Sapphire Foods India Limited has informed the Exchange about Transcript of Analysts/Institutional Investor Meet/Con. Call in relation to Q2 FY23 Earnings Presentation held on November 3, 2022.
:
Date
November 10, 2022
National Stock Exchange of India Limited To,
BSE Limited
Exchange Plaza, Block G, C/1, Bandra Kurla Complex, Bandra (E), Mumbai – 400051
Phiroze Jeejeebhoy Towers, Dalal Street, Mumbai – 40001
Symbol: SAPPHIRE
Scrip Code: 543397
Dear Sir/Madam, Subject: Earnings Call Transcript – Q2 FY23
Pursuant to the Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, please find enclosed herewith the transcript of earnings call held on Thursday, November 3, 2022, in relation to the financial results of the Company for the quarter and half year ended September 30, 2022.
The said Earnings Call Transcript is also available at the website of the Company (https://www.sapphirefoods.in/investors-relation/financials) under FY 2022-23 Quarter 2 section.
Request you to kindly take the same on record.
For Sapphire Foods India Limited Thanking you,
Sachin Dudam Company Secretary and Compliance Officer
Encl:
a/a
Sapphire Foods India Limited (formerly known as Sapphire Foods India Private Limited) CIN: L55204MH2009PLC197005
+91 022 67522300 info@sapphirefoods.in www.sapphirefoods.in 702, Prism Tower, A-Wing, Mindspace, Link
Road, Goregaon (W), Mumbai- 400062
“Sapphire Foods India Limited
Q2 FY2023 Earnings Conference Call”
November 03, 2022
MANAGEMENT: MR. SANJAY PUROHIT – GROUP CHIEF EXECUTIVE OFFICER & WHOLE TIME DIRECTOR – SAPPHIRE FOODS INDIA LIMITED MR. VIJAY JAIN – CHIEF FINANCIAL OFFICER – SAPPHIRE FOODS INDIA LIMITED MR. NACHIKET KALE – ORIENT CAPITAL
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Moderator:
Ladies and gentlemen, good day and welcome to the
Sapphire Foods India Limited November 03, 2022
Sapphire Foods India Limited’s Q2 FY2023 Earnings
Conference Call. As a reminder all participants are in the
listen-only mode and there will be an opportunity for you to
ask questions after the presentation concludes. Should you
need assistance during the conference, please press “*” then
“0” on your touchtone telephone to signal for an operator.
Please note this conference is being recorded. I would now
like to turn the conference over to Mr. Nachiket Kale from
Orient Capital. Thank you and over to you Mr. Kale!
Nachiket Kale: Good evening everyone and welcome to Sapphire Foods’
Q2 and H1 FY2023 Earnings concall. The management
today is represented by Mr. Sanjay Purohit, Group CEO and
whole time director along with Mr. Vijay Jain, CFO. I hope
everyone had a chance to go through the investor
presentation and earnings press release. Before we begin
just a reminder that this call may contain some forward
looking statements which do not guarantee future
performance and involves unforeseen risks. With that I
would like to hand over to Mr. Sanjay Purohit to take over.
Sanjay Purohit: Good afternoon ladies and gentlemen. Welcome to our Q2
highlights. I will talk very briefly about the numbers and
then I will give you a color on the quarter. In the quarter we
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Sapphire Foods India Limited November 03, 2022
delivered a strong performance. Our revenue was highest
ever at Rs.560 Crores, our EBITDA was at Rs.103 Crores
at 18.4% up 350 basis points year-on-year and our adjusted
EBITDA was about Rs.62 Crores at 11.1% up 490 basis
points year-on-year. PAT stood at Rs.27 Crores 4.8% of
revenue up 600 basis points year-on-year. Our India
restaurant EBITDA grew by 40 basis points year-on-year;
however, due to the adverse Sri Lanka impact consolidated
restaurant EBITDA of 16.8% was actually lower by 50 basis
points and all of this I am looking at versus our normalized
EBITDA of Q2 FY2022 and if you remember last year we
were painstakingly calling out that our EBITDA was
actually lower than what we had received in that period
because of one time incentives that we have got on our store
openings so against the normalized EBITDA numbers India
grew by 40 basis points but on a consolidated level we
dropped by 50 basis points.
At the beginning of the quarter we thought it is going to be
a challenging quarter. One KFC revenues especially for the
Sapphire markets are especially impacted because of the
higher festival vegetarian days that we see and I will say this
year the extent of drop that we see on vegetarian days has
gone back to 2018, 2019 levels so there has been quite a
severe drop versus say last year but in line with what we
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Sapphire Foods India Limited November 03, 2022
have seen perhaps in the earlier years so that was one
potential negative impact. The second potential negative
impact was that inflation peaking and on both the brands we
were seeing mid teens inflation levels. Therefore at the start
of the financial year along with Yum we have consciously
taken a call to have price increases not in line with inflation
but lower price increases so as to ensure that our transaction
volumes are maintained and that has worked really well for
us from a demand perspective so we are really happy with
how the quarter has gone from a demand perspective. If you
look at our same store sales growth had been really strong,
our year-on-year ADS levels have been sustained in spite of
176 stores that we have added in the last one year so I think
the fact that SSSGs are strong, transaction growth has been
maintained in spite of our price increases I think that bodes
well for us. So if you look at KFC now we delivered a 15%
same store sales growth and a 36% increase in overall
transaction. When we look at a channel level actually dine
in was quite strong and their transactions also grew on a
year-on-year basis but because our price increase which we
had taken about between 9% to 10% and like I said inflation
was in mid teens our gross margins were impacted by 310
basis points, but because of leverage that we got on 15%
SSSG and tighter cost management the drop in restaurant
EBITDA went to about 80 basis points versus the
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Sapphire Foods India Limited November 03, 2022
normalized EBITDA level of 18.7% in Q2 FY2022. You
would have heard both Vijay and me talk about Q2 being
generally the lowest quarter for us from KFC perspective
and it drops versus Q1 and then we hope to recover in Q3 as
we go past the festival vegetarian days. Gross margins went
down by 310 basis points, our restaurant EBITDA margins
just went down by 80 basis points so the SSSG focus as well
as the cost management focus helped us to curtail this drop.
