Sri Lankan crisis sent this debutant stock tumbling. Analysts see up to 72% upside!

While analysts do see the issue to impact the profitability of the non-exclusive franchise of YUM! brands (in India and Sri Lanka) in the short term, they are finding comfort from the fact that the stock is trading at a significant discount to its peers and believe that prevailing valuations bake in negatives fully. A few analyst targets suggest 37-72 per cent potential upside on the counter.

Sapphire Foods operated 95 Pizza Hut outlets in Sri Lanka, as of March 31, in addition to 263 KFC and 219 Pizza Hut outlets in India. It also has operations in the Maldives but they account for just 1 per cent of its total sales.

has initiated coverage on the stock with a target of Rs 1,420 that suggests a 44 per cent potential upside. The brokerage has assigned an FY24 EV/Ebitda multiple of 27 times to the KFC business on account of its robust metrics including average daily sales (ADS) and brand contribution margin, and 17 times to the PH business.

This brokerage said that the stock trades at a significant discount to the target multiples for Devyani’s KFC (45 times) and Pizza Hut (35 times) on account of the disadvantages that Sapphire faces in terms of trade. They include KFC’s territorial rights in states with a higher vegetarian population. Also, Devyani can venture into Sapphire Foods 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,” it said.

ET CONTRIBUTORS

Pizza Hut is the largest QSR chain in Sri Lanka. In an earnings call, Sapphire suggested that macro issues in Sri Lanka began nine months ago but worsened in the past 30-45 days. Sapphire, however, said it has benefitted, with the unorganised channel being impacted much more and also due to superior delivery capabilities, given it does 90 per cent of deliveries via its own fleet.

In FY22, Sri Lanka business, Sapphire said, delivered the best ever performance, with 25 new restaurants additions, same-store sale growth of 42 per cent, revenue growth of 60 per cent and restaurant Ebitda of 23.2 per cent, up 360 basis points

The company said it is not facing 15-hour power cuts in Sri Lanka, as reported by the media, but only 2-3 hour cuts. Also, it said it has stocked up on key commodities such as cheese, some of which it is also sourcing from India,

said.

The company is expecting the macro situation to stabilise in the next six months, noting that high double-digit same-store sales growth in constant currency terms has continued in this March quarter as well. The bulk of the Sri Lankan currency depreciation impact will come from Q1 onwards, the company said.

IIFL Securities said the stock price has corrected materially and builds in all the negatives. It has maintained a BUY on the stock with a target of Rs 1,350.

“Currency depreciation impact of 40 per cent should be partly mitigated by good underlying growth, store expansion plans for FY23 are on track. We believe there will be some decline in FY23. That said, we believe the situation is still evolving. When a country is faced with such significant economic challenges, a discretionary category is unlikely to escape without at least marginal bruises,”

said in a May 18 note while suggesting a target of Rs 1,700 on the stock from Rs 1,800 earlier, factoring in a 4-8 per cent hit on its Ebitda estimates for Sri Lanka in FY23-24.

At Wednesday’s price of Rs 986.85, the scrip is down 36 per cent from its high of Rs 1,535 hit on February 14. Price targets of up to Rs 1,700 on the stock suggest up to 72 per cent potential upside on the counter.

Sapphire reported a consolidated PAT at Rs 26.5 crore for the March quarter compared with a loss of Rs 13.7 crore in the year-ago quarter. Sales were up 46 per cent for the quarter to Rs 494.30 crore compared with Rs 316.20 crore in the same quarter last year. Ebitda margin rose to 21 per cent from 18.4 per cent YoY.

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