SAPPHIRE - Sapphire Foods India Limited Share Price

During the Q2 FY26 earnings call of Sapphire Foods India Limited, management expressed a cautiously optimistic outlook. Key highlights include:

1. KFC Performance: Revenue grew by 7%, with an underlying double-digit growth anticipated when adjusting for the Navratri shift from Q3 to Q2. The SSSG (Same Store Sales Growth) for KFC was affected by Navratri, but management anticipates recovery as they continue to drive penetration and frequency through campaigns like "Taste the Epic."

2. Pizza Hut Challenges: Pizza Hut revenue declined by 6%, although Tamil Nadu, an exclusive region for Sapphire, demonstrated double-digit growth, showcasing the potential for brand strategy replication.

3. Sri Lanka Success: The Sri Lankan business showed strong growth with an 18% revenue increase in LKR terms, reinforced by ongoing investments in brand innovation and effective marketing.

4. Restaurant Expansion: The company added 19 KFC and 2 Pizza Hut restaurants in India, as well as 1 Pizza Hut and 1 Taco Bell in Sri Lanka, bringing the total restaurant count to 997, with the 1000th location inaugurated recently.

5. Adjusted EBITDA: Management reported an adjusted EBITDA of Rs.45 crores, down 24% year-on-year, largely due to the impact of Navratri but noted improvements when excluding this effect.

6. Margins: Consolidated EBITDA margin decreased to 14.3%, a decline of 230 basis points year-on-year, with restaurant EBITDA margins impacted due to elevated delivery mixes and marketing investments.

7. Future Expectations: Management highlighted a better consumer sentiment outlook due to recent GST and income tax reductions expected to boost discretionary spending, indicating positive signs for Quarter 3.

In summary, while faced with challenges, particularly in the Pizza Hut brand, management is optimistic about KFC's potential growth and recovery in consumer spending, positioning their strategies carefully for the upcoming quarters.

1. Question: Your comment on Q3, any signs of recovery as the festivities kick in?

Answer: We are seeing signs of recovery and the numbers for the first 16-17 days are looking promising. Since we are overlapping with Navratri, I would advise waiting until the end of November to assess the actual trend. The performance in Sri Lanka and Tamil Nadu has shown us a path forward for Pizza Hut's growth. However, additional investments will be necessary to sustain this improvement.

2. Question: There was strong performance in Tamil Nadu; what is the timeline for replicating this in other markets?

Answer: We are actively discussing strategies to replicate our success in Tamil Nadu across other markets. It will require additional investments to build brand awareness and drive growth, making this a multi-quarter journey. We are well-aligned on our brand strategy but expect it to take time for results in other territories.

3. Question: What triggered the resignation of the nominee director of TR Capital?

Answer: Mr. Rohitt Mutthoo resigned from TR Capital, which necessitated his departure from our board as well. This is standard procedure for a nominee director upon leaving his position.

4. Question: How can we maintain margins even if the demand environment takes time to recover?

Answer: For KFC, we've had nearly 2.5 years of flat to negative SSSG, impacting margins. We believe, with improved sales in Quarter 3, we can recover from the drop seen in Quarter 2. However, margins may still be lower than last year. For Pizza Hut, we need to see an uptick in average daily sales for margin improvement.

5. Question: Can you share macro color on the QSR space? Is it impacted industry-wide?

Answer: Consumer discretionary spending remains constrained, compounded by intense competition. While the QSR segment has been affected, major brands can grow due to their capabilities. The government's recent GST cuts may help stimulate consumer spending, improving overall sector dynamics.

6. Question: In Sri Lanka, despite growth, why did EBITDA margins decline?

Answer: The decline in EBITDA margins in Sri Lanka is due to a significant minimum wage increase of 27% earlier in the year, which we struggled to mitigate. We have since implemented pricing adjustments and changes in salary structures to manage costs better moving forward.

7. Question: Are there any new initiatives in KFC that can replicate the Tamil Nadu model?

Answer: We are experimenting with various initiatives in KFC that show potential for future success. However, it's too early to disclose specific outcomes or methods. We'll continue to evaluate and adapt our strategies based on ongoing assessments.

8. Question: How is the ongoing decline in dine-in mix impacting margins?

Answer: The dine-in mix has declined due to several factors, including better performance in our delivery channels. We're actively implementing campaigns aimed at improving dine-in traffic; efforts include various promotions tailored for dine-in that should help bring back customers.

Each of these responses captures the essence of the management's insights while respecting the character limit.