SAPPHIRE FOODS INDIA

Franchisee with a big appetite!

Mumbai-based Sapphire Foods India is one of the two franchisees of Yum! Brands in India and operates around 37 per cent of Yum! Brand’s KFC/Pizza Hut (PH) stores in India and 100 per cent of PH stores in Sri Lanka. Sapphire operates KFC/PH stores in 10 to 11 Indian states. It also has an international presence in Sri Lanka and the Maldives. Promoted by a group of leading private equity firms led by Samara Capital, Sapphire has acquired 250 KFC and PH stores in India and Sri Lanka. Today, it operates a total of 679 stores across all brands and geographies. Yum! operates brands such as KFC, Pizza Hut and Taco Bell and has a global presence with more than 53,000 restaurants in over 150 countries.

Sapphire is steadily improving its performance and is on the cusp of a turnaround. Its valuations are quite attractive and the prospects going ahead are highly encouraging.

Consider:

• Within a decade or so, Sapphire has emerged as a popular Quick Service Restaurant (QSR). Interestingly, India has a low QSR penetration at around 8 per cent in food and services against 20 to 40 per cent in the US, China and Brazil. The Indian food service industry is expected to clock a 9 per cent CAGR in the coming years, with QSRs likely to grow faster at a 23 per cent CAGR over the next five years.
• The company has adopted a new strategy of optimizing the size of its new stores and ramping up its delivery channel. This will enable it to tap into consumption demand tailwinds. The company wants to double its network in the next five years for a 23-27 per cent CAGR. Experts believe that this scalable economic model may prove to be a gamechanger. The company’s Omni channel strategy and its reduction in store sizes, along with other elements of the model, have led to a big shift in its unit economics.
• According to a leading brokerage house Motilal Oswal, KFC India’s business is on a strong footing, with sales expected to register a 31 per cent CAGR over the next three years, driven by a smart psot-Covid recovery. At the same time, Pizza Hut’s business is seeing a turnaround, with a higher focus on delivery, while the next three years will see a resultant improvement in its restaurant EBITDA margin. Overall, Sapphire is poised to deliver strong growth with a 29 per cent/43 per cent sales/EBITDA CAGR over the next three years.
• The company is steadily growing on the financial front. During the last five years, its sales turnover has almost doubled from Rs 957 crore in fiscal 2018 to Rs 1,722 crore in fiscal 2022, with operating profit shooting up more than 20 times from Rs 15 crore to Rs 305 crore during this period. At the net level, the company has started staging a turnaround by earning a net profit of Rs 46 crore in fiscal 2022, in striking contrast to a loss of Rs 41 crore in fiscal 2018, Rs 158 crore in fiscal 2020 and Rs 98 crore in fiscal 2021. Its loss-making days are over and its financial position is also getting sound. At the end of March 2022, its reserves stood at Rs 944 crore – almost 15 times its equity capital of Rs 64 crore.
• With the company turning the corner, the management now aspires to be the best restaurant operator in India. To do this, the management has decided to improve customer experience with an uncompromising focus on food safety. The management will insist that each employee adopt a frugal mindset towards costs while it aims to weed out inefficiencies and wastage in the system. Pointing out that a strong supply chain will form the backbone of the company’s ability to serve its customers great food with a great experience and great value, the management says the company is expanding its restaurant base rapidly and is building capabilities to roll out profitable new stores, from sourcing to right locations at the right cost, to partnerships with its landlord-partners, in creating demand in a local area and building a loyal customer base. At the same time, the management is striving to build a great work environment and culture which will empower employees to grow personally and professionally

The company’s stock price has already shot up to Rs 1,500 before reacting to Rs 1,147 due to the recent downtrend. Wise investors will do well to accumulate these shares at every decline with a long-term perspective.

CONSOLIDATED PERFORMANCE INDICATORS (Rs. in crore)

MANALI PETROCHEMICALS

Tripling output of propylene glycol

Chennai-headquartered Manali Petro is a leading petrochemical company engaged in marketing propylene glycol and polyols. Annually it produces 27,000 mt of propylene oxide, 14,000 mt of propylene glycol and 15,000 mt of polyether polyol. These products find applications in a variety of industries, including appliances, automotive beddings, food and fragrances, furniture and footwear paints and coatings. As these industries are doing well and have very good prospects, the outlook for Manali is quite promising going ahead.

Consider:

• Last year, Manali entered into a tie-up with UKbased Econic Technologies for introducing more environmental-friendly CO2-containing polyols into the $ 28 billion global polyols market. It plans to scale up its catalyst technology which will enable the substitution of fossil-based raw materials with captured waste CO2 in the production of polyols. This green initiative will improve the ESG (environmental, social and governance) score of Manali Petrochemicals.
• The company is steadily growing on the financial front. During the last 12 years on a standalone basis, its sales turnover has expanded every year – from Rs 455 crore in fiscal 2011 to Rs 1,444 crore in fiscal 2022, with the profit at net level shooting up from Rs 25 crore to Rs 377 crore during this period.
• The company has a rock-solid healthy balance sheet. Its financial position is very strong with reserves at the end of March 2022 standing at Rs. 900 crore – more than 10 times its equity capital of Rs. 86 crore. No doubt, the there is a huge debt. Zooming in on the latest (2022) balance sheet data of the company, it is realised that Manali had liabilities of Rs. 18500 crore due within 12 months and liabilities of Rs. 75.12 crore due beyond that. However, offsetting these obligations, the company had cash of Rs. 617 crore as well as receivables valued at Rs. 16000 crore due within 12 months Rs. 50 in reality, the company can boast about 518 crore more liquid assets than total liabilities.
• In view of the rising demand for its products, Manali has chalked out an expansion plan to raise its manufacturing capacity of propylene glycol (PG) from the existing 22,000 tpa to 70,000 tpa at an estimated cost of Rs 450 crore. The expansion plan will be implemented in two phases. During phase I, a capacity of 24,000 tpa will be added at a cost of around Rs 60 crore, met through internal accruals. This phase will be completed within 18-21 months. Phase II to expand capacity by another 24,000 tpa will be completed within the next 15 months.
• This capacity expansion will give a boost to the company’s topline as well as bottomline. Today, Manali is the only manufacturer of PG in India, which is widely used in pharmaceuticals, foods and flavours and also in industrial applications. The current demand for PG in India is around 1,00,000 tpa, and this is growing at a rate of 5 per cent every year. The country has to meet the shortfall through imports. Manali’s capacity expansion will go a long way in reducing dependence on imports and saving valuable foreign exchange.

The company’s shares are quoted around Rs 100 per piece of a face value of Rs 5. Discerning investors can reap rich benefits with a long-term perspective.

PERFORMANCE INDICATORS (Rs. in crore)