Leading QSR brands with a substantial market presence
Sapphire Foods is an omni-channel player, leveraging their brick-and-mortar restaurants
and digital stores to provide dine-in, delivery and take-away services. Their wide
footprint of restaurants provides superior accessibility, creates brand awareness
and visibility, and improves customer retention in a competitive food service market.
By leveraging their brand strength, innovative product offerings, wide restaurant
footprint, robust supply chain management system, and dedicated workforce, they
are well-positioned to capture further opportunities in the QSR chain sub-segment
Strong relationship with YUM
SFIL’s association with YUM started in 2015 and they presently have the non-exclusive
rights to operate restaurants under 3 of YUM’s leading brands, namely, the
KFC, Pizza Hut and Taco Bell brands. They also enjoy access to YUM’s system
and expertise in building and establishing brands and operating large-scale restaurants
chains. Their Franchisee Arrangement allows them to operate under the KFC brand
in several states in India and across the Maldives, the Pizza Hut brand in several
states in India and across Sri Lanka and the Maldives, and the Taco Bell brand across
Sri Lanka, while leveraging YUM’s global best practices and systems. They
benefit from their ‘One System’ commercial negotiations where they negotiate
with their suppliers, jointly with YUM and its other franchisee in India, to procure
their key raw materials and equipment. They also benefit from YUM’s extensive
global marketing and advertising concepts, product development capabilities and
cooking techniques to drive sales and generate increased restaurant footfalls, while
being guided by YUM’s restaurant development procedures and standards.
Focus on accelerating growth:
The current COVID-19 pandemic, while having a negative impact on the food services
industry, has also provided opportunities to brands that can assure consumers of
consistent great tasting products, food safety, hygiene, great value and easy accessibility
across dine-in, takeaway and delivery channels. In Q4FY21, high street international
chain QSR restaurants recovered to almost 100% of their revenues in Q4FY20, prior
to the COVID-19 pandemic, aided by their ability to comply with social distancing
norms and safety and hygiene requirements. Over the next few years, Sapphire Foods
intends to accelerate their growth through the following strategies:
The company plans to continue to build their restaurant network using a cluster strategy, where they would launch their brands from flagship locations in high traffic and high visibility locations in key metropolitan areas and cities and then develop new restaurants within that cluster.
Improving new restaurant economic model
Sapphire Foods has continuously worked on improving their new restaurant economic
model in consultation with YUM. This is aimed at enhancing the value and affordability
proposition of their global brands to drive more transactions with higher ticket
sizes and acquire new customers through differentiated offerings. SHIL is also working
on optimizing the restaurant size (both the front-of-house customer area and back-of-house
kitchen area) to reduce capital expenditure, occupancy, and operating costs without
impacting revenue capacity. They have launched PACE SETTER program to bring in sustainable
cost efficiencies and, developed a robust internal process system to identify new
potential trade areas for the next 3 years to achieve their targeted level of sales.
Highly competitive market:
SFIL competes within the food service industry & the QSR sector not only for
customers, but also for personnel and suitable sites for their restaurants. Their
biggest competitors include international QSR chains operating in India, such as
McDonalds, Domino’s Pizza, Subway, Starbucks, and Burger King. SFIL may or
may not be able to identify and obtain suitable store locations, which could impact
their ability to achieve growth.
Loss making business:
The company has been reporting losses for the last three years. Temporary as well
as permanent store closures and reduced store-level operations, including reduced
operating hours and dining-room closures as mandated by regional regulatory bodies
due to pandemic added pressure on the financial performance of SFIL. It plans to
grow the business by opening new stores every year which could lead to further losses.
Increases in costs/expenses and investments in new restaurants may reduce margins
and adversely affect business & financial condition.
Franchisee Arrangement termination can affect business operations:
The Franchisee Arrangement with YUM provides SFIL with a right to use KFC’s,
Pizza Hut’s and Taco Bell’s system and system property covering aspects
of business operations and requires SFIL to maintain system-wide operating procedures
and product quality, taste parameters, food preparation methods, food safety, cleanliness
& customer service standards that are consistent with the global standards of
YUM. For example, for quality purposes, SFIL only purchase ingredients from YUM’s
approved suppliers. A failure or deterioration in quality control systems or protocols
for supply chain or restaurants could lead to the termination of the Franchisee
Arrangement, and have an adverse effect on the company’s business, reputation,
results of operations and financial condition.
Devyani International (DIL) & SFIL have franchisee rights over same core brands:
With franchisee rights over same core brands, DIL & SFIL can compete in the
same area which can lead to cannibalization of sales. Also, YUM can operate directly
or indirectly (through franchisees) in areas where SFIL is present. This can adversely
impact the business, results of operations and financial condition of SFIL.