On Pizza Hut I think we have had best ever quarter. Our
same store sales growth grew by 23%. There was a very
strong transaction growth in excess of this SSSG and the
ADS growth both over the corresponding quarter and the
sequential quarter and therefore even when gross margins
dropped by 110 basis points our restaurant EBITDA was our
highest ever at 15% up by 440 basis points compared to our
normalised restaurant EBITDA of 10.7% in Q2 FY2022. So
here I am happy to say that a combination of our Omni
channel strategy where dine in, takeaway and delivery all
three come, we are able to maximize revenue out of our
store through all three channels combined with all the work
that we have done on cost management as well as the
innovation on Pizza Hut the same store sales growth has
been very strong at 23%.
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Sapphire Foods India Limited November 03, 2022
Our Sri Lanka business also had a strong quarter and we
grew SSSG to the tune of 37%. Now this has largely been
on the back of price increases so the transaction growth has
been just about positive in this quarter. Inflation has
continued to rise and therefore our gross margins have got
significantly impacted and therefore restaurant margins also
dropped to about 550 basis points to 15% versus our
normalised restaurant EBITDA of 20.5% last year Q2.
Absolute value EBITDA grew by 23% in Lankan rupee
terms but in Indian rupee terms declined by 25% with
currency translation impact. Largely if you see in Q1 we
delivered in Indian rupees sense roughly about Rs.7 Crores
in this quarter also we have delivered similar roughly 10%
to 11% mix of our corporate EBITDA. We are also happy
to say that our restaurant expansion pace has been steady.
We opened 42 restaurants in Q2, 20 KFC, 14 Pizza Hut in
India and 7 Pizza Hut and a Taco Bell in Sri Lanka. So given
all the macroeconomic conditions that we are seeing many
consumer products company is showing lower transaction
growth, lower volume growth our inflation being quite high,
the fact that we consciously took lower price increases in
the hope that we will be able to maintain transaction growth
I think this quarter has been actually a very strong quarter
for us and we are quite happy at the way that it has panned
out coupled with our restaurant expansion that means that
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Sapphire Foods India Limited November 03, 2022
we are in a reasonably good space. Q3 is generally better
than Q2 and we expect some marginal amount of gross
margin improvement towards the end of Q3 perhaps
beginning Q4 but inflation continues to be at the same level
so there is no drop in inflation level so that is the overview.
When I look at page seven the consolidated financials you
will see as I am repeating myself here Rs.560 Crores up
36%, adjusted EBITDA Rs.62 Crores up 144%, Rs.62
Crores translates into 11.1% adjusted EBITDA margin,
EBITDA was Rs.103 Crores at 18.4% and PAT Rs.27
Crores at 4.8%. We ended the quarter with 658 stores, 301
KFC, 249 Pizza Huts in India and 106 Pizza Hut and Taco
Bell in Sri Lanka and two stores in Maldives so totally 658
stores. I will now quickly hand it over to Vijay who will talk
about the specific financial highlights.
Vijay Jain:
Good afternoon everyone. I will move on to slide number
nine consolidated financial highlights. Slide number nine so
we clocked sales of Rs.560 Crores our highest ever revenue
growth of 36%, gross margins we dropped by 310 basis
points, we will deep dive into this at each business level.
Moving on to slide number 10, slide number 10 is a bit busy
at times when you do over disclosures it can have this kind
of effect so I will take a bit of time on this particular slide.
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Sapphire Foods India Limited November 03, 2022
If you look at numbers in brackets which are given for last
year corresponding quarters those indicate normalized
restaurant EBITDA numbers taking aside onetime benefit
which we received from Yum on account of COVID
additional incentives which we received. We had called out
this last time as well in Q3 financials when we released so
on a comparison to our normalized restaurant EBITDA of
last year of 17.2% we delivered 16.8% this year, a drop of
50 basis points. If you look at the below the graph it says
Indian restaurant EBITDA grew by 40 basis points versus
last year so after excluding the Sri Lanka business where we
have seen a big drop on Sri Lanka the India restaurant
business grew by 40 basis points in spite of a 300 basis
points drop what we have seen at overall level. On adjusted
EBITDA at 11.1% it was up by 750 basis points over the
last year compared to a normalized EBITDA for Q2 which
was 3.6% last year. In terms of value we delivered Rs.62.4
Crores, Q1 for us was around Rs.73 odd Crores.
Slide number 11 overall EBITDA of Rs.103 Crores 18.4%
up by 610 basis points versus last year’s normalized
EBITDA of 12.3% and PAT of 4.8% at Rs.27 Crores up by
860 basis points over the last year. Last year we were
negative on PAT. On YTD basis if you look at we delivered
a PAT of Rs.65 Crores is close to 6% up by almost 1000
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Sapphire Foods India Limited November 03, 2022
basis points versus last year. Sanjay would take over on the
KFC section.
Sanjay Purohit: When we look at channel contribution we will find that dine
in has continued to increase in overall contributions so in
Q2 it was at 44% whereas delivery was at about 36% and
takeaway was about 20%. We had product launches chicken
peri peri, we had chocolate lava, a lot of branding and
promotions around both chicken peri peri and chocolate
lava. Our digital activation continues and the use of
celebrities. Our new store launches we have given you some
pictures. Finally we were able to launch a Colaba store.
