Ladies and gentlemen, good day and welcome to the Sapphire Foods India Limited Q2 FY 2023 earnings conference call. As a reminder, all participants are in a 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, you can press star zero on your touchtone telephone to signal for an operator. This conference is being recorded. I would now like to turn the conference over to Mr. Nishith Parekh from Orient Capital. Thank you, and over to you, Mr. Parekh.
Hi. Good evening, everyone, and welcome to Sapphire Foods Q2 and FY 2023 earnings call. Management today is represented by Mr. Sanjay Purohit, Group CEO and Managing 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 involve uncertain risks. With that, I'll just hand over to Mr. Sanjay Purohit to take us through.
Good afternoon, ladies and gentlemen. Welcome to our Q2 highlights. I'll talk very briefly about the numbers, and then I'll give you a color on the quarter. In the quarter, we delivered a strong performance. Our revenue was our highest ever at INR 506 crore. Our EBITDA was at INR 103 crore at 18.4%, up 350 basis points year-on-year, and our adjusted EBITDA was about INR 62 crore at 11.1%, up 490 basis points year-on-year. That stood at INR 27 crore, 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.
All of this I'm looking at versus our normalized EBITDA of Q2 FY 2022. If you remember last year, we were painstakingly calling out that our EBITDA was actually lower than what we had repeated that year because of one-time incentives that we had got on our store openings. Against the normalized EBITDA numbers, India grew by 40 basis points, but on our consolidated level, we dropped by 50 basis points. Restaurant EBITDA. What was the quarter like? At the beginning of the quarter, we thought it was 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.
I'll say this year, the extent 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 have seen perhaps in the earlier years. That was one potential negative impact. The second potential negative impact was that inflation peaking, and in both the brands we were seeing mid-teens inflation levels. Therefore, at the start of the financial year along with Yum, we had 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. That has worked really well for us from a demand perspective.
We are really happy with how the quarter has gone from a demand perspective. If you look at our same-store sales growth have 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. I think the fact that SSSG is a strong transaction growth has been maintained in spite of our price increases. I think that bodes well for the business. 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 the channel level, actually dine-in was quite strong and their transactions also grew on a year-on-year basis.
Because our price increase, which we have taken in about nine, between 9%-10%, and like I said, inflation was in mid-teens, our gross margins were impacted by 310 basis points. Because of leverage that we got on 15% SSSG and tighter cost management, restaurant EBITDA was the drop in restaurant EBITDA to about 80 basis points versus the normalized EBITDA level of 18.7% in Q2 FY 2022. You would have heard both Vijay and me talk about Q2 being generally the lowest quarter for us from a KFC perspective and it drops versus Q1, and then we hope to recover in Q3, as we go past the festival and Eid days.
This time we were able to reduce gross margins went down by 310 basis points. Restaurant EBITDA margins just went down by 80 basis points. The SSSG focus as well as the cost management focus helped us to curtail this drop. On Pizza Hut, I think we have had our best ever quarter. Our same-store sales growth grew by 23%. There was a very strong transaction growth in excess of this SSSG and there's ADS growth both over the corresponding quarter and the sequential quarter. 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 normalized restaurant EBITDA of 10.7% in Q2 FY 2022.
Here I'm happy to say that a combination of our omni-channel strategy where dine-in, takeaway, and delivery, all three come, you know, we are able to maximize revenue out of a store through all three channels, combined with you know 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%. Our Sri Lanka business also had a strong quarter, and we grew SSSG to the tune of 37% in LKR terms. 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 are consequently impacted, and therefore, restaurant margins also dropped by 550 basis points to 15% versus our normalized restaurant EBITDA of 20.5% last year, Q2 . Absolute value EBITDA grew by 23% in LKR terms, but in INR terms declined by 25% with currency translation impact. Largely, if you see in Q1 we delivered in INR terms roughly about INR 7 crore. In this quarter also we have delivered similar.
Roughly 10%-11% mix of our corporate EBITDA.
Yeah. We are also happy to say that our restaurant expansion pace has steadily, you know, 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. Given all the macroeconomic conditions that we are seeing many, you know, many consumer product companies 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 we are in a reasonably good space.
As we look at Q3, Q3 is generally better than Q2. We expect 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. That's the overview. When I look at page 7, the consolidated financials, you'll see as I'm repeating myself here, INR 560 crores, up 36%. Adjusted EBITDA, INR 32 crores, up 144%. INR 62 crores translates into 11.1% adjusted EBITDA margin.
