57 per cent a year earlier. KFC also launched Shawarma and Double Chicken Dynamite, while self-order kiosks had been deployed in about 75 per cent of stores.

KFC gross margin expanded by 160 basis points year on year, and restaurant EBITDA margin increased by 120 basis points to 16.9 per cent, despite elevated LPG and energy costs. Management said KFC had delivered three consecutive quarters of improving performance and reiterated guidance for 60 to 80 KFC store additions annually, with an aspiration to double the KFC store count over five years.

Pizza Hut India: Same-Store Sales Turn Positive

Pizza Hut India revenue grew 3 per cent year on year to Rs1,360 million, while same-store sales growth turned positive at 1 per cent after five quarters of negative comparable sales. Product launches, stable dine-in and delivery performance, and stronger omnichannel execution in Tamil Nadu supported the improvement.

Pizza Hut restaurant EBITDA margin nevertheless remained negative at 3.6 per cent, down 110 basis points year on year because of higher energy costs. Management views Tamil Nadu as the template for Pizza Hut’s turnaround and plans measured expansion until a unified brand strategy is finalised following regulatory approvals.

Sapphire Foods expects franchise alignment following the Devyani merger, further brand investment and a refreshed strategy from Pizza Hut’s global parent to support the business. Management said a potential sale of Pizza Hut’s global business would not be expected to affect Sapphire Foods’ franchise agreement.

Sri Lanka: Strong Sales Growth, Temporary Margin Pressure

Sri Lanka delivered 9 per cent same-store sales growth and 16 per cent revenue growth to Rs1,349 million, led by transaction growth. Gross margin improved by 220 basis points, but restaurant EBITDA margin declined to 12 per cent because of rupee depreciation, wage inflation and higher fuel and utility costs related to geopolitical developments.

Management expects these pressures to be temporary, although normalisation of Sri Lankan profitability could take at least a couple of quarters. Anand Rathi expects Sri Lanka revenue to grow at about 14 per cent CAGR over FY26 to FY28E.

Management Commentary and Growth Outlook

Management said broader consumer demand had not materially improved and attributed current growth mainly to internal execution and value initiatives. It continues to prioritise transaction growth over near-term margin maximisation.

Price increases of about 2 per cent at KFC and Pizza Hut were selectively implemented on relatively inelastic items. Management said demand and same-store sales had not been adversely affected. The pricing philosophy is to pass through only 50 to 60 per cent of inflation, while absorbing the remainder through supply-chain efficiencies and productivity.

Anand Rathi expects sustained KFC same-store sales growth above 3 per cent, Sri Lankan operations, price increases and cost savings to expand EBITDA margin by 150 basis points over FY26 to FY28E, reaching 16.6 per cent.

Valuation and Key Risks

At the report CMP, Sapphire Foods traded at 9.9x FY27E and 8.3x FY28E EV/EBITDA. Anand Rathi’s target price is Rs260, compared with the report CMP of Rs179.

Key risks identified by the broker are:

• Weak same-store sales caused by softer discretionary spending.
• Adverse changes to the Yum! Brands franchise agreement.
• Greater competition.
• Higher aggregator fees.