Recently in October we launched a store near fort and then
we have launched a store in Central Mumbai also near
Dadar. You can see the Faridkot, Punjab store, some of the
stores in Punjab are really beautiful big stores with full drive
through and it is an integrated retail development with lot of
food players, apparel players, entertainment, so the brand
does really well here and you can see a picture of the Jalna
Road, Aurangabad store.
Vijay Jain:
Moving on to slide 20 on financials very strong SSSG of
15% in the quarter for KFC, very healthy ADS of 134, this
ADS is in spite of the 82 restaurant additions which have
happened over the last one year so it includes all the new
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Sapphire Foods India Limited November 03, 2022
restaurants as well. On restaurant EBITDA of slide 21 on
gross margins just let me cover the gross margins first.
Restaurant revenue first, on restaurant revenue we clocked
Rs.350 Crores up by 36%, additions of 20 stores which took
the count part to 300 mark for us in KFC in the last quarter.
On gross margins we dropped by 310 basis points, two
reasons over here and one prime reason that inflation picked
in Q2. Q1 while inflation was there we were also carrying
old inventories. Inflation picked in Q2 that was a major
impact. A marginal impact also on account of delivery mix
compared to last year, last year it was 42% now it is 36% so
small impact also on account of delivery relaxation. Our
delivery prices are generally higher than our dine in and
takeaway prices; however, in spite of gross margin
reduction we were able to curtail the restaurant EBITDA
drop to 80 basis points if you compare to a normalized
EBITDA of last year of 18.7 we delivered 17.9%. This was
possible because of healthy SSSG which Sanjay spoke
about that we were able to drive because of lower price
increase than inflation combined with the cost control we
were able to limit the drop to 80 basis points in the quarter.
Overall it is a very soft quarter expectedly soft quarter from
a festival point of view, but from an overall demand and
SSSG point of view it was a strong quarter for us and the
cost management ensured we were able to restrict the
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Sapphire Foods India Limited November 03, 2022
impact to 80 basis points. Going forward Sanjay mentioned
that as we move into Q3 we expect a recovery in demand to
pick up because of the vegetarian festival days are over.
Gross margin point of view we expect marginal recovery to
happen in the end of Q3 and the beginning of Q4 and the
higher ADS or higher revenue should enable us to drive
greater restaurant EBITDA margins.
Sanjay Purohit: From a Pizza Hut perspective the channel sales contribution
is quite similar to Q1 where 35% came out of dine in and
about 15% to 16% comes out of takeaway, so deliveries
today about 49% to 50% of our total business. A lot of our
branding and promotions was focused on flavour fun that
we launched on in the end of July nationally. You can see
some of our new restaurant launches and we launched about
14 in the quarter so you can see Alwal, Gandhidham, and
Avadi where we have got KFC and Pizza Hut in the same
premise and Dighi in Pune and now Vijay will just talk
about the numbers.
Vijay Jain:
Slide 28 on Pizza Hut our overall SSSG was 23% and as
Sanjay mentioned that it was on the back of strong
transaction it was really heartening to see. In terms of the
ADS we were at 64000 which was not only a growth on
sequential quarter but as well as corresponding quarter as
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Sapphire Foods India Limited November 03, 2022
well and this is in spite of 61 store additions which happened
over the last one year in case of Pizza Hut. Restaurant
revenue grew by 60% at Rs.140 Crores with 14 additions
during the quarter from the overall tally 249 restaurants. On
gross margins we dropped by 110 basis points on account
of churn in our price increase generally been lower than the
inflation; however, our restaurant EBITDA when compared
to a normalized EBITDA of last year at 10.7% we delivered
15.1% which is up by 440 basis points so this was best ever
quarter for Pizza Hut in terms of revenue as well as in terms
of restaurant margins and within 15.1% if you guys
remember last time we called out that stores which have
opened from April 18, 2022 onwards over the last four years
those are delivering mid to high teens level of profitability
and stores prior to April 18, 2022 while they are converted
to Omni channel because of their insufficient size they
deliver lower double digit restaurant EBITDA.
Sanjay Purohit: Our Sri Lanka business in an economy that is still impacted
continues to do well. The highest or the greatest impact of
all the disturbances came in perhaps towards the end of
June, July and August but now things are stabilizing from
an operations perspective, it is easier to get fuel. There is
less number of electricity outages, imports again been
allowed so we are able to get our imported products also in
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Sapphire Foods India Limited November 03, 2022
time, cheese, etc., which is very important so operating wise
the business at least I would say 85% to 90% at a normal
level. Inflation when we look at the first half would anyway
close to about 75% to 80% we would have taken price
increases in the region of about 40% and therefore gross
margins here have dropped but ADS at a Sri Lanka level
SSSG grew by 37% and our store openings continue. We
opened 7 Pizza Huts and one Taco Bell. We are also seeing
reasonably good traction on Taco Bell even though it is just
7 stores today, but potentially at some point in time it could
be another driver of growth in Sri Lanka. Our new products
continue to do well so the brand is in a strong position and
when I look at October so improvement in operating
conditions; however, inflation is still there and given that
wage inflation is not in line with the general inflation there
will be pressure on consumer discretionary categories and
from a transaction level I feel that we will see pressure as
we go forward. The quick financials Vijay will talk about.
