Sapphire Foods - Business Model Intact; Equally Focused On Both Formats: Motilal Oswal

Motilal Oswal Report

We factor in a revenue/pre-Ind accounting standard Ebitda compound annual growth rate of 23%/30% over FY23-25E. Sapphire Food India Ltd. trades at an inexpensive multiple of 19 times FY25E pre-Ind AS Ebitda.

We have assigned an FY25E enterprise /Ebitda (pre-Ind AS 116) multiple of 25 times to the KFC business, based on its robust metrics (average daily sales and restaurant Ebitda margin), and 15 times to the Pizza Hut business.

These multiples are at 50% discount to the target multiples of Devyani International Ltd..'s KFC/Pizza Hut businesses (50 times/30 times) due to the following difficulties that Sapphire faces in terms of trade:

1. Sapphire’s territorial rights in KFC are primarily in states with a relatively higher vegetarian population, and

2. Devyani International can venture into Sapphire's territories with PHD format stores, which require lower capex.

While a discount to its multiples is justified given the aforementioned challenges, the earnings growth opportunity for Sapphire is still attractive enough to warrant an investment case despite the near-term uncertainty regarding demand recovery.

Reiterate 'Buy' with an SoTP-based target price of Rs 1,670.

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