Ladies and gentlemen, good day, and welcome to the Q1 FY 2023 Earnings Conference Call of Sapphire Foods India Limited, hosted by Orient Capital. As a reminder, all participant lines will be 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 call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Kapoor from Sapphire Foods India Limited. Thank you, and over to you, sir.
Thank you, Faizan. Good evening, everyone, and a warm welcome to Sapphire Foods' first quarter FY 2023 earnings conference call. I'm Rahul Kapoor from Sapphire Foods' Investor Relations team. Today on the call, I am joined by Mr. Sanjay Purohit, who's our Group CEO and Whole Time Director, and Mr. Vijay Jain, who's our CFO. We've already uploaded our investor presentation and earnings press release on stock exchanges and our company's website. We'll begin the call with a commentary from the management, which will be followed by a Q&A session.
This call may contain some of the forward-looking statements which are purely based upon our belief, opinion and expectation of the company as of today. These statements are in no way guarantee of our future performance and involve risks and uncertainties that cannot be predicted at this point in time. With that, I'll hand it over to Sanjay. Over to you, Sanjay.
Good afternoon, everybody. Sanjay Purohit, here. I'm also joined by Vijay Jain, who's our CFO, and both of us in tandem will take you through the highlights of our quarter one performance. Quarter one this year has been the first quarter since the COVID pandemic, and we've seen a full recovery in our operating hours. And that has translated into a positive impact on both KFC as well as Pizza Hut businesses, especially the dine-in businesses. And we have seen a strong recovery. Dine-in on KFC has come back to pre-COVID levels, and Pizza Hut is just a shade short at 85% recovery. We've had a really strong quarter. We delivered our highest ever quarterly revenue at INR 544 crore and our highest ever EBITDA of INR 111 crore.
Our previous highest EBITDA was INR 108 crore, just for the record, in Q3 of FY 2022. This excluded that additional incentive that we accrued in the quarter, and we had called it out at that point in time. For strong quarter, highest ever quarterly revenue and highest ever EBITDA. This EBITDA, post-interest stood at 20.5%, up 640 basis points year-on-year. Adjusted EBITDA was INR 72 crore at 13.3%, up 1,020 basis points. And PAT stood at INR 38 crore at 7%, up 1,570 basis points. I think the important part here is that this strong performance is despite the macroeconomic challenges that have impacted our Sri Lanka business, and I'll talk about it in a minute.
But just at a broad level, Sri Lanka used to contribute about 25% of our overall profits in the last year in FY 2021-2022. Today it contributes 10% in Q1. So despite Sri Lanka's performance, and that performance also I'll peel the onion in a minute or so, largely because of foreign currency translation. Therefore, the India business has really done well and has more than compensated for the flat Sri Lanka numbers. Let me now talk about the three businesses. KFC had a very strong quarter, 65% SSSG, and almost we doubled in overall revenue. We talked about inflation in the last quarter, and to mitigate this inflation, we have taken a price increase of about 9%.
So though gross margins dropped a bit, our overall cost efficiency programs enabled us to deliver among the best ever restaurant EBITDA at 20.3%. So KFC, really strong quarter we had. What is heartening is our Pizza Hut performance, and this continues to validate what we have said and tom-tommed about continuously that our compact omni-channel restaurant strategy, which delivers optimal customer experience in dine-in, takeaway and delivery, is the way for the brand to differentiate itself and be a strong number two. As a result, we've delivered SSSG of 47%. Overall revenue has increased by 85%. We took a lower price increase on Pizza Hut and limited it to 5%. As dine-in sales recovered, our legacy core portfolio also did well.
Our dine-in sales recovered, delivery sales held, and together with the cost efficiency programs, we delivered our healthiest 14.8% restaurant EBITDA margin. Pizza Hut performance was very strong. I think the other positive part on the brand is that there was a significant gap in our product price portfolio of Pizza Hut, and this is really a pizza under INR 100, and this has been plugged with the launch of the very differentiated Flavor Fun pizzas. I'll speak about it more when we come to the Pizza Hut section. This was test marketed in Chennai and Hyderabad in quarter one with really good results. An those encouraging results have emboldened us to launch it nationally on the 25th of July. That's another positive development on Pizza Hut. Let me come to Sri Lanka.
I think the external environment has been challenging and continues to be so. It has not deteriorated further, and therefore, there's some amount of stability that has come back to Sri Lanka. On the back of, we delivered an overall 53% SSSG in LKR terms and a 93% increase in overall revenue. While we took price increases, inflation was even higher, and therefore, gross margins dropped. Therefore, restaurant EBITDA also dropped to 15.5%. The absolute restaurant EBITDA grew by 65%. Once we do the currency translation impact in INR terms, the absolute restaurant EBITDA remained flat over last year quarter one. We continue to do well from a local business perspective in Sri Lanka.