EBITDA INR 103 crores at 18.4% and PAT INR 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 2 stores in Maldives. Total 658 stores. I'll now quickly hand it over to Vijay, who will talk about the, you know, specific financial highlights.
Good afternoon, everyone. I'll move on to slide number nine, consolidated financial highlights. Slide number 9. We clocked sales of INR 560 crore, highest ever revenue growth of 36%. Gross margins we dropped by ten basis points. We'll dive into this at each business level. Moving on to slide number 10. Slide number ten is a bit busy. At times when you do over-disclosures, it can have this kind of effect. I'll take a bit of time on this particular slide. If you look at numbers in brackets, which are given for last year corresponding quarters, those indicate normalized restaurant EBITDA numbers. Taking aside one-time 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.
On a comparison to a normalized last year, 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 note below the graph, it says India restaurant EBITDA grew by 40 basis points versus last year. 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 the 300 basis points drop what we have seen at an overall level. On adjusted EBITDA at 11.1%, it went up by 750 basis points over last year compared to a normalized EBITDA for Q2, which was 3.6% last year. In terms of value, we delivered INR 62.4 crore.
Q1 for us was around 73-odd crores. Slide 11. Overall EBITDA of INR 103 crores, 18.4%, up by 610 basis points versus last year's normalized EBITDA of 12.3% and PAT of 4.8% at INR 27 crores, up by 860 basis points over last year. Last year we were negative on PAT. On YTD basis if you look at, we delivered a PAT of INR 65 crores, which is close to 6%, up by almost 1,000 basis points versus last year. Sanjay will take over on the KFC section.
When we look at the channel contribution, we'll find that dine-in has continued to increase in overall contributions. In Q2, it was at 44%, whereas delivery was at about 36%. Takeaway was about 20%. We had product launches, Peri Peri Chicken. We had a Choco Lava Cake, a lot of branding and promotions around both Peri Peri Chicken and you know, Choco Lava Cake. Our digital activation continues and the use of celebrities. Our new store launches, we have given you some pictures. Finally in February, we were able to launch our Colaba store. Recently in October, we launched a store near the port, 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 the retail development in these, it's an integrated retail development with lot of food players, apparel players, entertainment. The brand does really well here. You can see a picture of the Jalna Road, Aurangabad store also.
Moving on to slide 20 on financials. Very strong SSSG of 15% in the quarter for KFC. Very healthy ADS of 134. Mind you, this ADS is in spite of the 52 restaurant additions which have happened over last one year. It includes all the new restaurants as well. On restaurant EBITDA, slide 21. On gross margins, just let me cover gross margins first. Restaurant revenue first. On restaurant revenue, we clocked INR 350 crores, up by 3%. Additions of 20 stores, which took the count past the 300 mark for us in KFC in the last quarter. On gross margins, we dropped by 310 basis points. Two reasons over here. One prime reason that inflation peaked in Q2. Q1, while inflation was there, we were also carrying old inventories.
Inflation peaked in Q2. That has a major impact. A marginal impact also on account of delivery mix reduction, compared to last year. Last year it was 42%, now it's 36%. Small impact also on account of delivery reduction. Our delivery prices are generally higher than our dining and takeaway prices. However, in spite of gross margin reductions, we're 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, and 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's 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. The cost management and health meant that we were able to restrict the impact to 80 basis points. Going forward, Sanjay mentioned that as we move into Q3, we expect a recovery and demand to pick up, because the festival days, the vegetarian festival days are over. Gross margin point of view, we expect marginal recovery to happen in the Q3 or beginning of Q4. The higher higher ADS or higher revenue should enable us to drive greater restaurant EBITDA margins.
From a Pizza Hut perspective, the channel sales contribution is quite similar to Q1, where 35% came out of dine-in and about 15%, 16% comes out of takeaway. Delivery is today about 49%-50% of our total business. A lot of our branding and promotions was focused on Flavor 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, 15 in the quarter. You can see Alwal, Gandhidham, Abids, where we've got KFC and Pizza Hut, the same premise in Vikhroli in Pune. Now Vijay will just talk about the numbers.
