Sapphire Foods sees broad-based SSSG recovery despite near-term margin pressure

Investment View and Rating

Motilal Oswal Financial Services’ October 22, 2026 results update on Sapphire Foods India retains a Buy rating. The broker described 2QFY27 performance as a beat across heads, while flagging cautious near-term margin commentary.

The positive view is supported by improving footfall at both KFC and Pizza Hut, recovery in same-store sales growth, prospective operating efficiencies and better unit economics. Motilal Oswal also expects the proposed Devyani-Sapphire merger to create scale synergies and strengthen execution across brands and geographies.

2QFY27 Consolidated Performance

Consolidated revenue rose 20 per cent YoY to Rs 890 crore, the highest growth in 12 quarters and ahead of Motilal Oswal’s expectation of Rs 850 crore. Reported EBITDA grew 24 per cent YoY to Rs 130 crore, above the broker’s estimate of Rs 110 crore, while the reported EBITDA margin expanded 50bp YoY to 14.3 per cent versus the estimated 13.5 per cent.

The sequential decline in gross margin was attributed to food inflation, higher minimum wages and elevated gas and electricity costs. Pre-Ind AS EBITDA was a beat, and loss before tax narrowed to Rs 0.6 crore from a Rs 16.6 crore loss in 2QFY26.

Brand and Geographic Performance

KFC India

KFC India was the principal growth driver. Revenue grew 26 per cent YoY to Rs 610 crore, ahead of expectations, with same-store sales growth of 14 per cent. Adjusted for the shift in Navratri to 3QFY27, KFC same-store sales growth was close to double digit. Average daily sales increased 10 per cent YoY to Rs 1.13 lakh.

KFC gross margin expanded 50bp YoY to 67.7 per cent, while restaurant EBITDA margin expanded 70bp to 14.5 per cent despite higher poultry and energy costs. Sapphire Foods added 15 KFC restaurants during the quarter, taking the KFC store base to 606. Management retained guidance for 60 to 80 KFC additions in FY27 and stated that 31 stores had been added in 1HFY27.

Pizza Hut India

Pizza Hut India showed improving demand trends from a weak base. Revenue rose 7 per cent YoY to Rs 140 crore, in line with expectations, while same-store sales growth was 5 per cent against a negative 12 per cent base in 2QFY26. Same-store transaction growth was in double digits, including positive dine-in and takeaway transactions, and average daily sales rose 5 per cent YoY to Rs 44,000.

Gross margin expanded 190bp YoY to 76.3 per cent, but restaurant EBITDA margin declined to negative 2.8 per cent from negative 1.8 per cent in 2QFY26, owing largely to higher gas costs. Sapphire Foods closed four Pizza Hut stores, leaving 342 stores. Management is prioritising same-store sales recovery and store-level profitability before restarting expansion.

Sri Lanka

Sri Lanka revenue increased 8 per cent YoY, or 9 per cent in local currency, to Rs 140 crore. Local-currency same-store sales growth was 5 per cent, while average daily sales were flat YoY at Rs 1.09 lakh. Restaurant EBITDA margin contracted 290bp YoY to 12.5 per cent amid energy and wage inflation.

Management remains confident about recovery potential as economic conditions improve, but noted near-term exposure to inflationary pressure linked to the Middle East conflict.

Demand Drivers and Cost Outlook

Management attributed growth to entry-level value offers, greater marketing spending and customer recruitment amid subdued discretionary demand. It expects FY27 marketing expenditure to rise 50bp to 100bp for KFC and 100bp to 150bp for Pizza Hut versus FY26.

Price increases of 2 per cent to 3 per cent were taken in April and May, followed by a further 2 per cent to 3 per cent Pizza Hut hike at the end of 1QFY27. However, management intends to limit further increases to protect transactions.

Cost inflation is expected to intensify and peak in 3QFY27, which remains the central risk to margins.

Estimates and Valuation

Motilal Oswal cut its EBITDA estimates by 5.9 per cent for FY27 and 4.3 per cent for FY28 because of inflationary pressure, while raising sales estimates by 0.8 per cent and 1.1 per cent, respectively.

The Rs 245 target price is based on 20 times September 2028 estimated pre-Ind AS EV/EBITDA.