However, the situation continues to remain challenging but stable, and I would say just very marginally improving, perhaps over the end of July and August. If you remember, we had advised that we should be able to double our restaurant count, which was standing at 550 restaurants in December 2021. We said we should be able to double it in three-four years. Accordingly, our total addition of 37 restaurants has kept in pace with that guidance that we have given. We opened 18 KFCs, 16 Pizza Hut in India, two Pizza Hut and one Taco Bell in Sri Lanka. So this was the broad highlights. Specifically from a number perspective, our restaurant sales. I'm now referencing the slide presentation that you have got access to. I'm on slide number seven.
Our restaurant sales was INR 544 crores. Adjusted EBITDA up by 80%. Restaurant EBITDA, INR 72 crores, 13.3%. The same quarter last year, which was COVID impacted, was 3.1%. Our EBITDA is INR 111 crores, up 161% over INR 43 crores in quarter one of FY 2022 or 20.5%, up 640 basis points. PAT is INR 38 crores versus negative INR 26 crores in the same quarter last year. 7% PAT. I'll now hand it over to Vijay, who will take us through the specific consolidated financial highlights. And then I'll come back to give you indication of KFC, Pizza Hut in Sri Lanka.
Thanks, Sanjay. Good afternoon, everyone. I'll take over from slide number nine, consolidated financial highlights. As we said, restaurant revenue of INR 543 crore was highest ever for the quarter. Gross margins, as estimated, we were expecting a drop in gross margins on account of inflation and our price increase being lower than the inflation. We dropped the gross margins at 520 basis points. And we had guided that in spite of a drop in gross margins, we were confident of not only sustaining, but improving our restaurant EBITDA margins. Restaurant EBITDA margins of 18.3%, up by 690 basis points over corresponding quarter. And even if you look at sequentially, it was 18.3% in quarter four.
This translated into higher adjusted EBITDA of 13.3%, up by 1,020 basis points at INR 72.2 crores. Slide 11, corporate EBITDA or consolidated EBITDA at INR 111 crores, which is highest ever. As Sanjay mentioned, the previous highest was in quarter three of last financial year. This was up by 640 basis points over corresponding quarter and a growth of 161%. We delivered a PAT of 7% at INR 38 crores, up by 1,570 basis points. The corresponding quarter was a loss we took on account of COVID impact, second wave of COVID impact.
Let me quickly take you through KFC's performance. As you could expect, as I spoke about this, when operating hours started to normalize, our dine-in sales recovered. Dine-in sales as a contribution, I'm talking about slide number 14 of the presentation. Dine-in was 46% and delivery held, but in a contribution sense, came down to 35%. When we look at comparable stores and their recovery versus our recovery at a channel level, absolute ADS versus FY 2020, dine-in is 102%, takeaway is 112%, and delivery is still double of what it was in FY 2020. From a new product launch perspective, we had the KFC Popcorn Nachos launch, and that's done quite well.
It's a very differentiated product, and I invite, you know, everyone on the call to perhaps try it once. It's really, really tasty. I'm now going to go to some of the new restaurant launches. I wish I could show you some slides, but there was a really important gap in our mall portfolio that we plugged in quarter one. Perhaps the largest and most successful malls in the country that fall in our territory is the High Street Phoenix or the Phoenix Palladium Mall in Parel. And there we've been knocking on the doors of the mall. While we've got great relationships with the mall, they were unable to find a space for us for six years.
And finally we were able to, you know, enter the mall in what is perhaps an absolutely iconic store location. And to my mind, it's a one-off location. I haven't seen any such stores anywhere else in the country. So within a successful mall, you have a separate structure. Many of you are Mumbai-based, and therefore you know what I'm talking about. When you go on the road, you can see the separate structure, and KFC is open there. We're very proud of that store. It's doing really well. And then you can see on the next slide number 19, some of the other stores that we have opened in Chikhli and Shalimar Bagh, Delhi, in Guindy, Chennai and then Viviana Mall, Mumbai. Vijay will now take us through the numbers.
Slide 20 on KFC financials. Our SSG was 65% over corresponding quarter with the ADS of 144,000, a growth of 37%. Restaurant revenue was at growth of 98% at INR 353 crores. This was highest ever revenue for KFC. The gross margin dropped by 200 basis points. If I break this down into two parts, one was on account of mix. Our delivery mix was lower compared to the corresponding quarter. Last year, same quarter, it was 62%. Now it has come down to 35%. Generally, our delivery prices are 10%-15% higher. So roughly 50% of drop is contributed by the change in mix. The balance 50% is on account of inflation.