Slide 28 on Pizza Hut. Our overall SSSG was 23%. As Sanjay mentioned that this was on the back of strong transactions, it was really heartening to see. In terms of ADS, we were at 64,000. This was not only a growth over sequential quarter, but as well as corresponding quarter as well. This is in spite of 61 store additions, which has happened over last one year in case of Pizza Hut. Restaurant revenue grew by 60% at INR 140 crore with 40 additions during the quarter, it comes to overall tally to 49 restaurants. On gross margins, we dropped by 110 basis points on account of churn and 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. This was best ever quarter for Pizza Hut in terms of revenue as well as in terms of the restaurant margins. Within 15.1%, if you guys remember last time we called out that stores which have opened from April 2018 onwards over the last four years, those are delivering mid to high teens level of profitability. Those prior to April 2018, while they're converted to omni-channel because of their inefficient size, they deliver low double-digit restaurant EBITDA.
Our Sri Lanka business, in a 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. Now things are stabilizing from an operations perspective. It is easier to get fuel. There are less number of electricity outages. Imports again being allowed, so we are able to you know get our imported products also in time, cheese, et cetera, which is very important. Operating wise, the business is at least I would say 85%-90% at a normal level. Inflation, when we look at, the H1 would anywhere close to about 75%-80%.
We would have taken price increases in the region of about 40% and therefore gross margins here have dropped. ADS at a Sri Lanka level, SSSG grew by 37%. Our store openings continue. We opened six Pizza Huts and one Taco Bell.
Seven Pizza Huts.
Sorry, Pizza Hut's and one Taco Bell. We are also seeing reasonably good traction on Taco Bell, even though it is just seven stores today. Potentially at some point in time, you know, it could be another driver of growth in Sri Lanka. Our new products continue to do well. The brand is in a strong position. When I look at October, there's been a little easing out of so improvement in operating condition. However, inflation is still an issue. Given that wage inflation is not in line with general inflation, there will be pressure on consumer discretionary. From our transaction level, I feel that we will see pressure as we you know go forward. The quick financials, Vijay will talk about.
Page 36, overall SSSG 37%, with EBITDA in Lankan rupees at LKR 335 thousand. 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, LKR 312 crore revenue for the quarter, up by 76%. In Indian rupees it's 67 crores, up by 2%. Still positive even though a big impact on translation of currency. Gross margins dropped 1,000 basis points as we saw even in Q1, there was a drop of close to 950 basis points, impacted by inflation. We spoke about that our price increase are in the range of 40% while the inflation was in the range of 75%-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 dropped 15%. Overall things are more stable in terms of Sri Lanka operating conditions, be it forex availability, be it supply chain management, be it power and fuel. As mentioned earlier, this year we expect probably the overall year where revenue to grow by 20%-30% in Lankan rupees. We would be happy if we are able to hold or marginally grow our EBITDA at Lanka level in LKR terms. Of course, we will have a depreciation impact of 40%, which means at a corporate EBITDA level on an annual basis, there would be impact of INR 15-INR 20 crore in Indian rupees.
Having said that, India business is more than able to cover for the deficit on Lanka business, and this now forms only 10%-11% of mix at corporate EBITDA level in the future. That's it, guys. Thank you. I'll hand it over to Vikram for the Q&A session.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press Star and one on their touchtone telephone now. If you wish to remove yourself from the question queue, you may press Star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press Star one now. We have a first question from the line of Sameer Gupta from India Infoline. Please go ahead.
Hi. This is Percy Panthaki here. My question is on the margins. You mentioned there's a 300 basis points hit on gross margins. What is the plan to counter that? Is it that you see the commodities coming down and that itself will take care of it? If so, to what extent? Do you think any more price increases are necessary? That's the first part of the question. Second part of the question is that assuming that you recover this 300 basis points over the next two, three quarters, does that mean that your EBITDA margin also versus the 11%-11.5% you've done this quarter, does it mean it goes up to 14%+ when that happens or it doesn't translate that way?
Yeah. Percy, if you see, I just let me take, say, a KFC example. I think we've got one balancing act to do between pricing and the impact of that pricing on consumer demand. Therefore, we've taken 9% versus inflation on menus, been able to still hold on to very strong SSSGs, and despite 310 basis points in gross margins, our EBITDA margins just dropped by 80. Now, I mean, if we do another calculation and say, let's take mid-teens price increase, 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. This is something that along with Yum, we are monitoring at a close level.
We are not seeing commodity prices coming down, you know, at an overall level significantly. Some places it is coming down, for example, oil has come down. 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'll be very cautious about, some of the price increases. I'll say gross margins perhaps will see some marginal improvement towards end of Q3, beginning of Q4, but won't see any dramatic improvement in the, 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'm hoping that restaurant EBITDA margins improve.
