Sapphire Foods India Limited analyst Q&A

Thank you very much, sir. We will now begin the question -and-answer session. The first question comes from the line of Gaurav Jogani from JM Financial. Please go ahead.

Thank you for taking my question and congrats on the strong operational performance, I would say, in the challenging environment. Sir, my first question is with regards to the improvement that you are seeing. I think your other franchise partner has also indicated the same of improvement in January and even one of the burger brands have also indicated this. So are you seeing a pickup in the overall macro environment or is it because of the specific initiatives that you have been taking is dri ving this positive SSSG or momentum improvement in January as well?

Yes. Possibly, it is both. I don't think where we sit, we can comment on the overall macro. Certainly, we had seen this improvement start in December after the INR 99 initiative. The Dine- in, Takeaway business undoubtedly has seen a swing post that initiative happening. Like I think it is January, while we must not try and extrapolate this to infinity. But certainly, January starting off on a good note is a positive part. But let's wait and see as to how the whole quarter goes.

Sure. No, sir, the reason why I asked -- when I meant the macro, it is specifically for the food services industry is what I meant, the improvement?

I don't think I can answer that. If you're saying that other people have also shown this good, that means the industry is turning around.

Sure. And sir, this INR 99 initiative that you have started, would this be a margin dilutive initiative or at scale, maybe you could still sustain the same level of profitability that you are doing right now?

So again, if I take you back to the Epic Saver campaign, at that time, we were investing almost 100-odd basis points, and we dropped our gross margin below last year by almost 100 basis points. If you look at current quarter, we are up by 50-odd basis poin ts over last year. But however, this particular promotion started only in third week. Yes, this particular promotion would be dilutive on gross margins, but I don't see an impact beyond 50 basis points to 60 basis points from current level in terms of gross margin. Having said that, if it can help us drive SSSG, that will be more than compensated in terms of the overall profitability.

Vijay, when you say from the base, I mean, that would be Q3, right?

Okay. And my second question is with regards to the Pizza Hut. Pizza Hut, the brand has been struggling and you have also not done new store additions. But where would you position yourself in terms of the recovery journey? I mean, the initiatives that you have taken so far, do you think with these initiatives, at least you can target a positive SSG in the coming financ ial year?

I think for Pizza Hut, it would be important that both the franchisee partners come together and decide on a way forward. And hopefully, that can happen sooner once the CCI approval comes into the picture. Yet whatever coordination we can do within -- through the Yum! system, that will still go on. But I think that would be a key factor as we move forward. Along with that, there would be some amount of -- like while we have opened 0 units in terms of net, we had a few closures. I think those few closures will still happen in terms of trying to make s ure that you minimize the losses. But we don't see a major expansion even in the coming year. And the overall focus will be to make sure the brand revives first. And I think for the brand revival, both the franchisee partners needs to come together to decide on the way forward. We are quite confident of how the work -- things are going in Tamil Nadu. And I think this is now third or fourth consecutive quarter whether Tamil Nadu has been able to deliver a differential performance vis-a-vis the rest of the other estate.

Tamil Nadu and Sri Lanka, Gaurav.

And Tamil Nadu is based on Sri Lanka.

Sri Lanka, in that market, we continue to, in tough conditions, do well. So I think there's a clear model for the revival of this brand, which is quite differentiated, and I don't think anyone else can copy easily.

Sure sir. Yes, there's a great work in Sri Lanka that you have done and the profitability and the revenue growth is clearly reflecting that.

No. We will do also the same thing, Gaurav. If you go visit our stores in Tamil Nadu, you'll understand. They're just fantastic stores.

Sure. And sir, just lastly, on the overall this merger thing, because this merger process is now on, what kind of -- will the business will continue as usual? Will there be any changes in the functioning post the CCI approval comes in? If you can give some guidelines until the ultimate merger happens?

The overall entity continues to remain independent and function independently until the merger becomes effective. So -- and we had given out the timelines earlier. From now, it could be maybe around 12 months for the merger to become effective. It has started with the Board approval and it goes to the exchange for approval, then CCI approval, filing with NCLT. So all this can take 12 months. Till then both the companies operate independently. Having said that, once the CCI approval comes in, which could be anywhere between now and let's say, maybe around 3 to 6 months, one can expect a bit more closer coordinati on on some of the strategy points, while each of the companies still continue to function independently.