As I checked previously that our price increase was 9%, while inflation was well into double digits into mid-teens. We were able to drive restaurant EBITDA margin expansion, 20.3%, one of the highest ever margins on KFC. This was due to dining recovery, as well as the cost efficiency, which enable us deliver a very strong EBITDA performance at restaurant level for KFC. So overall, very strong quarter for KFC. Our momentum continues in terms of store expansion, the revenue growth, and still delivering some amount of margin expansion in KFC.
Quickly, the Pizza Hut channel sales. I'm on slide number 23. Dine-in had a smart recovery and now contributes 37% of the total business. Delivery contribution has dropped to 47%, but as an overall ADS level continues to hold. When we look at recovery versus FY 2020, dine-in is at 85%. When I compare dine-in 85% to, say, KFC at 102%, largely we see this gap in coming out of Karnataka and perhaps a few mall stores where dine-in transactions are still not back to pre-COVID levels. That explains the slight gap between dine-in recovery on KFC and Pizza Hut. Other than that, I talked about the Flavor Fun Pizza launch. I'm on slide number 24.
The starting price range is at INR 79. There are five delicious sauce flavors. There's a classic Italian tandoori, cheesy, and Schezwan sauce. It comes only in the personal pan size range. There are 12 pizza offerings. It goes up to, I think about INR 149 or INR 189 for the top-end non-veg range. We're really excited with this launch. It comes with a cheesy dressing and it tastes absolutely fantastic. Basis the encouraging response that we have got in the test markets that we ran, Chennai and Hyderabad, we are hoping that this will also do quite well at the national level. We continue to open stores in Pizza Hut, and you can see some of the pictures. We're very proud of the kind of stores that we open also.
That Capital Mall, Nalasopara Mall, we're doing about INR 1 lakh ADS, and it's just a beautiful stores. I think similarly, across the board, the stores that we open look good, the customer experience is great. Quickly, Vijay, on the numbers.
Slide 28. Pizza Hut delivered SSSG of 47% with ADS of INR 61,000 and a growth of 24% versus corresponding quarter. Again, Pizza Hut too delivered an all-time high revenue of INR 122 crores, up by 85% over corresponding quarter. 15 store additions, 16 restaurant additions in the quarter. The gross margins dropped on Pizza Hut by 110 basis points, led by inflation on cheese, packaging and a bit of oil. But again, we had an excellent margin expansion of 14.8%, which is probably one of the best ever performance in case of Pizza Hut restaurant EBITDA level. I think the previous highest was quarter three, the first two quarters where we delivered 14.9% excluding the additional incentives. Really good margin expansion.
This was possible on account of dining recovery, which we saw. Our strategy on compact omnichannel format. The new additions which have been happening since April 2018 onwards are on this higher profitable format. Our cost efficiency program has enabled us deliver highest ever restaurant EBITDA with Pizza Hut. Within this, 14.8%, I always give a color on pre-2018 and post-2018 restaurants. The stores which have opened post first April 2018 they are delivering now, moving from mid-tier level of profitability towards high-tier. This is enabling us to drive margin expansion on Pizza Hut. So overall, very heartening performance on Pizza Hut. Especially since the compact omnichannel strategy being played out, and we're able to deliver a significant margin expansion on the brand.
From a Sri Lanka perspective, let me first give you a quick insight into what is happening on ground in that country. We saw the images of you know of the general public uprising against the government and against the president and the prime minister. We saw what happened there. After that, there's been a prime minister elect, a prime minister who's been appointed. Little more stability from a political perspective. I think people are realizing that there isn't a silver bullet answer to their issues. From a general consumer and general public perspective, inflation has hit them quite hard. And month-on-month we have seen inflation.
Overall general food inflation, they have been hit. We have taken price increases, but I think, to be able to still retain transactions, we have still not taken price increases in line with inflation. I think Vijay will give you a little bit of color on that. Having said that, availability of gas, electricity, that enables us to do business has slowly and steadily stabilized and perhaps improved. That is on the upward tick. Quarter one typically is a low quarter for us from a seasonality perspective in Sri Lanka. Quarter two onwards is when, if I just look back at the trend over the last five, six years, quarter two and then quarter three are the very big, are the best quarters.
I'm anticipating as the business stabilizes, as the overall environment and economic, macro-economic conditions stabilize, our business also should do well. We continue to be the number one QSR operator. Internally, we monitor our market share and this is our estimates of market share. And we believe that we have steadily increased and gained market share in, you know, from, in the total QSR business in Sri Lanka. So we continue to do better than anyone else in Sri Lanka. And again, that's because of our advantages. The brand is very powerful. Our innovation and product program is very strong. We are most accessible, the highest number of restaurants we got there. We have our own delivery capability also.