Vijay Jain:
Page 36 overall SSSG 37% with ADS in Lankan rupees at
Rs.335000. If you look at the Indian rupees, impacted by
translation of currency of almost 40%
impact or
depreciation. In terms of revenue in Sri Lankan rupees
Rs.312 Crores revenue for the quarter up by 76% in Indian
rupees it is Rs.67 Crores up by 2% so still positive even
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Sapphire Foods India Limited November 03, 2022
though a big impact on translation of currency. At gross
margins a drop of 1000 basis points as we saw even in Q1
there was drop of close to 900 to 950 basis points impacted
by inflations. Sanjay spoke about the uprising figure is in
the range of 40% while the inflation was in the range of 75%
to 80%. Absolute margin still grew by 23% in LKR terms
while the percentage margin dropped by 550 basis points
when you compare with normalized EBITDA of last year so
it has clocked 15% so overall things are more stable in terms
of as Sanjay said operating conditions be it for availability,
be it supply chain management, be it power and fuel and as
indicated earlier this year we expect probably the overall
year where revenue to grow by 20% to 30% in Lankan
rupees. We would be happy if we are able to hold or
marginally grow our EBITDA at Lankan level. In LKR
terms of course we will have a depreciation impact of 40%,
which means at a corporate EBITDA level on annual basis
there would be an impact of Rs.15 Crores to Rs.20 Crores
in Indian rupees. Having said that the India business has
more than able to cover for a deficit on the Lanka business
and this now comes only 10% to 11% of mix at corporate
EBITDA level. That is it guys. Thank you. I will hand it
over to Vikram for the Q&A session.
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Sapphire Foods India Limited November 03, 2022
Moderator:
Thank you very much Sir. Ladies and gentlemen we will
now begin the question and answer session. Ladies and
gentlemen, we will wait for a moment while the question
queue assembles. The first question is from the line of
Sameer Gupta from India Infoline. Please go ahead.
Percy Panthaki: My question is on the margins you mentioned there is a 300
basis points hit on gross margins so what is the plan to
counter that, is it that you see the commodities coming down
and that itself will take care of it and if so to what extent and
do you think any more price increases are necessary that is
the first part of the question and the second part of the
question is that assuming that you recover this 300 basis
points over the next two to three quarters does that mean
that your EBITDA margin also versus the 11% to 11.5%
you have done this quarter does it mean it goes up to 14%
plus when that happens or it does not translate that way?
Sanjay Purohit: I just let me take KFC example, I think we have got one
balancing act to do between pricing and the impact of the
pricing on consumer demand therefore we have taken 9%
versus inflation of mid teens been able to still hold on to
very strong SSSGs and despite 310 basis points in gross
margins EBITDA margins just dropped by 80. Now we do
another calculation and let us take mid teens price increase
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Sapphire Foods India Limited November 03, 2022
and if it leads to a very poor SSSGs then the leverage impact
will vanish and therefore it can have a detrimental impact
on restaurant EBITDA so this is something that along with
Yum we are monitoring at a close level. We are not seeing
commodity prices coming down at an overall level
significantly. Some places it is coming down for example
oil has come down but for both the brands inflation versus
last year continues to be at this level. Now are there
opportunities to take price increases I think we will be very
cautious about some of the price increases so I will say gross
margins perhaps will see some marginal improvement
towards end of Q3 and beginning of Q4 but would not see
any dramatic improvement in gross margins. Having said
that restaurant EBITDA in Q3 because of better sales
compared to Q2 we will see some leverage coming out of
that and I am hoping that the restaurant EBITDA margins
improve.
Vijay Jain:
Just to add to that Percy we have always called out that our
focus is more at a restaurant EBITDA margins level and we
always try and take the impact in our stride on gross margins
and still deliver, sustain and improve upon restaurant
EBITDA margins so that journey will still continue where
while you may not see a full recovery on gross margins and
marginal recovery but our cost management and the SSSG
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Sapphire Foods India Limited November 03, 2022
which will gives us leverage will help us move towards that
restaurant EBITDA margins the ideal margin which we are
looking for.
Percy Panthaki: If the interest costs comes off in future do you think you
would retain that benefit or in one way or the other not
through MRP but through extra promotions or something
like that a large part of that would get passed through to the
consumer?
Sanjay Purohit: Let us wait and watch if it comes down Percy and it will be
all combination of what SSSGs and what growths we are
seeing at that point in time and based on that we will take a
call Percy.
Percy Panthaki: One small question I had was on corporate expenses, the
corporate expenses that I am deriving for this quarter are
about 5.6% of sales versus in Q1 it was 5.1% of sales so
there is a 50 basis points operating deleverage on a
sequential basis so am I reading too much into this or do you
think there is scope for this corporate expenses itself to be
like over the next six to eight quarters can be 100 basis
points driver of margins or something like that?
Sanjay Purohit: We will not comment on a specific line and give specific
line guidance. Having said that Q2 corporate cost is also
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Sapphire Foods India Limited November 03, 2022
impacted by the ESOPs grant which happened towards the
latter half of Q1 so Q1 did not see probably the full impact
of that so that has probably contributed 30 basis points in
this. Yes marginal impact has also happened on account of
leverage on account of lower sales. As the revenue builds
up happen our corporate cost which is a combination of
corporate cost and regional team will definitely grow lower
than the revenue growth so you will see some leverage
happening quarter-on-quarter or more logically year-on-
year on corporate cost because on quarter-on-quarter
seasonality also plays out so you will see some leverage I
will not put that leverage.
Percy Panthaki: This ESOP cost of 30 basis points does it continue into the
coming quarters as well?
Sanjay Purohit: Q2 is now representative of the ESOP cost so it is full ESOP
cost which have got built in. in fact what may happen is after
March 2023 when some ESOP gets vested it may come
down slightly in fact.
Percy Panthaki: Okay that is all from my side. Thank you.
Moderator:
Thank you. We have the next question from the line of Nihal
Jham from Nuvama. Please go ahead.
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Nihal Jham:
Thank you so much and good evening to the management.
Sapphire Foods India Limited November 03, 2022
Sir a couple of questions. First on the KFC part because you
were highlighting the seasonality generally what is the
impact from Q1 to Q2 in ADS that happens because of as
you said higher instance of vegetarian in the areas we
operate?