Yes. And on the brand strategy, overall brand strategy, in any case, we are guided by Yum. So I don't think anything changes there. All 3 of us used to come and sit on the table together. I think specific operational issues can only be handled after CCI approval.

Especially in case of Pizza Hut because there's a territory overlap over there. And hence, that becomes. Otherwise, we used to coordinate between us, Yum and Devyani used to coordinate anyways on the key brand product and marketing strategy.

The next question comes from the line of Rehan Saiyyed from Trinetra Asset Managers.

Good evening to the team and thanks for taking my question. So my first question is around, I want to understand regarding your Tamil Nadu performance delta. So you have consistently highlighted that the Tamil Nadu because it was positive double-digit delta in terms of sales growth and profitability over the rest of India. So what specific consumer behavior or competitive dynamics in that market are driving this counter performance? And to what extent can we -- will be reflected in other struggling regions to arrest the 12% SSSG decline? This is my first question?

So in terms of Tamil Nadu, the first thing which is there, Tamil Nadu is an exclusive market for Sapphire. So there is no overlap between us and Devyani. So there are no 2 different formats at play. In the other markets, Sapphire largely operates dining forward omnichannel restaurants, Devyani would operate in our territories, Pizza Hut delivery format. So that would be one big difference between the other territories and Tamil Nadu in terms of the format complications and the overlap. Now that because we are able to operate Sapphire is the exclusive territory, we are able to communicate this to the custo mer in terms of the brand experience, the restaurant experience by putting in money in that particular estate. If it comes to putting in money in any other estate or any other territories, you will require an alignment with the other franchisee partner for that additional investment. And unfortunately, that alignment right now does not exist. It did exist last year for the first 9 months. It gave us Sapphire the upside. It did not give the other franchisee partner the required upside. And understandably so, they said we don't want to invest further in terms of additional marketing investment. So that's the deadlock which continues in other markets, which is because of territory overlap, and that does not exist in case of Tamil Nadu. In terms of replicability, we are -- for Sapphire, the experience remains the same even in the other markets from a format perspective. But our communication strategy is not similar as Tamil Nadu, and that's the difference. And the day we are able to align, we will be able to communicate. We don't see any other reason why we should not be able to replicate the performance in any other territories as well.

Okay. Okay. So basically, you are saying that the main point here is the communication that you are not communicating apart from Tamil Nadu right?

Yes. And we were able to do that last year. If you remember, recall, April'24 to December'24, we were able to do a jointly aligned on a marketing communication strategy, and we did invest additional money between all 3 partners, us, Devyani and Yum. That is not happening anymore. Now it's only Sapphire, which invested in Q3 along with Yum! in Tamil Nadu.

Okay. Fair enough. And just want a bit understanding regarding your digital transformation that you have mentioned that digital kiosks are now rolled out across 70% of the estate. So beyond operational frictionless experience, are you seeing a measurable increase in ticket size or scaling -- kiosks compared to traditional counter service?

Yes. So we are seeing increase in APC across the stores where we are seeing -- where the kiosks have been rolled out in case of KFC. But more than just the increase in APC, I think it just gives us the power as we move forward in terms of collecting the right customer data. It also gives power to the customer in terms of controlling its own ordering journey. And we believe as we move forward using intelligence, this should help us upsell and drive ticket size further. So I think it's just a start of the journey. It's a long way to go.

The next question comes from the line of Kaivalya Baing with IIFL Capital.

This is Percy Panthaki here. So I just wanted to understand the KFC margin expansion despite SSSG being weak, we generally understand that we get operating leverage at, let's say, 3%, 4% because the general inflation per store is around that level? But despite SSSG being lower than that, we are seeing 20 basis points leverage between gross margin and EBITDA in addition to the 40 basis points at the gross margin, so overall 60 basis points. So can you comment on both the 40 basis points as well as 20 basis points as to what are the drivers which are driving that?