When last year in June, July, when there was severe shortage of petrol, you know, for our delivery vehicles, we hit upon quite an innovative idea of delivering on cycles. And about 10, 12% of our total deliveries was then being handled on cycles. And you know, as fuel has got more available, we are able to deliver again back on our bikes. Sri Lanka, from an overall perspective, I think we have seen the worst of what is to happen there. We have continued to open stores in Sri Lanka because we see that as an opportunity, and we opened two Pizza Hut and one Taco Bell in Sri Lanka in the quarter. Vijay, the numbers?
Yeah. Slide 34. SSSG grew by 53% in LKR terms. Overall, sorry, SSSG was 53% in LKR terms. Our ADS grew by 34% in LKR terms at LKR 333,000. In Indian rupees, due to translation impact and due to currency depreciation, our ADS dropped by 18%. Our revenue in LKR terms grew by 93%. While you convert it to Indian rupees, it grew by 17% for the quarter. Gross margin had a big impact on account of high inflation, and we were actually pre-estimating this. The idea was to minimize the impact at a restaurant EBITDA level. And more specifically, the idea for this year was how do you actually try and deliver and grow the absolute EBITDA in LKR terms?
So while restaurant EBITDA dropped by 250 basis points, the LKR EBITDA margin actually grew by 65%. When you convert that into Indian rupees, it was flat year-over-year. Overall, as Sanjay mentioned, external challenges continue to remain, and it gets further aggravated by the fact of depreciation of currency when you translate the numbers in Indian rupees for consolidation.
However, Sri Lanka used to form 25% of our company EBITDA mix in FY 2022, which has come down to now close to 10% in FY quarter one of this particular financial year. In spite of this drop, this impact has been not just mitigated, in fact surpassed by the India business performance. And this has allowed us to still deliver an overall very healthy quarter and our highest ever corporate EBITDA of INR 111 crores. Over to you, Faizan. We can open the session for Q&A. Thank you.
Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. 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. A reminder to participants, anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, sir. Just wanted to understand firstly for your India business, typically, what would be the Q1 ADS as a percentage of the full year ADS in a normal year?
Q1 is typically on annual average. In terms of seasonality, I can just explain to you how the quarter-wise seasonality plays out in Sapphire Foods. Q1 is typically annual average at a restaurant EBITDA level and at a corporate EBITDA level. Quarter two, we see a slight dip on account of seasonality, especially on our KFC business because of the various festivities, the various religious festivities, the Shravan in the North, Shravan in the West, the Navaratri, which impacts us the quarter two seasonality. This gets well more than compensated by our Q3 performance, which is a festive quarter where the sales actually goes up. Quarter three is higher than the annual average, and quarter four is typically the annual average. Q1 and Q4 is annual average. Q2 drops a bit, which gets more than compensated by the Q3 performance.
The Q2 drop is largely North and West. I mean, if I just look at North and West and non-vegetarian, that is a drop. From a Pizza Hut perspective, I think it is reasonably stable right through the four quarters. Perhaps quarter three is slightly higher because of the.
[crosstalk]
-festival, yes. Does that answer your question, Percy?
Hello?
This is the operator, so one moment please. Percy Panthaki, please go ahead.
Yeah, am I audible?
Yes, sir.
Of course.
I was just saying, Q1 is in line with annual average both on ADS as well as EBITDA margins.
Yeah, largely. Yes, yes, Percy.
Okay.
You were able to get the answer, Percy, because I think you got dropped there. You were able to get an answer on the entire seasonality, Q1, Q2, Q3, Q4?
Yes. I was able to hear you, yes.
Yes.
Second question is on Sri Lanka. Just wanted to understand in terms of the margin trajectory. See, Q1 has done 15.5%, but was it a sliding scale across the three months? I mean, the exit margins for the quarter, are they significantly lower and therefore Q2 margins on that trajectory, do you expect it to be below Q1 for Sri Lanka?
See, again, we don't get into quarterly guidance, but what I can tell you though, we don't anticipate overall Q2 absolute EBITDA for Sri Lanka to be any worse off than quarter one. Largely should remain on the same trajectory as quarter one, in terms of absolute EBITDA. Why I'm calling out absolute EBITDA again and again is because this is the year where it's going to be very difficult to predict the percentage margin. The way there is a high inflation in the country.
The price calls cannot be every week, price calls, right? Again, at the same time, you need to hold onto the transition. Heartening part is that we have been able to hold onto the transitions in quarter one. The way we are going to drive this year's tailoring Sri Lanka is in LKR terms, and we'll hold on to the previous year's LKR EBITDA and drive upon that and grow upon that. So we anticipate a drop when you translate that EBITDA into Indian currency. Last quarter I had called out there would be a drop on translation. We anticipate this drop could be anywhere between now INR 10 crore-INR 20 crore rupees. This was overall INR 50 crore rupees EBITDA last year. Roughly I'm giving you in at a corporate level.
