Sapphire Foods shares: Will KFC, Pizza Hut operator keep re-rating?

ICICI Securities in its latest note on consumer staples said it believes Sapphire Foods Ltd will continue to rerate vis-à-vis Devyani International and as the consensus fully appreciates the improvement in key operating metrics. The consensus has historically attributed a valuation discount of 5-51 per cent (mean: 37 per cent) on Sapphire against Devyani International, it noted. 

The Sapphire Foods  stock is up 14 per cent in 2024 so far. It gained 33 per cent in the past one year. This is against a 19.58 per cent fall in Devyani International shares in 2024 and a mere 5.4 per cent rise in the past one year.

The rerating may come as there's material divergence in Devyani's narrative against the reality, it said. Sapphire Foods has outperformed Devyani in terms of KFC - a 5-year same-store sale growth (SSSG) of 8 per cent compounded annually against 4 per cent for Devyani.

In Pizza Hut, both Sapphire and Devyani performance poorly with 5-year SSSG CAGR of nil and 1 per cent. Devyani's store expansion rate at 25 per cent (4-year CAGR) was significantly ahead of Sapphire's at 19 per cent but Sapphire improved its store expansion rate to 21 per cent YoY in 9MFY24, it said.

Lastly, ICICI Securities said the store operating margin gap between the two has reduced meaningfully with Sapphire getting ahead of Devyani in KFC by 20 basis points in 9MFY24 against 280 bps in FY20. In Pizza Hut, that gap has been cut to 90 bps behind in 9MFY24 against 320 bps in FY20.

"The company level Ebitda margins show a similar trend with Sapphire having lower margins by 430 bps and 500 bps in FY21 and FY22, respectively, which have reduced to 280 bps and 20 bps in FY23 and 9MFY24, respectively. However, consolidated margins at company level are not completely comparable with both Sapphire and Devyani having other business clubbed in them," it said.

For Sapphire, ICICI Securities said its earnings estimates remain unchanged, as it models in revenue and Ebitda CAGRs of 20 per cent and 27 per cent, respectively, over FY24-FY26E.

It maintained 'ADD' on the stock with an unchanged DCF-based target price of Rs 1,750. ICICI Securities does not rate Devyani International. It has no investment opinion on it.