So first, the biggest driver has been the gross margin and the gross margin has been the function of the reduced discounts, which we had and the rationalization of the value offer construct. You would recall that we had Epic Saver campaign at INR 299 in the H1. And while we continued with that particular campaign in Q3, we continued in a different form and shape, where our gross margins was not taking hit as much as it took a hit in H1. So that this combination of discount reduction as well as this particular change on the value offer helped us get the gross margin back, and it shows an upside over last year, whereas previous quarter, we actually dropped on the gross margin compared to pr evious years. So that's on the gross margin side. On the cost efficiencies, definitely, we had our efficiencies in terms of the Labo ur Cost as well as our store operating cost where whether it's electricity, R&M and other lines, we were able to squeeze enough amount to drive this particular efficiency. There's also a small amount of benefit, which if I call out in terms of the base effect, the Navratri actually fell in quarter 2 this year versus it was actually in quarter 3. So that also helps its bit in terms of SSSG as well as the EBITDA when you start comparing with last year. So these are the 3 things.

Got it. Secondly, on the delivery versus dine -in mix, we have seen even for some other companies that dine-in is now doing better versus a few quarters ago where delivery was growing faster. And the change or the flip in equation has come not largely from improvement in the absolute growth rate of dine-in. Of course, that has happened. But it seems that the delivery growth rate, which used to be sort of better earlier, that is now struggling. So can you comment on the dynamics behind the delivery versus dine-in mix?

So first of all, I wouldn't say dine -in right now, at least for the quarter which has gone by, has performed better versus delivery. I would say the gap has definitely reduced in case of KFC. Of course, in case of Pizza Hut, the decline in dine-in has been less than the decline in the delivery. Coming back to your original point, whether it has plateaued out or slowed down, it has definitely slowed down the kind of delivery goods you used to see earli er. You don't see that anymore. Having said that, there is also -- I think each of the companies, especially Sapphire, both the brands, the kind of offers, value promotions, deals we are focusing on at a dining and takeaway channel are something is also helping us bridge this particular gap between dining and delivery.

Epic Saver Campaign which was mainly a dine-in promotion, you have reduced that, right, so?

No, the same thing now we have pivoted towards this Chicken Krisper Burger Meal, that's also a Dine-in and Takeaway offer, whether it is in case of Pizza Hut, which was buy 1 get 3 Dine- in, Takeaway offer, INR 99 Course Meal in case of Pizza Hut, again, a Dine-in, Takeaway offers. So most of these offers and promotions are focused to driving Dine-in and Takeaway customers and drive those transactions up. So that's another reason why it has -- the gap has bridged. Also, previously, I used to always call out when the delivery mix was growing, I used to call out that apart from delivery performance, there are other factors which were at play. We used to call out that the mall estate post-COVID from a real estate point of view, the supply of estate was lower, where mall typically has a higher Dine-in mix. Late night delivery as addition as an occasion was again a delivery occasion. So, I think those two, three factors which gave a delivery a flip has now probably got built in into the last year anyways. So now you're looking at a real genuine like-for-like performance on delivery.

But we are seeing actually decline, Vijay, so if, let's say, KFC SSSG is 1%. If I break up that 1% into dine -in versus delivery, dine -in is growing at low to mid -single digit and delivery is probably declining at, at least a low -single-digit or mid -single-digit also. So just wanted to understand why something and which was doing well, which even when the overall SSSG was negative, maybe the delivery part was still flat to positive. Why that has gone into negative? Because if you see the overall delivery growth in India as a country, if you use Swiggy, Zomato as proxies, that is not doing badly. Both the companies are still growing at mid-to high teens. So just wondering why our delivery SSSG is now in negative territory, low-to mid-single-digit?

See, I'm not sure how have you derived those numbers because we have never said that the dine- in for the quarter was above 1% or positive when delivery was negative. I'm still calling out.

Where the dine-in mix has increased on a Y-o-Y basis?

No, it is not. Dine-in, takeaway mix for the KFC has not increased on the Y -o-Y basis. In fact, our delivery mix has increased by 300 basis points for KFC, 41% delivery mix for KFC last year has gone to 44%.

Sorry, I got the -- it was mixed up. I'm sorry. Okay. I'll take it offline, whatever.

No worries. It's important that I clarify for all the listeners as well that the gap between dine -in and delivery is reducing. But still, as of now, the quarter 3 delivery has performed better than dine-in for KFC. For Pizza Hut, of course, the decline in dine-in has been lower than the decline in case of delivery. So let me just clarify that for everybody. Yes.

The next question comes from the line of Ashutosh with MIT.