So that could be a INR 10 crore-INR 20 crore drop at Indian rupees level. But again, as I said, this has been more than compensated by our India performance. And then overall mix of Sri Lanka business at an EBITDA level has come down to 20%-10%.
Okay, understood. Basically the absolute EBITDA that you have done in rupee terms in this quarter, that kind of average quarterly run rate is sort of sustainable for-
We'll be able to hold on. Yes. Yes, Percy.
Okay, understood. Yeah, that's all from me. I'll come back in the queue if I have more questions. Thank you.
Thank you, Percy.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one. Ladies and gentlemen, please limit your questions to two per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The next question is from the line of Jaykumar Doshi from Kotak. Please go ahead.
Hi.
Hello, Jay. How are you?
I'm very happy, thank you. Thanks for the opportunity. You know, just to follow up on what Percy asked on Sri Lanka. From what I recall, your brand EBITDA for Sri Lanka was around INR 70 crore-INR 72 crore last year. Your corporate EBITDA was INR 50 crore-INR 52 crore. That's a corporate overhead of INR 25 crore per quarter. When I look at that quarter INR 10 crore brand EBITDA, I would assume that corporate EBITDA would be five-odd crores.
When you are indicating that corporate EBITDA for Sri Lanka will not be more than INR 10 crore-INR 20 crores lower than last year, you are indicating INR 30 crores for full year, at least, and which means that you are assuming a, you know, significantly higher or rather, you know, in absolute terms the INR 10 crore or INR 6 crore you are expecting improvement. Are you seeing any improvement on the ground or you think that this political stability will gradually sort of, you know, translate into recovery, you know, or allow you to take more price increases to offset inflation, et cetera?
A bit of correction in those numbers, Jay. When you look at INR 5 crore corporate overhead last year, when you translate into Indian currency, even that translation would have dropped, right? [audio distortion] . Almost INR 3 crore. That's why the math, if you are estimating INR 10 crore restaurant EBITDA, the math says that it has to be in the range of INR 7-odd crore. That's why I said it should surpass INR 30-odd crore rupees for the current year. INR 7 crore not restaurant EBITDA. Yeah. You understood. Yeah.
Perfect. Second question is, this quarter we have seen very strong, you know, recovery or sequential performance or more or less full recovery in dine-in for all dine-in-centric QSR be it McDonald's, be it KFC. We witnessed some weakness in Jubilant's results versus expectation. To date on your channel mix it clearly indicates that, you know, Pizza Hut dine-in is 83% recovery versus 550 levels. We're seeing similar sort of trends for Pizza Hut or Biryani as well.
Do you think Pizza as a category, you know, this is a new normal where more or less all stores will settle at a lower footfall, settle at a lower dine-in, absolute sales than where it was earlier. If that is the case, so are you sort of, you know, are you getting that feeling, first for you? Give us some thoughts or insights there.
Not so at all, Jay. I mean, if I just look at some of our strong malls, I mean, if I just look at Bombay, Mumbai, and if I say, Infinity, Inorbit Vashi, Seawoods. Sorry, Seawoods we are not there. Some of these malls, our dine-in is back. In high street dine-in also is back. I think it's just a matter of time that we'll see full recovery on Pizza Hut also. It is in pockets where it has not recovered fully.
Karnataka still today it is not recovered or in quarter one, it's still not recovered fully. I think when we speak to other people, Bangalore from a retail perspective was still not, you know, back to pre-COVID levels. I think Pizza Hut, pizza as a category, we can't extrapolate it, at least for Pizza Hut run by Sapphire, not at all.
Understood. When you mentioned, you know, specific footfalls in Karnataka, Bangalore, some malls where, you know, seeing better recovery. When you talk to other brands, and Sanjay I'm sure you would, you don't manage KFC there or KFC Bangalore. But, is KFC recovery or let's say McDonald's recovery in those malls, those markets also lower than in suburban. Have you-
No
-uh, had a chance to-
I don't know that, Jay, because we don't run KFC in Karnataka, so I'm not able to comment on that.
Understood. My final question is for Vijay. Vijay, you did mention that first quarter EBITDA is typically average of full year. It's INR 72 crore, but if everything's been normal, should ideally mean you would do INR 285 crore-INR 288 crore of EBITDA further. Does that factor in, you know, the store additions that you also planned, or this is bare minimum and store additions to that will be more?
Jay, again, I would not get drawn into annual number over here, annual number guidance. I just try to give an indication on trend, how quarter one is and how quarter two, quarter three, quarter four. At Sapphire, we would always avoid giving a quarterly or annual number-based guidance. So that's for you to,
Does that trend take into consideration store addition? Is that right?
