Sapphire Foods, which got listed in November last year (2021), has fallen below its issue price. The stock is currently trading around 5 percent lower than its issue price of ₹1,180, at ₹1,118. It has lost around 27 percent from its all-time high of ₹1,535, hit in March 2022.
The IPO of Sapphire Foods, operator of KFC and Pizza Hut outlets in the Indian subcontinent, was open for subscription from November 9 to 11 and saw a subscription of 6.6 times. Its initial share sale was entirely an offer for sale (OFS) by promoters and existing shareholders. The IPO saw a subscription of 7.5 times in the qualified institutional buyer (QIB) category, and 3.5 times in the non-institutional investor category. The quota reserved for retail investors saw a subscription of 8.7 times.
Despite its recent loss, brokerages remain bullish on the stock on the back of expectations of improvement in its earnings.
Brokerage House Emkay recently initiated coverage on the stock with a 'buy' call and a target price of ₹1,500, indicating a potential upside of 35 percent. Tasty Pizza-KFC combo is now available at appetising valuations, said the brokerage.
Sapphire Foods operates nearly 37 percent of Yum Brands’ KFC/Pizza Hut (PH) stores in India and 100 percent of PH stores in Sri Lanka (SL), noted the brokerage. It added that India has a lower quick service restaurants (QSR) penetration at about 8 percent, and this Emkay expects a continuation of a mid-teen revenue CAGR for the Indian QSR industry over the next 10-15 years.
"Sapphire has optimised the size of its new stores and ramped up its delivery channel, to tap into the consumption demand tailwinds; the company aims to double its network in the next 3-4 years (23-28 percent store CAGR)," Emkay highlighted.
The brokerage also said that its target multiple implies a 40 percent valuation discount Devyani International and is justified by challenges in Sri Lanka, a smaller Pizza Hut opportunity and lower liquidity amid lock-up expiry on certain pre-IPO shares. However, faster improvement in Pizza Hit margins and Sri Lanka revival may reduce valuation discount to 20 percent, it added.
Meanwhile, Kotak Institutional Equities also noted that reduction of cost structure and shutdown of loss-making stores have helped the firm to accelerate store additions. It expects Sapphire Foods to be one of the fastest-growing QSRs in India over the next 2-3 years with margin expansion and an improving return profile.
Kotak believes that the company is well placed to rise on the industry tailwinds and capitalise on the under-penetration of KFC and Pizza Hut in India. Also, valuations appear attractive which provides comfort to the brokerage firm.
Kotak also initiated coverage on the stock with a ‘buy’ call and target price of ₹1,425.
Sapphire Foods operates 482 restaurants in India as of March 2022, including 263 outlets of KFC India and 219 outlets of Pizza Hut India.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.