Vijay Jain:
Nihal very difficult to put an exact ratio because what
happens is the religious festivals the days can move between
Q2 and Q3 and then last two years COVID has actually
played havoc with trends analysis so very difficult to put
actual number. For example even this quarter you saw
Navratri part of Navratri coming in September last week
whereas last year the entire Navratri was in October so very
difficult to put. What I can say is that this year the dip which
we are seeing is similar to the dips which we have seen in
pre COVID times.
Sanjay Purohit: Having said that Q1 our overall ADS was in the region of
144, our overall ADS in Q2 is 134 so there is a 7% give or
take because new store impact from quarter-to-quarter
would not be high so that is the kind of impact we see over
the full quarter Nihal.
Nihal Jham:
Understood. The only reason I am asking because you have
highlighted inflation so if there was exaggerated impact of
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Sapphire Foods India Limited November 03, 2022
footfalls or something but I will take the number that you
are giving that this is represented.
Sanjay Purohit: I called out and that was one worry that we had that with
inflation and with vegetarian days would it impact
transactions but we are really happy with the kind of SSSG
growth that we have seen because dine in has been strong
their transaction growth has been strong and we have also
seen it translates into SSSG growth also.
Nihal Jham:
Understood. Taking two questions on Pizza Hut and first is
if you could again highlight on the flavour fun which you
highlighted from July have been promoting and the second
is if you could separately call out the margins for a new
format stores if that is the right term I will be done with?
Thank you.
Vijay Jain:
The second question is first. We have said that the stores
which have opened from April 18, 2022 onwards and it is
not a new format it is all way operative Omni channel stores
whether it is old or new. The April 18, 2022 onwards are
more compact ones compared to the size which we were
operating earlier which we inherited in legacy so the
compact ones are delivering anywhere from mid to high
teens.
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Sanjay Purohit: On flavour fun the response has been very positive and
Sapphire Foods India Limited November 03, 2022
loathe to call out a specific number on flavour fun because
it is just really too early days and while we always say that
there is a seasonality impact on KFC there is also some
seasonality impact that happens in Pizza Hut also so I think
we should wait for three to four quarters and look at how
this specific innovation goes. Undoubtedly it is leading to
transaction growth and from an anecdotal basis the kind of
customers we are seeing coming to our stores and ordering
is definitely these consumers might not have come in the
past so that value layer under Rs.100 like we called out even
in the last earnings call is the important future driver of
growth. I hope we answered your question Nihal.
Nihal Jham:
Very much thank you so much. I will come back in the
queue.
Moderator:
Thank you Sir. We have the next question from the line of
Devanshu Bansal from Emkay Global. Please go ahead.
Devanshu Bansal: Thanks for the opportunity. Sir I just wanted to check what
is the typical growth trend in ADS from Q2 to Q3 because
Q2 generally is a weak quarter for KFC so if you can just
help me with the historical trends it would be helpful?
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Vijay Jain:
ADS is also a function of how many new stores you are
Sapphire Foods India Limited November 03, 2022
opening. When you look at a historical trend we were not
expanding so much so it may not be the representative. The
new store additions do dilute to some extent the overall
ADS. Having said that we have seen a drop of 5% to 7%
vis-à-vis Q1 something of in that range it could be anywhere
between that 4% to 8% so I would not put a specific number
to it but that could be the range on Q3 versus Q2.
Sanjay Purohit: Devanshu Sanjay here I just want to interrupt. I think I heard
Vijay say decrease in Q3 versus Q2 actually it is between
4% to 8% increase in Q3 versus Q2.
Devanshu Bansal: Yes Sir I got that. I understood it as an increase only Yes
Sir.
Vijay Jain:
We just wanted to clarify for the benefit of everyone.
Sanjay Purohit: There are 260 people on the call so there should not be 260
minus Devanshu all of them freezing and saying my God
this quarter we are going to be lower than Q2 so I just clarify
for that sake. Go ahead with your question again please
Devanshu.
Devanshu Bansal: Yes Sir so I was indicating that Pizza Hut has seen a very
encouraging performance with 23% SSSG this quarter I
wanted to check if there was any sort of a low base element
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Sapphire Foods India Limited November 03, 2022
for you last year for Pizza Hut format due to operating
conditions, etc.?
Sanjay Purohit: I would say there was very marginally lower base. I would
say malls were at say 90% recovery last year versus what
they would normally be but I think it is minimal so base is
not the issue.
Vijay Jain:
So marginally it is a small impact and may be a pocket
territory like Maharashtra where the conditions got slightly
more favorable in operating from October onwards
September towards the end of September but then that is a
marginal impact in the base.
Devanshu Bansal: Lastly Sir if you can talk about the trends in terms of SSSG
for the festive season it would be very helpful for both the
formats?
Sanjay Purohit: The festive season is over so we have given you the SSSG
numbers the quarter numbers are you talking about Q3 or
what are you talking about?
Devanshu Bansal: Yes festive season in Q3 some outlook if you can provide
then it will be very helpful.
Sanjay Purohit: We can predict our business but we are not soothsayers here
and therefore what Vijay said roughly we have seen 4% to
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8% increase over Q2 I think that is about as much that I am
able to perhaps predict.
Vijay Jain:
That is for KFC just to call out clarify again Pizza Hut does
not get so impacted by seasonality anyway so Q2 was the
best ever quarter so the ADS of Pizza Hut which was 64000
in Q2 does not have any seasonality impact so we hope we
continue on the same trajectory for Pizza Hut.
Devanshu Bansal: Got it Vijay. That is it from mine. Thank you.
Moderator:
Thank you Sir. We have the next question from the line of
Kapil Jagasia from Edelweiss Broking. Please go ahead.
Kapil Jagasia: First of all congratulations for a great set of numbers Sir.