Jay, what I actually meant was percentage margins, right? Percentage margins of 13-odd% is what we said we were. It is typically an annual average. So you are drawing me into a conversation where how much is the absolute EBITDA considering the store additions. I'll not get drawn into that conversation, Jay.
Jay, plus, in any case, your model is so detailed that, you know, we might have to come to you to say what will happen to us in two years down the line.
You know, I was tempted to ask this question because I know you don't guide, but you were asking a question on ADS trend, and you yourself indicated EBITDA trend. I thought I might as well push my luck. Thank you so much.
Thank you, Jay. Appreciate your call.
Thank you. Thank you.
Thank you. The next question is from the line of Kapil Jagasia from Edelweiss Financial Services. Please go ahead.
Thank you for taking my question. First of all, congratulations for a great set of numbers because of the situation in Sri Lanka. Sir, my question pertains to the Sri Lanka situation only. If you know, let us know what would be the inflation for raw material cost in Sri Lanka, and like what would be the cumulative price hike taken by us in the current situation. And if I'm not wrong, you had mentioned something like 15% price hike even in the last quarter. Any more price hike even this quarter, the customer would be fine with both?
So roughly another 15%-16% price hike in quarter one FY 2023, whereas the inflation would be anywhere between 30%-40% for the quarter.
Okay. Cumulative inflation would impact be like if we look from the last 12 months perspective?
It would be upwards of 60-odd%.
Are we understanding like further price hikes or like are we like done for now if the situation remains the same?
Too volatile. The initial indications of July, August say that the things are improving, but too early to take a call either way. It's volatile. We'll just keep a watch how quarter two passes by. I think from quarter three onwards, we should be a bit more confident about how the situation goes and which direction.
Okay. Perfect. Thank you, sir. My next question is, if I look at the Pizza Hut India EBIT numbers for this quarter, it's at INR 61,000, and you know that's like FY 2019 levels. We have kind of, you know, reached those levels. But if I look at the Domino's number at around INR 84,000-85,000, we are about 30% away from reaching that. I'm sure, you know, with time we expect, we should reach those levels or even surpass it. Like what could be the two, three key initiatives that you would be taking out in nearer to medium term to improve this number?
I think one is plugging this gap in our product price portfolio. This forms a large portion of the overall pizza market, pizza under INR 100, and that has been one of our lacunae. Now, because it's important for us to when we launch something here to do it in a manner that is quite, you know, Pizza Hut. And therefore, from a product perspective also, we are known for superior products, so it has to deliver that kind of Pizza Hut product superiority. I think this launch is one important factor in, you know, us improving ADS.
I think apart from that, as we continue to get our execution right, improve our accessibility on the brand, so our product innovation at the top end, so both the San Francisco Style as well as the Momo Mia Pizza, all of them have done well. We've done a couple of pasta launches. I think the story on Pizza Hut continues to be strengthen the areas where we win, which is, you know, product and innovation and our dine-in omni-channel experience. On value. On our regular range, we have, you know, we are now competitive versus the principal competitor, and we have plugged one big gap in the portfolio. On delivery, we continue to hold and improve accessibility. So this is continuing to execute what we have called out on the brand, Kapil.
Just to add to that, Kapil, while you're saying bridging gap versus the number one competitor, I don't think we're in that particular race because again, the model allows us, our omni-channel allows us to deliver a higher profitability at lower ADS as well. So I've been talking about our new compact omni-channel model, which we have been opening since April 2018, which is already moving from mid-teens to high teens. In this model, if the ADS goes towards INR 70,000 as well, we can deliver a 20% kind of a profitability. So that's the power of that model. I'm not saying that we can deliver INR 70,000 tomorrow, but we don't have to reach the level of INR 80,000, to deliver that kind of profitability. This is because of our dining mix, which gives us higher profitability.
Okay. I'm sure, like, you would be spending a lot on A&P also, you know, to improve this number, like, so for, like, just so you know, a specific number, what the A&M plan would be for us this quarter at this stage?
6% of our revenue is towards marketing.
Okay. This is, like, significantly higher than the 5% last year, right?
It was always 6%. 5% goes to a national kitty, which Yum! would spend nationally on the brand, and 1% happens through a local sales marketing.
Okay. We are kind of, you know, looking to settle at that level. 6% can be like GOP related.
Can have a particular percentage. It's not either going down or going up at this level.
Okay. Sure. Thank you. Thank you so much for your time. I'll come back in the session. Thank you so much.
Thank you, Kapil. Bye.
Thank you. The next question is from the line of Krishnan Sambamoorthy from Motilal Oswal Institutional Equities. Please go ahead.