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. That journey will still continue where while you may not see a full recovery on gross margins, marginal recovery, but our cost management and the SSSGs, which gives us leverage, will help us move towards that restaurant EBITDA margins, the ideal margin which we are looking for.
If the input cost 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, large part of that would get passed through to the consumer? What's your sense on this?
Look, Percy, if it comes down, let's wait and watch if it comes down, Percy. It would be a combination of what SSSG is and what growth we are seeing at that point in time. Based on that, we will take a call, Percy.
One small question I had was on corporate expenses. The corporate expenses that I'm deriving for this quarter are about 5.6% of sales, versus in Q1 it was 5.1% of sales. There's a 50 basis points operating deleverage on a sequential basis. Am I reading too much into this or do you think, I mean, there is the scope for this corporate expenses itself to be like over the next 6 quarters-8 quarters can be a 100 basis points driver of margins or something like that?
First, again, we will not comment on a specific line and give a specific line guidance. Having said that, Q2 corporate cost is also impacted by the ESOPs grant which happened in towards latter half of Q1. Q1 did not see probably the full impact of that. That's have 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 teams, will definitely grow lower than the revenue growth. You will see some leverage happening quarter-over-quarter or more logically year-over-year on corporate cost because on quarter-over-quarter seasonality also plays out. You will see some leverage. I will not put a number on leverage.
This ESOP cost of 30 basis points, does it continue into the coming quarters as well?
Q2 is now representative of the ESOP costs, so it's full ESOP costs 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.
Oh, okay. That's all from my side. Thank you.
Thank you, Percy.
Thank you. Ladies and gentlemen, in the interest of time and fairness to all participants, please restrict questions to two per participant. If you still have more questions, kindly join the queue afresh. We have the next question from the line of Nihal Jham with Nuvama. Please go ahead.
Yes, thank you so much and good evening to the management. A couple of questions. First, on the KFC part, you're highlighting the seasonality. Generally, what is the impact on Q1 to Q2 in ADS that happens because of, as you said, the higher prevalence of vegetarian in the areas you operate?
Nihal Jham, very difficult to put an exact figure because what happens is, the religious festivals, the days can move between Q2 and Q3. Last two years, COVID has actually played havoc with trend analysis. Very difficult to put an actual number. For example, even this quarter we saw Navratri, part of Navratri coming in September last week, whereas last year the entire Navratri was in October. Very difficult to put. What I can say is that this year the dip which we have seen is similar to the dips which we have seen in pre-COVID times.
Having said that, Q1, our overall ADS was in the region of 144. Our overall ADS in Q2 is 134. That is the extent of the dip.
7% dip you are seeing.
Yeah. Give or take, because new store impact from quarter to quarter won't be high. That is the kind of impact we see over the whole quarter, Nihal.
Understood. The only reason I'm asking is because you highlighted inflation. If there was an exaggerated and 36,000 something, but I think the number that you're giving of this is representative.
Yeah. No, no, I called out that 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. We have, you know, we have also seen it translate into SSSG growth also.
Understood. Two quick questions on Pizza Hut. First is if you could again highlight on the flavor front which you highlighted since July we've been promoting. Second is, Vijay, if you could separately call out the margins for the new format stores, if that is the right term. I'll be done here. Thanks.
The second question first. We have said that the stores which have opened from April 18 onwards, and it's not a new format. It's all we operate is omni-channel stores, whether it's old or new. The April 18 onwards are more compact ones compared to the size which we were operating earlier, which we inherited in legacy. The compact ones are delivering anywhere from mid to high teens.
On flavor front, response has been very positive. I am loath to call out a specific number on Flavor Fun because it's just really too early days. While we always say that there is a seasonality impact on KFC, there is also some seasonality impact that happens in Pizza Hut also. I think we should wait for three, four quarters, look at how the specific innovation goes. Undoubtedly, it is leading to transaction growth. From an anecdotal basis, the kind of customers we are seeing coming to our stores and ordering is definitely, you know, these consumers might not have come in the past.
That value layer under INR 100, like we called out even in the last earnings call, is a important, you know, future driver of growth. I hope we answered your question, Nihal.
Very much. Thank you so much. I'll come back with you.
Thank you, Nihal Jham.
Thank you, sir. We have next question from the line of Devanshu Bansal with Emkay Global . Please go ahead.