The issue is purely an OFS:
The issue is purely an OFS and company will not get any capital from this issue.
All proceeds will go to such selling investors.
Company profile:
Sapphire Foods India Limited (SFIL) was incorporated on November 10, 2009. Sapphire
Foods is YUM’s largest franchisee operator in the Indian subcontinent with
revenue from operations of Rs 1,340 crore and Rs 1,020 crore for the financial years
2020 and 2021, respectively. It is also Sri Lanka's largest international QSR
chain, in terms of revenue for the financial year 2021 (with revenue of Rs 190 crore
representing 35% of the total market revenue), and the number of restaurants operated
as of March 31, 2021 (with 68 restaurants representing 39% of the total number of
outlets in the market).
As of June 30, 2021, the company owned and operated 209 KFC restaurants in India and the Maldives, 239 Pizza Hut restaurants in India, Sri Lanka and the Maldives, and 2 Taco Bell restaurants in Sri Lanka. The company's total number of restaurants in the subcontinent region grew from 376 in 2019 to 450 in 2021. Their franchisee arrangement with YUM allows them to operate, on a non-exclusive basis, under the KFC brand in several states in India and across the Maldives, the Pizza Hut brand in several states in India and across Sri Lanka and the Maldives, and the Taco Bell brand across Sri Lanka.
The company intends to expand its business while focusing more on the new restaurant economic model in consultation with YUM to become profitable. Increasing internet and mobile penetration within India and the advent of food delivery apps are key factors to lead consumers away from traditional dine-in experiences and towards convenience-driven options. The prevalence of home delivery in the Indian QSR industry is expected to continue to grow due to changing lifestyles and changing consumer eating patterns in the post-COVID atmosphere. At the upper price band of Rs 1180, the IPO is valued at 7x of FY21 sales, which looks reasonable considering its peers (Devyani International, Jubilant Foodworks & Burger King India) trade at a much higher multiple. Hence, we recommend SUBSCRIBE to the IPO for long term perspective.
Peer comparison (Rs crore) | FY19 | FY20 | FY21 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Company | Revenues | EPS | ROE (%) | Revenues | EPS | ROE (%) | Revenues | EPS | ROE (%) | PS ratio |
Sapphire Foods India | 1194 | (15) | - | 1340 | (31) | - | 1020 | (19) | - | 7 |
Devyani International | 1311 | 0 | - | 1516 | (1) | - | 1135 | (1) | - | 15 |
Jubilant Foodworks | 3563 | 24 | 29% | 3927 | 21 | 24% | 3312 | 18 | 18% | 15 |
Westlife Developments | 1402 | 2 | 4% | 1548 | 0 | - | 986 | (6) | - | 9 |
Burger King India | 633 | (1) | - | 841 | (2) | - | 494 | (5) | - | 14 |
Use of Proceeds:
The total issue size is of Rs. 2,073 crore is fully an OFS constituting offer for
sale of up to 1.76 crore equity shares by investors. Company will not get any capital
from this issue. All proceeds will go to such selling investors.
Book running lead managers:
JM Financial, BofA Securities, ICICI Securities, IIFL Securities
Management:
The company is run by Sanjay Purohit, Whole Time Director and Group CEO of the company.
He has over 30 years of work experience across consumer product categories including
food and apparel retail, packaged food, and paints. He is well supported by an experienced
senior management team.
Yr End March (Rs Cr) | FY19 | FY20 | FY21 |
---|---|---|---|
Net Sales | 1194.00 | 1340.00 | 1020.00 |
Material Cost | 395.00 | 432.00 | 310.00 |
Employee Cost | 206.00 | 229.00 | 196.00 |
Other Expenses | 447.00 | 494.00 | 390.00 |
EBITDA | 146.00 | 185.00 | 124.00 |
EBITDA Margin | 12.00% | 14.00% | 12.00% |
Depreciation & Amortization | 154.00 | 191.00 | 209.00 |
EBIT | -8.00 | -6.00 | -85.00 |
Other Income | 12.00 | 11.00 | 62.00 |
Interest & Finance Charges | 72.00 | 72.00 | 76.00 |
Profit Before Tax - Before Exceptional | (68) | (67) | (99) |
Exceptional items | 0.00 | (94) | 0.00 |
Tax Expense | 1.00 | (2) | 1.00 |
Net profit for the year | (69) | (159) | (100) |
Net Profit Margin | - | - | - |