Sapphire Foods Ltd: Takes few more qtrs to become profitable

Considering the fact that Devyani, other franchisee of Yum, which had issued shares at Rs 90 per share and has seen its share price increase over 60% today over Rs 152, has delivered an excellent performance post turning profitable, one would be tempted to look at Sapphire foods IPO. Unfortunately, the like-to-like comparison for Sapphire is an issue price of Rs118 against Rs 90

Sapphire Foods Ltd is tapping the capital markets with its offer for sale of 1,75,69,941 equity shares in a price band of Rs1,120-1,180. The issue opens on Tuesday (November 9) and would close on Thursday (November 11). The company is a franchisee of Yum in India, Sri Lanka and Maldives. The company operates 220 KFC stores, 260 Pizza Hut stores and 2 Taco Bell restaurants in India. It reported revenues of Rs1,019 crore for the year ended March 2021. It is currently a loss-making company and would need a couple of quarters before it becomes profitable at the net profit level. The other franchisee of Yum, Devyani International Limited, is also a listed company and has turned profitable in the last quarter ended September 2021.

Sapphire Foods Limited had in August 2021 done a preferential allotment of 93.73 lakh shares to its PE investors at a price of Rs515 and Rs555 which works out to a sharp discount to the asking price of Rs1,180 at the top end of the price band. One wonders what has changed in less than 3 months that the price should change by more than 2.3 times. Clearly this is the greed of both merchant bankers and PE investors. Further the fact that the share price of the other franchisee has increased sharply post reporting results which saw the company turning profitable, may be another driver. Readers should compare the two companies before taking a call on subscribing to the issue from Sapphire Foods Limited.

The comparison of the two franchises would suffice and make it clear as to who is bigger and as of date a more profitable and better proposition. The Devyani franchisee at the end of September 2021 had 759 stores in India with 309 KFC, 351 Pizza Hut, 45 Costa Coffee and 54 others. It also had 27 and 17 stores in Nigeria and Nepal. Compare this with the 219 KFC stores in India, 188 Pizza Hut and 2 Taco Bell stores. The total is 409 in India and 482 when one adds Sri Lanka and Maldives. The top line for the year ended March 21 was Rs 1,134 crore for Devyani which has increased to Rs 869 crore in the first half of FY22. In comparison, Sapphire Foods reported revenues of Rs 1,019 crore for the year ended March 2021 and in the first three months ending June 21, revenues of Rs 302.7 crore. (Corresponding number for Devyani was Rs 353 crore).

The strategy of adding new stores and reducing the size of each store to maximise returns is paying off for Devyani while it is yet to pick up similarly for Sapphire foods. The former added 111 new stores on a net basis in the first six months of the current year while Sapphire added 45 stores. Ultimately revenues and subsequently profits would flow from new stores which would add to business, better visibility and higher omni channel consumption.

Besides the above two competing franchises, the QSR (quick service restaurant) has players like Dominoes, McDonalds and Burger King amongst the major competitors in this space.

Considering the fact that Devyani, which had issued shares at Rs 90 per share and has seen its share price increase over 60 per cent today over Rs 152, has delivered an excellent performance post turning profitable, one would be tempted to look at Sapphire foods IPO. Unfortunately, the like-to-like comparison for Sapphire is an issue price of Rs118 against Rs 90. Herein lies the catch and the number of stores between the two franchise openers. Take your pick and choose wisely.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)