Yes, thank you for the opportunity. Sir, I wanted to check what is the typical growth trend in ADS from Q2 to Q3, because Q2 generally is a peak quarter for KFC. If you can just help me with these historical trends, it will be helpful.
ADS is also a function of how many new stores you are opening. When you look at historical trends, we were not expanding so much, so that may not be represented. The new store additions will dilute to some extent the overall ADS. Having said that, we have seen a drop of 5%-7% vis-a-vis Q1. Something of that, in that range. It could be anywhere between that 4%-8%. I would not put a specific number to it, but that could be the range on Q3 versus Q2.
Sir, for Pizza Hut, it has been a very encouraging performance with 23% versus 20. Just wanted to check if there's element of low base in the last year.
Devanshu, Sanjay here. I just want to interrupt. I think I heard Vijay say decrease in Q3 versus Q2. Actually, it is between 4%-8% increase in Q3 versus Q2.
Yes, sir, I got that. I listed it as an increase only. Yes, sir. Fair.
We just wanted to clarify for the benefit of everyone.
There are 260 people on the call, so there shouldn't be 260 minus Devanshu, all of them freezing and saying, "My God, this Q3 going to be lower than Q2." I just clarified for that sake. Go ahead with your question again, please, Devanshu.
Yes, sir. I was indicating that Pizza Hut has been a very encouraging performance with 23% SSG this quarter. I wanted to check if there was any type of a low base element for you last year for Pizza Hut format due to operating conditions, et cetera.
I would say there was very marginally lower base. I would say malls that were at, say, 90% recovery last year, versus, you know, what they would normally be. I think it is minimal. Base is not the issue.
Yeah. Marginally, yes, small impact and maybe a pocket territory like Maharashtra, where the conditions got slightly more favorable in operating from October onwards, September towards the end September, but then that's a marginal impact in the base.
Lastly, sir, if you can talk about the trends in terms of SSG for the festive season, it would be very helpful for both the formats.
Just repeat. 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?
Yes, sir. Festive season in Q3, some outlook if you can provide, then it will be very helpful.
You know, we can predict our business, but we are not soothsayers here, Devanshu, and therefore what Vijay said, roughly we have seen 4%-8% increase over Q2. I think that's about as much that I am able to, you know, perhaps predict.
That's 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. The ADS of Pizza Hut, which was 64,000 in Q2, does not have any seasonality impact. We hope we continue on the same trajectory for Pizza Hut.
Got it, Vijay. Yeah. That is from my end. Thank you.
Thank you, Devanshu.
Thank you, sir. To ask a question, please press star one on your touch-tone phone now. We have next question from the line of Kapil Jagasia with Edelweiss Broking. Please go ahead.
First of all, congratulations on a great set of numbers. First question is, I was-
Kapil, you're the first person who's congratulated us. Normally, Percy is the first person who would say a good set of numbers. This time, Percy for some reason was very muted. Thank you, Kapil.
Sure, sir. The store opening run rate has been very healthy in H1. Would we be eligible for the incentives [audio distortion]
It's very fine. I think you are referring to the incentives which we actually had last year. So, as per a contract every year we continue we have been getting incentives over last five years. We will continue to get incentives over last next five years, that's not gonna change. What we called out last year was there was some additional component on account of COVID. Because of COVID our targets were revised and we were given additional incentives. That's all we have called out. The current set of numbers, are our 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.
Okay, that's that's very much clear. And I just wanted to understand your take [audio distortion] And I just wanted to understand your take away channel because you know if in terms of GG COVID taking away GG's item but now, which you know nothing there no restrictions there. It's clearly a dine in or a delivery channel because [audio distortion] understand why the take away like what is like any any drivers for it or how you see the channel going going forward?
Take away has always been a double digit channel for us. Even in the past and proximity to store, you know proximity to store, enables this, take away. In many of our mall, format stores and drive through stores, people so, when they drive through format also we say that when person purchases in the drive through that that is under, under take away. I think said that I think now I'll 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 take away prices.
And apparently there is a global trend where consumers look at these delivery prices. If they are in the definitely 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 take away percent are slightly better than what has been there in the past but again compared to, you know what happened during COVID it's not better than what happened during COVID. Just come reduce the little bit. I think it's traditionally been a strong double digit contributing channel and the, behavior that started during COVID period when take away increased that's sort of continues even when COVID is off and neighborhood, restaurants and access to a restaurant drives ready take away.