Thanks for the opportunity, and congrats on a good quarter for a long time on the profitability as well as SSSG side. So a couple of questions. First, on the -- I wanted to check what has been our SSTG growth in the context that we have now rationalized discounts also. And we have been calling out better SSTG growth for the last couple of quarters. So has it accelerated meaningfully from there? And has it sustained in January as well given discounts have been slightly rolled back? Second would be on the delivery revenue in the Pizza Hut segment. So we have seen aggregators reporting slightly improved growth over the past couple of quarters on the delivery front, but Pizza Hut this quarter was a substantial decline in terms of delivery revenues. So anything that you want to call out there?

In terms of SSTG, SSTG for KFC, it's largely in line with the way the SSSG is. So it's a similar number or it's in a similar range. So both SSTG and SSSG are right now going in hand in hand. And while you called out that we have rolled back Epic Saver campaign, but we have gone ahead with even more or pivoted towards even more aggressive campaign. So while Epic Saver, we are toning it down considerably, the entire marketing works and the entire focus is on making sure that how this INR 99 offer on Chicken Krisper Burger Meal is used to drive new transactions, get new customers inside the stores. So we have not really dialed down. And whatever results we are seeing in the first 7 weeks of this offer, definitely, the transactions are growing faster than the SSSG. So SSTG is faster -- and I'm talking about the stores where this has been rolled out. In the first few weeks of December, this was around 25% stores. Now in Jan, this has gone up to 33% of our stores. So yes, we are seeing higher transaction growth than the SSSG in Jan.

On the Pizza Hut. Pizza Hut, again, we don't feel it's an issue of a delivery or a particular store or a particular -- I think at a brand level, we have called out that all brand codes which are required to be in place are in place. So whether it is all about the -- our customer proposition on dining forward channel, whether it is about the format size, whether it is the delivery credentials on Swiggy and Zomato, which used to be around 3.5, now gone above 4, backed by our Dragontail tool , which is helping us drive deliver hot and fresh pizzas. So whether it is about our product innovations, it's enough and more in the pipeline. So it's all about how do we communicate to the customers. That's where the focus should be, and that's where also the challenge rise right now. With the limited marketing budget, unless we put in more money and we put in more money behind the revival of the brand consistently quarter-after-quarter, unless we do that, we will see a challenge, and that's what we hope to resolve with other franchisee partner pretty soon.

So how we should understand is that large part of the problems related to your -- maybe ratings and all that's all major part that is left is your marketing…

So it's about 20 years of legacy in terms of what we carried as a premium brand now that we are as powerful in terms of our value as any other competitor and delivering great experience on top of that backed by our product innovation. If you don't say it t o customer and if you don't shout enough, everything goes down the drain.

And post CCI approval, should we expect you to replicate the Tamil Nadu strategy across India or would that be something that we will take on later?

See, we are not hanged on to a particular thing. The idea is finally the two partners have to come together and decide on a common way forward. So it's not about our solution or their solution. As long as we all agree to a common solution, the good part about the retail or the QSR business is any solution can be experimented in a small territory, smallest or one state, get the results and then replicate it across all the states. So it's not about Tamil Nadu solution. Finally, whatever both partners agree, we have to agree on one way forward and then roll it out Pan-India.

And one more question, if I may. On the Sri Lanka business, we have seen continued good growth improvement across all metrics. So do we have an opportunity to accelerate the store growth there from 8% to 10% to maybe low double digits or something?

We believe it should be at least high -single-digit for the coming year, at least -- continue to be high-single-digit, possibly touching 10%, maybe, but I would say high-single-digit.

As there are no further questions from the participants, I would now like to hand the conference over to Mr. Sanjay Purohit for closing comments.

Yes. Thank you very much, everybody, for attending our quarter 3 business performance presentation. Like I said, we saw improved profitability on the back of restaurant EBITDA of KFC coming at 18.8%. KFC grew at 11%. Pizza Hut declined a t 11% and Sri Lanka grew at 15%. And from an ESG perspective, our ESG ratings for fourth year in a row, we've continued to improve. And we are now among the top 3 QSR companies in the world and by far the number one company in India. That's it for me. Thank you so much. We'll close the conference now. Bye-bye.

Thank you, sir. On behalf of Sapphire Foods, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.