Sanjay Purohit: Kapil you are the first person who has congratulated us
normally Percy is the first person who says good set of
numbers but this time Percy for some reason was very
muted so thank you Kapil.
Kapil Jagasia: Sure. Sir the store opening run rate has been very healthy in
H1 so would we be eligible for incentives from Yum this
year too and what would be the quantum?
Sanjay Purohit: So just to clarify I think you are referring to the incentives
which we actually had last year so as per our contract every
year incentives we have been getting incentives over the last
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five years we will continue to get incentives over the next
five years as well that is not going to change, what we called
out last year was there was an additional component on
account of COVID, because of COVID our targets were
revised and we were given some additional incentives that
is all we have called out. Those current set of numbers are
representative in terms of incentive calculations you will not
see a reduction in terms of incentives, you will not see
increase in terms of incentives.
Kapil Jagasia: That is very much there and just wanted to understand your
takeaway channel because if I just see in terms of during
COVID probably people might be sitting in and taking away
the pizza or KFC items but now with nothing there no
restriction is there would it clearly a dine in or a delivery
channel because I am just trying to understand why the
takeaway still at 20% of sales like what is like any drivers
for it or how do you see this channel growing going
forward?
Sanjay Purohit: Takeaway has always been a double digit channel for us
even in the past and proximity to store enables this
takeaway, in many of our malls format stores and drive
through stores, we say that when a person purchases in the
drive through that comes under takeaway. Having said that
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I think now I will just refer to a global trend that we are
seeing and perhaps that will play out in India sometime. If
you look at globally delivery now delivery prices are
substantially higher than either dine in or takeaway prices
and apparently there is a global trend where consumers look
at these delivery prices and if they are in the vicinity of the
store preferred to come and take away because it is little
more economical perhaps something like that we are seeing
in India because our takeaway portions are slightly better
than what has been there in the past but again compared to
what happened during COVID it is not better than what
happened during COVID so it has reduced a little bit so I
think it has traditionally been a strong double digit
contributing channel for us and the behavior that started
during COVID period when takeaway increased that sort of
continues even when COVID is off and neighborhood
restaurants and access to a restaurant drives really takeaway.
Vijay Jain:
Just to add to that our Omni channel strategy where all the
three channels are available actually puts us in a strong
position that you can take advantage of one channel versus
the other. All the three channels are available in the fire
formats be it Pizza Hut it is Omni channel and be it KFC it
is Omni channel.
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Moderator:
Thank you. We have the next question from the line of C
Kishore from Chola MS. Please go ahead.
C Kishore:
Good evening. Thanks a lot for taking my questions. I just
want to understand what is the average size of the new stores
that you are opening and I want to understand going forward
would it be safe to assume that the future would be towards
let us say smaller store sizes so that the unit economics
actually work out better? Thank you.
Vijay Jain:
So our sizes for KFC are in the range of 1500 square foot to
1600 square foot, Pizza Hut in 1200 square foot. The
reductions in sizes have happened over the last five to six
years that I want to call out it is not just a COVID
phenomenon that we have cut down the sizes it happened
with calculations in terms of the covers, table turns, and with
the advent of delivery channels, partnering with aggregators
meant that we can be a more Omni channel player so that is
how the decision has happened. While the reduction in sizes
happen again just to clarify will not impact our capacity to
serve customers so the ADS throughput can be considerably
higher than what we delivered right now. At the levels
where we are we do not expect in the medium term or
dramatic or a further reduction in the sizes as we move
forward because you require X amount of capacity sitting
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capacity for your dine in channel to be relevant, any cut
downs from here on would compromise that particular
channel.
C Kishore:
Fair enough. Thank you so much.
Moderator:
Thank you. We have the next question from the line of
Ashish Kumar from Infinity Alternatives. Please go ahead.
Ashish Kumar: Thank you Sir and congratulations for a good set of results.
Sir if you compare our pace of store addition while we have
kind of comment significantly from where we were last year
the question which I have is that when we compare to our
peer group they seem to be opening almost double this
number of stores on the KFC plus Pizza Hut India do you
think we have a part to kind of get to catch up with them in
terms of the same store sales because from GDP perspective
we kind of split the GDP 50:50 right?
Sanjay Purohit: I think the pace of our expansion is in line with what we
have said consistently over the last one year that we hope to
double our restaurant base of about 550 stores at the end of
December 2021 and that gives us roughly in the region of
130 to 160 stores between these numbers and all three
businesses Pizza Hut, KFC and Sri Lanka will be roughly
be able to deliver this kind of pace for expansion. Now this
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is what we are happy and comfortable with. I think this is a
factor when you look at pace of expansion it is pace of
expansion into the ADS that you are able to get out of a new
store and if you look at I do not think we have compromised
in any way with respect to our peers.
Vijay Jain:
So just to add Sanjay said you mean doubling in three to
four years time vis-à-vis the numbers which we had in
December 2021 and again our guiding factor would not be
what Pizza Hut is doing our guiding factor would be our
levels, our strike rates, our paybacks that is our internal
measures which we use and that is why we feel we are
comfortable with doubling the count over three to four
years. On the point which you just made the GDP wise the
territory distribution is 50:50 I would like to clarify the
territories which KFC operates for us they contributes 56%
to India’s GDP, for Pizza Hut the territories which we
operate is roughly 57% of India’s GDP.
Ashish Kumar: Which is where I was coming from and maybe yes you are
right that this is in line with the guidance that you have given
but given the fact that we are seeing an environment where
in the shift towards branded players like yourselves is
significantly higher if I were to say does it make sense to it
and we have a balance sheet with very healthy cash accruals
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and healthy internal accruals does it make sense to kind of
exercise the pace of rollout given the fact that you have a
higher footprint of the country it is a question of if you do
not do it then somebody like Popeyes may come and kind
of capture the space it is a question of land grab?