Just to add to that, our omni-channel strategy where all the three channels are available actually puts us in a strong position that we can take advantage of one channel versus the other. All the three channels are available in Sapphire formats. Be it Pizza Hut, it's omni-channel, be it KFC, which is omni-channel.
Does that answer your question? Vikram, we are hearing some disturbance. Maybe you can take it over, and we can move on to the next caller.
Sure. Thank you. The next question comes in line of C. Kishor[guess] with Chola MS. Please go ahead.
Yeah. Hi. Good evening. Thanks a lot for taking my question. I just want to understand what is the average size of the new stores that you're opening. And let's say, I want to understand going forward, would it be safe to assume that, I mean, the future would be towards, let's say, smaller store sizes so that the unit economics actually work out better? Thank you.
Our sizes for KFC are in the range of 1,500 sq ft-1,600 sq ft. Pizza Hut in the 1,200 sq ft. Reductions in sizes have happened over last 5 years-6 years that I want to call out. It's not just a COVID phenomenon that we're gonna cut down the sizes. It happened with calculations in terms of the covers, table turns, and with the advent of delivery channel, partnering with aggregators meant that we can be a more omni-channel player. That's how the reduction has happened. While the reduction in sizes happened, again, just to clarify, it won't impact our capacity to serve customers. The area throughput can be considerably higher than what we deliver right now.
At the levels where we are, we don't expect in the medium term it will for a dramatic or a further reduction in these sizes as we move forward because you require X amount of capacity, seating capacity for your dining channel to be relevant. Any cutdowns from here on would compromise that particular channel.
Fair enough. Thanks a lot.
Yeah. Thank you, Kishor.
Thank you. We have our next question from the line of Ashish Kumar from Infinity Alternatives. Please go ahead.
Thank you, sir, and congratulations for a good set of results. Sir, on this, when you compare a base of store addition, while we've kind of come 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. How do you think we have a path to kind of get to catch up with them in terms of the SSSG? Because from a GDP perspective, you kind of split the GDP 50-50, right?
I think the pace of our expansion is in line with what we have said consistently over the last one year, that we will, we hope to double our restaurant base of about 550 stores at the end of December 2021. That gives us roughly in the region of 130 stores-160 stores between these numbers. All three businesses, Pizza Hut, KFC, and Sri Lanka, will be roughly be able to deliver the this kind of pace of expansion. This 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. If you look at that, I don't think we are compromised in any way with respect to our peers.
Just to add, Sanjay said double. He meant doubling in 3 years-4 years' time, vis-à-vis the numbers which we had in December 2021. Again, our guiding factor would not be what peer set is doing. Our guiding factor would be our levels, our strike rates, our paybacks. That's our internal measures which we use, and that's where we feel we are comfortable with doubling the count over 3 years-4 years. On the point which you just made, that GDP-wise the territory distribution is 50-50, I would just like to clarify. The territories which KFC operates in, for us, they contribute 56% to India's GDP. For Pizza Hut, the territories which we operate, they cover roughly 57% of India's GDP.
Yeah. This is where I was coming from. Maybe, yes, you are right that this is in line with the guidance that we have given. Given the fact that we're seeing an environment wherein the shift towards branded players like yourselves is significantly higher, if I were to say, does it make sense to expand? We have a balance sheet with a very healthy cash flow and a healthy internal accruals. Does it make sense to kind of accelerate the pace of rollout, given the fact that you have a higher footprint of the country? It's a question of if you don't do it, if somebody like a Popeyes may come and kind of capture the space. That's the. It's a question of a land grab, right, at some level.
I don't think it's a question of land grab, Ashish. Like I said, there are many things that need to be balanced at this rate. The ADS that we get, and therefore the new store paybacks that we get are healthy. I think anyone, I think it'll be, or there'll be few players who can match this rate of expansion, deliver the kind of returns that we are looking at. Short answer is, this is the rate of expansion that we are looking at this stage.
Sorry, I missed a little bit of the call when there was an initial question of gross margin. Do we believe that we'll get back to our historical gross margin in the next couple of quarters?
I believe you're referring to KFC in particular.
Yes.