Yeah, hi, team. Are you surprised by the resilience of the takeaway channel, particularly for Pizza Hut, sustaining at 16% despite the recoveries that's happening on dine-in? What do you expect of this proportion to be going forward?
So while mix are good to look at, we don't really predict mix because what happens if there is one channel performing far superior to other channel, the mix can go up and down. What we look at is at what levels we are compared to the previous quarters or the previous years. Takeaway at 110%, I think we are comfortable at this level. From here, as the overall business grows with our Flavour Fun addition, I think the growth should come across all the three channels, and not just one channel versus the other, but difficult to comment on the mix.
I think we have to look at absolute ADS here, Krishnan. At 110% we have recovered perhaps slightly above FY 2020. That's the way to look at it.
My question was more from the perspective that, I would've thought that once dine-in comes back, COVID restrictions ease, there was an expectation that takeaway as a channel may decline, and it is still sustained at higher levels.
I think someone else also asked this question, and we have been consistently saying that dine-in will come back. When dine-in comes back, it'll overall add to the sales. We don't expect neither takeaway or delivery, which is really optimized consumption. Though takeaway someone is coming to our premises and ordering, they're still taking away and consuming it at home, and that component of our business continues to hold. It's just contributions here are less meaningful than how we have recovered from an absolute basis.
Got it. Thanks, Sanjay. Thanks, Vijay.
Thanks, Krishnan.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global Financial Services. Please go ahead.
Yes, sir. Thanks for the opportunity, and congratulations on a great set of numbers. I wanted to check with this filling of a key gap through Flavour Fun in Pizza Hut. Are we also revisiting our 7%-8% SSG guidance that we have provided for this brand?
No, we are not revising our guidance at this moment. Let's let it play out, Devanshu, and then we'll see.
Sure. [audio distortion]
We are very excited about this launch.
A successful traction here can actually bulk up our SSG. Is this the right way to look at it?
Yes. Potentially, yes.
Yes. Okay. You indicated that Q2 typically for KFC things are declining in ADS due to festive season. Can you sort of ballpark quantify what is the level of decline in Q2 ADS versus Q1 ADS?
First of all, I just want to explain this. This happens, you see, because our KFC is largely north and west, so we've got the Tamil Nadu also. When you look at us, we are perhaps impacted slightly more. We recover also equally fast, as soon as. For example, right now, Sawan ends in north today. From tomorrow onwards, people will do revenge KFC eating. For the short term, there is this drop that we see.
Can you quantify this ballpark based on historical trends?
So again, we don't want to get into specific quarterly numbers. What I can tell you is that at a restaurant EBITDA level, typically quarter two, we see 100-150 basis points kind of a drop at a KFC level due to seasonality factor. Again, depends upon where the Navaratri are and which quarter it is falling. Sometimes it falls in quarter two versus quarter three. Partially it falls in quarter two versus quarter three, and the same recovery happens in quarter three. Internally, the way we look at is quarter two, quarter three combined.
The quarter two, quarter three combined gives us an annual average for us. Again, this year the Navaratri starts from last week of September, so again we'll have the last week of September Navaratri impact. Difficult to predict quarter-on-quarter, but that's the range we see an impact at a restaurant EBITDA margin level.
Got it. Vijay took a certain impairment charge for Sri Lanka operations in this quarter. Although it was a non-cash charge, but just wanted to check, do you also foresee any such impairments for Sri Lanka operations?
So again, at least not at this point in time, because we continue to deliver our Lanka numbers in LKR terms. The business continues to grow over there. Even in the current quarter, in LKR terms we have actually grown our profitability. Again, for the full year, if we are able to deliver the same number as last year or marginally grow our EBITDA in absolute terms, I don't think it will require to take an impairment charge. Again, the situation needs to be monitored quarter on quarter.
Sure. And lastly, what is the CapEx inflation that you are seeing, both for India and Sri Lanka operations?
Sorry, come again.
CapEx inflation.
Sorry, come again.
What is the CapEx inflation that you are seeing both for India and Sri Lanka businesses?
For India business, we have seen inflation in the range of anywhere between 7%-8% on both the brands. Sri Lanka, this is in the range of 15%-20% CapEx inflation.
Sure, sir. That's actually helpful to get it from there.
Thanks. Thanks very much.
Thank you. The next question is from the line of Tejash Shah from Spark Capital. Please go ahead.
Hi. Thanks for the opportunity. A couple of questions from my side. First on ADS recovery, it has been heartening in both the brands. But inflation has also a decent role to play in ADS numbers for the in-store as well also. Just wanted to know in terms of volume, where are we tracking versus pre-COVID number in terms of central cash if you track. I'm sure you must be tracking it at the company level. Giving any qualitative comments also on that.