Sanjay Purohit: So I do not think it is a question of land grab Ashish. As I
said there are many things that need to be balanced. At this
rate the ADS that we get and therefore the new store
payback that we get are healthy. Anyone I think will be or
there will be few players who can match this rate of
expansion, deliver the kind of returns that we are looking at
so the short answer is this is the rate of expansion that we
are looking at this stage.
Ashish Kumar: Okay and coming back I am sorry I missed a little bit of the
call when there was an issue on the gross margin do we
believe that we can get back to our historical gross margins
in the next couple of quarters?
Sanjay Purohit: So I believe you are referring to KFC in particular?
Ashish Kumar: Absolutely.
Sanjay Purohit: So while again this gross margin drop of 300 basis points
happened our restaurant EBITDA dropped by only 80 basis
points so that is the way we are focusing. The idea is not to
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take a price increase in inflation and probably potentially
impact our revenue and transaction so we are happy with
where the price increase stays right now. Yes marginally we
expect the gross margins to come back towards the second
half of Q3 and starting Q4 marginally but on improving the
restaurant EBITDA which would happen with
the
improvement in sales which we are anyway sitting in Q3
over Q2 because the vegetarian days are now over in terms
of the festivities, but the focus is more on the restaurant
EBITDA margin and how do we sustain and drive restaurant
EBITDA margins.
Moderator:
Thank you. We have the next question from the line of
Jignesh Kamani from Gmo. Please go ahead.
Jignesh Kamani: Just with the gross margins front we have seen the milk
prices increased by Rs.3 to Rs.4 last month and hence
cheese and all the other products so do you think it is still
some of the element of the gross margin and raw material
still continue to rise and will have further impact on the
gross margins in the second half at least for the pizza if not
for KFC?
Sanjay Purohit: So I mentioned this right at the beginning that there are
some items where prices have come down, some items
where as you rightly said milk prices have gone up and
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therefore potentially over the next three to four months will
have an impact on dairy products that we consume also so
overall I think inflation will continue at the levels that we
have seen in the first half so I am saying the deviation from
this will be marginal it is not going to go down dramatically,
it is not going to go up dramatically.
Jignesh Kamani: Understood. Second thing on the flavour fun based on the
initial experiments are we seeing more downtrading or new
customer is taking care of any small downtrading is
happening?
Sanjay Purohit: So like I said it is too early to call it on flavour fun it is just
that we are getting and I am sure we are getting higher level
of transaction growth than we have got earlier so net-net it
is positive. We are not going into great specifics on this
Jignesh so forgive me for that.
Jignesh Kamani: No issues. Thank you Sir.
Moderator:
Thank you. We have the next question from the line of
Heeru Tejwani from Motilal Oswal. Please go ahead.
Heeru Tejwani: Good evening Sanjay and Vijay. My question is on a very
comprehensive and macro level to Sanjay other than India
or Sri Lanka like in the QSR space other peer groups are
growing in other countries so it is obviously from the
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question on increasing stores would you look at strategically
introducing any other country in the near future?
Sanjay Purohit: It is too hypothetical a question Heeru at this moment.
Vijay Jain:
Having said that we have always called out in terms of our
strategy that apart from organic growth in terms of KFC and
Pizza Hut restaurant additions in terms of inorganic growth
we would love to have a third brand at some point in time.
If not in the short term may be in the medium term and that
is where we will leave it at. Now whether it could be new
territory or new brand in India it is too early to hypothetical
to comment.
Sanjay Purohit: I think largely one of the considerations is that it should be
able to offer similar kind of growth trajectories as India
offers so if anything that is not offering the kind of India’s
growth trajectory another territory then I think we will be
very, very circumspect.
Vijay Jain:
The mantras for those identification of brand we have listed
in our annual report so if you go page to 35 there are seven
mantras which defines where you want to have scale and
success both then that would go into our choice of the third
brand so you can refer to the page 35 of our annual report as
well.
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Heeru Tejwani: Sure thank you.
Moderator:
Thank you. We have the next question from the line of
Kalpit Narvekar from Allianz Global Investors. Please go
ahead.
Kalpit Narvekar: Good evening and congrats on the results of the quarter. I
had two questions. I want to understand how this essentially
if you have done any studies on the demand elasticity say at
the young level or for the product categories like KFC and
Pizza Hut right so if like how does the prize hike affects
volume growth like say in the past in the past cycles if you
have done any studies and if you have any sort of color on
that?
Sanjay Purohit: So Kalpit actually we are in new territory here, over the last
five or six years we have not had an inflation of this level
and hence there is very little past data to fall back on. I am
just looking at my old consumer product experience that
says that in general there is an impact on any discretionary
income categories there is an impact when you take severe
price increases so the best way to find out actually is to
experiment and in general we feel that if we are able to
restrict price increases in the region of between 60% and
70% of inflation and then find the economies of scale
elsewhere it works well because the product then becomes
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more affordable over a period of time. I think we have used
similar kind of understanding when we have taken price
increases this year also, but there is no hard and fast
heuristics that shows the demand elasticity. I think we have
just got to do something and then see how it plays out. I
think the fact that we have kept price increases to the level
that we had in Q2 compared to the inflation and it has borne
out with SSSG means that at least right now it has worked
in the quarter that has gone by.
Kalpit Narvekar: Great Sir. That is helpful and my second question was on
the delivery fees so how much of the delivery fees is through
our own delivery system and what is the strategy in terms of
expansion of our own delivery network?
Vijay Jain:
The breakup for both the branches will different KFC would
be 90% approximately and I am giving you very
approximate numbers 90% through aggregators and the rest
delivery Pizza Hut would be 80:20 ratio so our plans for our
own delivery in terms of our systems or app, the kind of
offers which we have on our platform they continue to be
there for the last two to three years and they continue to
grow well. What is happening at the same time aggregator
continues to pump in money they are growing really well so
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the mix is not changing. However our own delivery as well
as aggregator both the platforms are growing healthily.