KFC in particular. While again, the gross margin drop of 300 basis points happened, our restaurant EBITDA dropped by only 80 basis points. That's the way we are approaching. The idea is not to take a price increase with inflation and probably potentially impact our revenue and transactions. We are happy with where the price increase stays right now. Yes, marginally, we expect the gross margins to come back towards H2 of Q3 and starting Q4, marginally. That's based on improving the restaurant EBITDA, which would happen with the improvement in sales, which we're anyway seeing in Q3 over Q2 because the vegetarian days are now over, in terms of the festivities. The focus is more on the restaurant EBITDA margin, and how we sustain and drive restaurant EBITDA margins.
Right.
Thank you, Ashish.
Sir, I'm sorry to interrupt. Can you come back with your question, please? Thank you. We have next question from the line of Jignesh Kamani with GMO. Please go ahead.
Hi, Jignesh. Just on the gross margin front, we have seen the menu prices are increased by INR 3-INR 4 last month, and hence, cheese and all the other products. Do you think it's in some of the elements of the gross margin and raw materials still kept increasing and will have further impact on the gross margin in H2 ? At least for Pizza Hut, if not for KFC.
Yeah. Well, 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 therefore potentially over the next 3 months-4 months, have an impact on dairy products that we consume also. Overall, I think inflation will continue at the levels that at the levels that we have seen in the first half. I think the deviation from this will be marginal. It's not going to go down dramatically. It's not going to go up dramatically.
Understood. Second thing on the Flavor Fun. Based on the initial experience, are we seeing more downtrading or new customer is taking care of the any small downtrading is happening?
Like I said, it's too early to call it on Flavor Fun. It's just that we are getting, I'm sure, higher level of transaction growth than we have got earlier. Net it is positive.
Okay. Thank you.
I'm not going to grade specifics on this, Jignesh, so forgive me for that.
No worries. Thank you.
Thank you. We have next question. Ladies and gentlemen, please raise your questions to participant. Our next question from the line of Hiru Titwani[guess] with Motilal Oswal. Please go ahead.
Good evening, Sanjay and Vijay. First of all, I appreciate the numbers briefly on the results. 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. It's obviously the question on increasing stores. Would you look at strategically introducing any other country in the near future?
Well, that's too hypothetical a question, Hiru, at this moment.
Having said that, Hiru, 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. It's not in the short term, maybe in the medium term, and that's where we'll leave it at. Now, whether it could be new territory or new brand in India, it's too early, too hypothetical to comment.
I think, largely one of the considerations is that it should be able to offer similar kind of growth trajectories as India offers. If anything that is not offering the kind of India growth trajectory on another territory, then I think we'll be very, very circumspect.
The mantras for those identification of brand that we have listed in our annual report. If you go to page 35, there are seven mantras which the firm defines where you want to have scale and success both, then that would go into our choice of the third brand. You can refer to the page 35 of our annual report as well.
Sure. Thank you.
Thank you, Hiru.
Thank you. We have next question from the line of Kalpit Merwekar[guess] with Allianz Global Investors. Please go ahead.
Hello, sir. Good evening, to add on the results for the quarter, I have two questions. One, I want to understand how discretionary the category. Essentially, if you've done any studies on the demand elasticity, say, at the income level or for the product categories, like, say, KFC and Pizza Hut, right? Like, how does price hike affect volume growth? Let's say in past cycles, if you've done any studies, if you have any sort of color on that?
Kalpit, actually we are in new territory here. Over the last five or six years, we've not had an inflation of this level, and hence there is very little past data to fall back on. I'm just looking at my old consumer product experience, which says that in general, there is an impact on any discretionary income category. There is an impact when you take, you know, steep severe price increases. The best way to find out actually is to experiment and say, let's.
In general, we feel that if we are able to restrict price increases to in the region of between 60% and 70% of inflation and then find economies of scale elsewhere, it works well because the product then becomes 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. There is no hard and fast heuristic that shows the demand elasticity. I think we've 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 have in Q2 compared to the inflation and it's borne out with SSG means that at least right now it has worked in a quarter that has gone by.
My second question was on the delivery fees. How much of the delivery fees is through our own delivery system, and what is the strategy in terms of like functioning of our own delivery network?
The breakup for both the brands would be different. KFC would be approximately 90%, and I'm giving you very approximate numbers, 90% through aggregators, and the rest delivery. Pizza Hut would be 80-20 this ratio. Our plans for our own delivery in terms of our systems, our app, the kind of offers which we have on our platform, they continue to be there for last 2 years-3 years and they continue to grow well. What's happening at the same time, aggregator continues to pump in money. They are growing really well. The mix is not changing. However, our own delivery as well as aggregator, both the platforms are growing healthily.
