Stock to buy: The Sri Lankan crisis caused this debutant stock to fall. Analysts see up to 72% increase!

NEW DELHI: Concerns over operations in Sri Lanka, which accounted for 17% of FY22 sales, weighed heavily on shares of the recent debutant.

While analysts see the issue as impacting the profitability of the non-exclusive YUM! brands (in India and Sri Lanka) in the short term, they are reassured that the stock is trading at a significant discount to its peers and believe that prevailing valuations are entirely negative. A few analyst targets suggest 37-72% upside potential on the meter.

Sapphire Foods operated 95 Pizza Hut outlets in Sri Lanka as of March 31, in addition to 263 KFC outlets and 219 Pizza Hut outlets in India. It also has operations in the Maldives, but they represent only 1% of its total sales.



initiated a hedge on the stock with a target of Rs 1,420 which suggests an upside potential of 44%. The brokerage assigned a FY24 EV/EBITDA multiple of 27 times to the KFC business due to its robust metrics including average daily sales (ADS) and brand contribution margin, and 17 times to PH activity.

This brokerage said the stock is trading at a significant discount to multiple KFC targets of Devyani (45 times) and Pizza Hut (35 times) due to the trade downsides Sapphire faces. . They include KFC’s territorial rights in states with large vegetarian populations. Also, Devyani can venture into Sapphire Foods territories with PHD format stores, which require lower investment.

“While the discount multiples are warranted given the above reasons, the opportunity for earnings growth is attractive enough to warrant an investment case,” he said.

AND CONTRIBUTORS

Pizza Hut is QSR’s largest chain in Sri Lanka. On an earnings call, Sapphire suggested that the macroeconomic problems in Sri Lanka began nine months ago but have worsened over the past 30 to 45 days. Sapphire, however, said it benefited, with the unorganized channel being much more affected and also due to superior delivery capabilities, given that it makes 90% of deliveries through its own fleet.

In FY22, the Sri Lankan business, Sapphire said, had its best performance ever, with 25 new restaurants added, same-store sales growth of 42%, revenue growth of 60 % and a Restaurant Ebitda of 23.2%, up 360 basis points.

The company said it did not face 15-hour blackouts in Sri Lanka, as reported by the media, but only 2-3 hour blackouts. Additionally, he said he has sourced key commodities such as cheese, some of which is also sourced from India,

mentioned.

The company expects the macroeconomic situation to stabilize over the next six months, noting that double-digit same-store sales growth in constant currency terms also continued in this March quarter. Most of the impact of the depreciation of the Sri Lankan currency will come from the first quarter, the company said.

IIFL Securities said the stock price corrected significantly and incorporated all negatives. He maintained a BUY on the stock with a target of Rs 1,350.

“The impact of the 40% currency depreciation should be partly mitigated by good underlying growth, FY23 store expansion plans are on track. We believe there will be some decline in FY23. That said, we believe the situation is still evolving. When a country faces such significant economic challenges, it is unlikely that a discretionary class will pull through without at least less marginal bruising,”

said in a May 18 note while suggesting a target of Rs 1,700 on the stock of Rs 1,800 earlier, taking into account a 4-8% impact on its Ebitda estimates for Sri Lanka in during the year 23-24.

At Wednesday’s price of Rs 986.85, the certificate is down 36% from its peak of Rs 1,535 reached on February 14. Price targets of up to Rs 1,700 on the stock suggest up to 72% upside potential on the counter.

Sapphire reported a consolidated PAT at Rs 26.5 crore for the March quarter, compared to a loss of Rs 13.7 crore in the prior year quarter. Sales increased by 46% for the quarter to Rs 494.30 crore from Rs 316.20 crore in the same quarter last year. Ebitda margin increased from 18.4% YoY to 21%.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)

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