Brokerage firm Motilal Oswal Financial Services has initiated coverage on Sapphire Foods India with a 'buy' rating. It has fixed the target price of ₹1,420 per share on the stock.
The brokerage firm is positive on the stock because of its attractive valuations and growth prospects.
The company is one of the two franchisees of Yum! Brands (Yum) in India. Yum operates brands such as KFC, Pizza Hut and Taco Bell. It has a global presence with more than 53,000 restaurants in over 150 countries.
The company also has an international presence in Sri Lanka and the Maldives. As Motilal Oswal pointed out, the company operates a total of 579 stores across all brands and geographies as of March 31, 2022.
Investment rationale
Motilal Oswal is of the view that Sapphire Foods offers an exciting investment opportunity in the Indian quick service restaurant (QSR) space. Below are a few points mentioned by the brokerage firm to suuport its investment rationale:
1. The Indian food service industry (FSI) is expected to clock 9 percent CAGR in the coming years, with QSRs likely to grow faster at 23 percent CAGR over FY20-25.
2. Sapphire Foods’ new scalable restaurant economic model is a game-changer. Its omnichannel strategy and reduction in store sizes, along with other elements of the model, have led to a big shift in Sapphire's unit economics.
3. KFC India’s business is on a strong footing, with a healthy ADS and profitability. Motilal Oswal expects it to register a 31 percent sales CAGR over FY22-24E driven by rapid store additions and strong SSSG aided by a smart recovery post-Covid.
4. Pizza Hut’s India business is seeing a turnaround, with a higher focus on delivery, while retaining its dine-in edge. Motilal Oswal expects it to register a 35 percent sales CAGR over FY22-24E with a resultant improvement in its Restaurant EBITDA margin.
5. Sapphire is poised to deliver strong growth with 29 percent and 43 percent sales and EBITDA, respectively, (pre-Ind AS 116) CAGR over FY22-24E.
6. Sapphire’s valuations are at a considerable discount to peers. The brokerage firm has initiated coverage with a 'buy' rating and a target price of ₹1,420 per share (27 times and 17 times FY24E EV/EBITDA for KFC/Pizza Hut) which is at a significant discount to the target multiples for Devyani International’s KFC/Pizza Hut at 45 times/35 times on account of the disadvantages that Sapphire faces in terms of trade.
Explaining why Sapphire’s target price is at a significant discount to the target multiples for Devyani International, Motilal Oswal said that Sapphire’s territorial rights in KFC are largely in states with a higher vegetarian population, and Devyani International can venture into Sapphire’s territories with PHD format stores, which require lower capex.
"While the discount multiples are justified given the above-mentioned reasons, the earnings growth opportunity is attractive enough to warrant an investment case," Motilal Oswal said.
Disclaimer: The views and recommendations made above are those of the broking firm Motilal Oswal Financial Services and not of MintGenie. This article is based on a report by the brokerage firm.