Yeah. Typically we'd have stopped. Our call was for an hour, but we are quite happy to continue it if the people on the call are also willing to continue. We'll take our next call therefore, Vikram.
Thank you, sir. We have next question from the line of Harsh Mulchandani from KRIIS PMS . Please go ahead.
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 delivery customers that you're in and, you know, how does that number look like on a quarter-over-quarter basis?
I don't have those numbers offhand with me, I must confess, Harsh. I mean, if necessary, we can get back later, but I don't have those numbers offhand with me.
Okay. Okay, sure. No worries. I have another question on the prices. Just want to understand that you operate across states. Your prices are consistent across states where you operate or they are different?
Yes. They are consistent all India. There might be. There are, yeah.
They're consistent across India. They will be different across channels. For example, delivery channel may have slightly higher prices for KFC in particular. In Pizza Hut even that's not the case. Otherwise, from state to state, territory to territory, the prices are consistent.
Yeah. We also have some premium price stores. That's about the difference. Otherwise, pricing is consistent across the country.
Got it. Fair. Just to compare it with the pricing with, you know, the other operator for Pizza Hut which operates in India. The prices with them is also similar or you have a different pricing power?
Pan-India similar. Irrespective of the stores are operated by the system franchisee or by Sapphire, the pricing strategy is consistent not just for Pizza Hut, even for KFC across all states, all territories.
Got it. Fair. Thank you so much.
Thank you. We have next question from the line of Ameya Gawande[guess] with Metaverse EPG Fund. Please go ahead.
Yes. Thank you for the opportunity. Sir, my question is, what growth you are anticipating in within the next three years, particularly in Sri Lanka?
I don't think I can venture that answer, Ameya. What growth?
Sri Lanka, as we have called out already this year, we are seeing 20%-30% growth. The macroeconomic situation, while it has stabilized, continues to remain critical. We'll be very foolhardy to probably try and predict 3 years from right now for Sri Lanka. We'll take a quarter at a time. Let's see in next 6 months time where we reach, and maybe then we can have this conversation.
Sure, sir.
Thank you. We have next question from the line of Bhushan Shah with Congruence Advisors. Please go ahead.
Hello. I just wanted to know what is the advertisement spend we are doing on the percentage basis?
As per the contract with Yum!, we are required to spend 5% for a national campaign, which we contribute to Yum! along with the system franchising, which is used for Pan-India marketing, and 1% for local sales marketing, which we spend internally. Total 6%.
Geographically, our system concern and all, in our company, do we have any segregated advertisement spend or we have collective advertisement spend on a basis of the franchise we do?
The segregation is on that 1%, where it's local sales marketing where we spend into our territories. For the 5% it's a national pool which is used for Pan-India marketing.
Okay. Okay. Got it. Thank you, sir.
Thank you. We have next question from the line of Jigar Trivedi[guess] with DJP Investment[guess] . Please go ahead.
Yeah. Hi. I have a couple of bookkeeping questions. What is the likely tax rate for this financial year?
This financial year it's unlikely that we will have a tax outflow, because we have enough carry forward of losses. I guess we'll get into the tax regime next year, maybe towards second half probably. Then going forward a year later, we'll fall into 25% tax regime, but that's probably a couple of years away.
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?
So the overall-
First of all, we don't pay to a master. We are a master franchise. We pay royalty to Yum!
Yeah, to Yum!
Yeah.
Yeah. As per agreement, it's 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%.
Is it likely to go up in the next year also?
Our royalty of 6.3% has been consistent for last few years. In fact, for Yum!, it has been consistent globally. We don't expect this to either come down or go up. That's the rate which Yum follows globally for quite a few years across all territories.
Cool. Got it. Thanks.
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.
Yeah. First of all, thank you all for joining. We had a really good question answer session at the end of a quarter which was potentially challenging, but we have been able to navigate these turbulent waters quite well. From a demand perspective, both brands were strong. In Sri Lanka also, business was strong. Our old adage where we said that let's not look at gross margin, but see what is the impact of price increases on volume. If we are able to maintain volume and therefore grow same-store sales growth, we are able to get leverage. That's how it has played out in Q2. Therefore, our restaurant EBITDA margins have been quite, you know, quite strong.
The drop versus last year quarter on KFC has been quite minimal. The Indian restaurant EBITDA, both brands put together actually went up by 40 basis points. I'm 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.
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.