Pizza Hut, operator KFC, Sapphire Foods share price is down 18% so far in 2022; turnaround coming, should you buy?

Shares of Pizza Hut, KFC operator Sapphire Foods have plunged 18% so far this year, underperforming the benchmark Nifty 50 index which has fallen 8%. However, analysts at Motilal Oswal Financial Services expect the stock to rise 42% on the back of growth in KFC, the Pizza Hut business in the country. “Sapphire Foods’ earnings growth opportunity is attractive enough to warrant an investment case,” the national brokerage firm said in its report while issuing a hedge on the stock with a “buy” rating. and a target price of Rs 1,420 per share. Sapphire Foods shares were trading at Rs 987, down 1% on NSE intraday.

Net profit margin to improve

According to Motilal Oswal analysts, with a healthy SSSG and rapid store additions, Sapphire Foods is expected to see strong double-digit sales growth in the coming years (29% CAGR FY22-24). The company’s efforts on the omnichannel model, with downsizing of stores, evidently led to a turnaround in profitability, with overall EBITDA margin rising from low-single digits over the course of the year. FY19-21 at 11% in FY22. Going forward, analysts forecast an EBITDA CAGR of 43% in FY22-24. “It made a net profit in FY22 after suffering losses in FY19-21. We expect it to improve its net profit margin to 5.3% in FY2019. FY24 versus 2.7% in FY22,” they said.

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Analysts believe that Sapphire Foods offers an exciting investment opportunity in the Indian Quick Service Restaurant (QSR) space as the Indian Food Service (FSI) industry is expected to register a CAGR of 9% in the coming years. , with QSRs likely to grow faster at 23% CAGR on FY20-25. The company’s new scalable restaurant business model is a game-changer and its omnichannel strategy and downsizing of stores, along with other elements of the model, have resulted in a big shift in Sapphire’s unit economics . Meanwhile, KFC India’s business is also strong, with healthy ADS and profitability. Pizza Hut’s Indian business is also experiencing a turnaround, with an increased focus on delivery, while maintaining its restaurant edge. “Overall, SAPPHIRE is poised to deliver strong growth with a CAGR of 29%/43% sales/EBITDA (pre-Ind AS 116) in FY22-24E,” the brokerage said. .

Ready for strong network expansion growth

Analysts believe that KFC and PH are poised for strong growth due to their rapid network expansion and the health of their SSSG over the next few years. “We expect KFC/PH to see a CAGR of 31% / 35% in sales in FY22-24. There is considerable potential for improvement in our guidance, as our estimated ADS levels for FY24 had already been exceeded in 3QFY22 (although this is an outlier),” they said. . Sapphire Foods’ operating profitability should also continue to improve. However, recent challenges related to commodity inflation and the Sri Lankan crisis

may put some pressure on short-term profitability.

Attractive valuations, initiate hedging with Buy

“We assigned an FY24E (pre-Ind AS 116) EV/EBITDA multiple of 27x to the KFC business due to its robust metrics (ADS and brand contribution margin), and 17x to the PH business. These are significantly lower than DEVYANI’s KFC/PH multiple targets (45x/35x) due to the disadvantages SAPHIRE faces in terms of trading: a) its territorial rights in KFC are largely in high population states vegetarian, and b) DEVYANI can venture into SAPPHIRE territories with PHD format stores, which require lower investments,” the brokerage said.

While the discount multiples are warranted given the reasons mentioned above, the opportunity for earnings growth is attractive enough to warrant an investment case, they said, adding that Sapphire’s valuations are at a considerable discount compared to its peers. The brokerage has assigned a ‘buy’ rating to the stock with a target price of 1,420 rupees, implying a 42% upside.

(The stock recommendations in this story are from the respective research analysts and brokerage firms. Financial Express Online takes no responsibility for their investment advice. Investments in the capital markets are subject to rules and regulations. Please consult your investment advisor before investing.)

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