Sapphire Foods jumps 73% in last four months; brokerages say the stock still a 'buy'

Sapphire Foods India stock has been witnessing strong gains in the last four months. The stock hit its 52-week low of ₹910 on June 8, 2022, and jumped 73% to hit its 52-week high of ₹1,572.95 on October 6, 2022.

The company is primarily engaged in the franchise business of KFC and Pizza Hut restaurants in India. As per media reports, directly and through its subsidiaries, the company is one of the largest franchisees of YUM brands in the Indian subcontinent in terms of revenue with the rights to operate KFC, Pizza Hut and Taco Bell stores in India, Sri Lanka and the Maldives.

Thanks to its healthy fundamentals, the stock seems to be set for more gains.

Brokerage firm Edelweiss Securities has initiated coverage on the stock with a buy call, fixing the target price of ₹1,784, implying a 21% upside from the stock's October 7 closing price of ₹1474.80.

"Sapphire Foods India offers a compelling growth story driven by significant store addition opportunities in KFC (potential nearly 750 stores, FY22: 263) as well as Pizza Hut (PH)," said Edelweiss.

"The company has made significant efforts to revamp customer experience and store economics for its brands, which reflects in the improved margin profile (from nearly 7-8% in FY16 to 20% now; remains best-in-class ex-Domino’s)," the brokerage firm highlighted.

Edelweiss estimates of KFC’s store potential work out to nearly 750 over the next decade (nearly 850 for Devyani International), implying sizable scale-up visibility. This coupled with a limited competition-related headwind, does make for a scalable and profitable brand/format.

The brokerage firm highlighted that Sri Lanka had been Sapphire's dominant and profitable territory. Though recent macro issues have impacted all QSRs (quick-service restaurants), PH’s share has improved. With contribution slipping to nearly 10% in FY25 (peak 29%), the downside is limited, but normalcy may drive upgrades, said Edelweiss.

Edelweiss expects revenue and EBITDA CAGR of 24% and 34%, respectively, over FY22–25E factoring in 20% store expansion.

Edelweiss believes brand margin uptick and operating leverage will drive a 34% EBITDA CAGR. For Sri Lanka, the brokerage firm expects the recent impact on margins to persist.

"In view of Sapphire’s relative standing to Devyani International (DIL), we assign Sapphire a target 20 times FY24E EBITDA, a 40% discount to DIL. Sapphire’s target multiple, based on growth and return profile, juxtaposed with other QSR peers too, implies re-rating potential," said Edelweiss.

Another brokerage firm Spark Capital has also initiated coverage on Sapphire Foods stock with a target price of 1,800.

The brokerage firm said the omnichannel-led strategy of the company will drive growth alongside margin expansion.

"After establishing the first omnichannel PH store in 2017/18, Sapphire has been adding smaller omnichannel PH stores over the last 4-5 years. Mature stores in the newer omnichannel format are already delivering margins at high teen levels, on par with DIL-operated stores. With incremental stores being opened under a new smaller format, change in store mix would lead to improvement in blended margins," said Spark Capital.

"With ongoing cost efficiency programs and operating leverage, a marginal improvement in margins of legacy store also possible," said the brokerage firm.

With a strong turnaround delivered in a short period of time in consolidating multiple franchisees, Spark Capital expects growth momentum for Sapphire Foods to continue leading to a nearly 22% revenue CAGR over FY22-26E.

It said robust store additions, cost efficiency and operating leverage will drive earnings CAGR of nearly 55% over the medium term.

"Despite attractive growth momentum, the valuation multiple remains at lower levels relative to peers given the concerns of potential large supply from existing investors," said Spark Capital.

Technicals show some exhaustion

The stock remains a long-term buy for the near term, technical charts are showing some signs of exhaustion and investors may book some profit at the current juncture.

"At the current juncture, the stock is trading near its crucial resistance zone of ₹1,500-1,550. Also, the volume is dropping as the price increases, which is an anomaly with respect to volume price analysis (refer to the below chart). On the indicator front, daily MACD has made a bearish cross which is a sign of caution along with daily stochastics making negative divergence," said Jigar S. Patel, Senior Manager - Equity Research, Anand Rathi Share and Stock Brokers.

"One can book some profits at current levels and other higher levels (i.e ₹1,550) if achieved. Fresh buying as of now is not advised," said Patel.

Disclaimer: The views and recommendations given in this article are those of broking firms. These do not represent the views of MintGenie.