Sanjay Purohit: Typically we would have stopped our call work for an hour
but we are quite happy to continue it if people on the call
are also willing to continue so we will take our next call
therefore Vikram.
Moderator:
Thank you Sir. We have the next question from the line of
Harsh Mulchandani from KRIIS PMS. Please go ahead.
Harsh Mulchandani: Thank you for the opportunity. Congratulations Sir
for a good set of numbers. I just wanted to understand that
do you track the set of repeat customers at your end and how
does that number look like on a quarter-to-quarter basis?
Sanjay Purohit: So I do not have those numbers offhand with me I must
confess Harsh so if necessary we can get back later but I do
not have those have numbers offhand with me.
Harsh Mulchandani: Okay sure no worries and I have another question
on the prices so just want to understand that you operate
across states so your prices are consistent across states
where you operate or they are different?
Sanjay Purohit: Yes we are consistent all India.
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Vijay Jain:
They will be different across channels so for example
delivery channel may have slightly higher prices for KFC in
particular, in Pizza Hut even that is not the case, otherwise
from state-to-state and territory-to-territory the prices are
consistent.
Sanjay Purohit: We also have some premium price stores but that is about
difference otherwise pricing is consistent across the
country.
Harsh Mulchandani: Got it fair and just to compare it with the price with
the other operators for Pizza Hut which operates in India so
the prices with them is also similar or you have a different
pricing?
Vijay Jain:
It is Pan India similar so irrespective of the stores are
operated by the sister franchise or by Sapphire the pricing
strategy is consistent not just for Pizza Hut even for KFC
across all states and all territories.
Harsh Mulchandani: Got it fair. Thank you so much.
Moderator:
Thank you. We have the next question from the line of
Ameya Gawande from Metaverse Equity Fund. Please go
ahead.
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Sapphire Foods India Limited November 03, 2022
Ameya Gawande: Thank you for the opportunity so Sir my question is what
growth you are anticipating within the next three years
particularly in Sri Lanka?
Vijay Jain:
So Sri Lanka as we had called out already this year we are
seeing 20% to 30% growth and the macroeconomic
situation while it has stabilized continues to remain critical
so would be very full heartedly to probably try and predict
three years from right now for Sri Lanka. We will take a
quarter at a time, let us see in the next six months time where
we reach and may be then we can have this conversation.
Ameya Gawande: Sure Sir.
Moderator:
Thank you. We have the next question from the line of Pujan
Shah from Congruence Advisers. Please go ahead.
Pujan Shah:
I just wanted to know what is the advertisement spend we
are doing on the percentage basis?
Vijay Jain:
So as per the contract with Yum we are required to spend
5% for a national campaign which we contribute to Yum
and along with the sister franchise which is used for Pan
India marketing and one person for local sales marketing
which we spend internally.
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Pujan Shah:
So as the geographical wise our sister concern and all our
companies do we have any segregated advertisement spend
or we have collective advertisement spend on the basis of
this franchise base?
Vijay Jain:
So the segregation is only 1% where it is local marketing
where we used to spend into our territories, for the 5% it is
a national approved which is used for Pan India marketing.
Pujan Shah:
Okay got it. Thank you Sir.
Moderator:
Thank you. We have the next question from the line of
Dhairya Trivedi from DJT Investments. Please go ahead.
Dhairya Trivedi: I have a couple of book keeping questions what is the
likely tax rate for this financial year?
Sanjay Purohit: So this financial year it is unlikely that we will have a tax
outflow because we have enough carry forward of losses. I
guess we get into the tax sale time next year may be towards
second half probably and then going forward a year later we
will fall into 25% tax regimen so that is probably couple of
years away.
Dhairya Trivedi: Okay got it. Another one on the royalty front what is the
royalty that we are paying to the master franchise at the
current stage?
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Sanjay Purohit: First of all we do not pay to the master we are the master
franchise we pay royalty to Yum.
Vijay Jain:
As per agreement it is 6.3% but again we have called out
there would be waivers depending upon the store opening
plan but the base number is 6.3%.
Dhairya Trivedi: Is it likely to go up in the next year or so?
Vijay Jain:
So our royalty of 6.3% has been consistent for the last few
years, in fact for Yum it has been consistent globally we do
not expect this to either come down or go up that is the rate
which Yum follows globally for quite a few years across all
territories.
Dhairya Trivedi: Okay got it. Thanks.
Moderator:
Thank you. Ladies and gentlemen we have reached the end
of the question and answer session and I would like to hand
the conference back over to Mr. Sanjay Purohit for closing
comments. Over to you Sir!
Sanjay Purohit: So first of all thank you all for joining. We had a really good
question and answer session. At the end of a quarter where
which was potentially challenging but we have been able to
navigate these turbulent waters quite well and from a
demand perspective both brands were strong in Sri Lanka,
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also business was strong and our old adage where we said
that let us not look at gross margins but see what is the
impact of price increases on volume and if we are able to
maintain volume and therefore grow same store sales
growth we are able to get leverage and that is how it has
played out in Q2 and therefore our restaurant EBITDA
margins have been quite strong. The drop versus last year
quarter on KFC has been quite minimal and the India
restaurant EBITDA both brands put together actually went
up by 40 basis points. I am quite looking forward to Q3 and
Q4 and ending the year also on a strong note. Having said
that we will see you at the turn of the New Year and
therefore best wishes for the New Year in advance to all of
you. Thank you.
Moderator:
Thank you very much Sir. Ladies and gentlemen, on behalf
of Sapphire Foods India Limited that concludes this
conference. Thank you for joining us. You may now
disconnect your lines.
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