Yeah. I don't know the immediate numbers from an ADT perspective, but I can explain to you ADT versus quarter one of last year. ADT and ADS are in the same trajectory.
In fact, our ADT has grown faster than our ADS.
Yes.
Both the brands in India, we have grown transactions higher than the SSSG growth. That's
As compared to last year.
That's heartening for us.
Okay. Any inflation versus pre-COVID or one tiered currently?
From a transition point of view, see the recovery in case of KFC is just about 100%, and we have taken a price increase, so in terms of transition we will be trending below pre-COVID levels. Same thing would be for Pizza Hut, because we have taken a 5% price increase even in case of Pizza Hut as well.
Second question is, you spoke about how we have actually filled the gap in our portfolio. Just wanted to understand when you go about menu innovation, it's always difficult to manage the conflicting objective of managing gross margin at that particular offering levels and also obviously filling the gap in white space in the portfolio. So how do you go about it? Is it that each product, each launch, matches certain gross margin thresholds, or you play it at a very portfolio level and perhaps not at gross level, but if EBITDA level it kind of compensates the margins?
I mean, it's a combination of both. Each launch, you have to individually measure the gross margin for each launch as well, and then you have to predict that what kind of mix it would turn out. That's why we do pilots in various states before we actually do a national launch. So that's at an individual level. Again at an overall level, not just the new product launches, if you see, then even inflation has impacted us in quarter one. The idea is to keep an eye on the ADS and the throughput.
With the dining recovery happening, it has added to the overall revenue of a particular store, which gives us a huge operating leverage in terms of the cost management, which allows us to deliver an expanded restaurant EBITDA margin in spite of dropping gross margins.
So this particular category which we have launched, Flavour Fun, we don't expect a material impact on our gross margin levels. It would definitely have some marginal impact, but not a material impact. Whatever impact it has, we expect it to get more than compensated by the throughput it will add to the store and thereby give us actually an expansion in the restaurant EBITDA margin.
Sure. Vijay, you made an interesting comment that the new format allows us to play this portfolio game. Does it mean that some of these offerings are more profitable in delivery versus dine-in and hence now with the variety of value proposition that we have, we can experiment much with the margins of the offerings?
No, that's not what Vijay meant. What Vijay said was because of a strong dine-in contribution in an omni-channel format versus if you are dependent purely on delivery or largely on delivery, omni-channel restaurant at slightly lower levels of ADS also potentially can deliver similar profitability at a restaurant level to the market leader. I think that's the point that Vijay was making.
Okay. I'm clear. Thanks, and all the best.
Thank you very much.
Thank you.
Thank you. This is the last question from the line of Amnish Aggarwal from Prabhudas Lilladher. Please go ahead.
Yeah. We can go up to 5:45. Yeah. We'll take a few more questions after this. Please, Amnish.
Yeah. Hi, sir. I have a question mainly on the, your new launch, which is, your Flavour Fun pizza. The question I have is that how is our product or what is the difference between our product vis-à-vis the Pizza Mania, which Domino's is, selling from past so many years? That is one. The second part is in terms of quality, like, Pizza Mania usually it's said that it is not having mozzarella cheese or cheese sauce. Is our product different from that? And third is what percentage of the total pizza market, your, is in the less than INR 100 or you can say these kinds of products? This is my question.
So I don't know about the competitor's product. I'll just tell you what Flavour Fun is all about. We didn't look at competition specifically and try to match their product, nothing. What we did was if we had to have a pizza under 100 INR, what is the kind of offering that a consumer would love from a Pizza Hut? So therefore, we've got five different sauces. We've got a cheesy dressing. So you're right, it's not mozzarella cheese. It's a cheesy dressing. We've got 12 different pizzas with different toppings. I think, I mean, if you have the product, like I said, you'll understand as to. Each pizza also has two toppings at a, you know, at a bare minimum.
So this is the product that we have launched. Roughly, I would think that, don't hold me to these numbers, Amnish, because we are looking at unorganized sector also. In many of the markets that we operate, there is an unorganized pizza market also. I would think in a value perspective, value sense, this would be anywhere between 20% and 25% and 35% of the market. I'm talking of, like I said, there are markets where there are small local players. Even there is an opportunity for Pizza Hut to play.
Okay. That's very useful. Thanks a lot. That was my only question.
Yeah. I'm inviting you again, Amnish, to go and try out the product. It's sensational.
Yeah, yeah. Sure, sir. Sure.
Mr. Aggarwal, does that answer your question?
Yeah, yeah.
Thank you. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Sir, can you give some idea on Sri Lanka, given the macro disruption, how many stores are we planning to add this year on a net basis?
So again, we are not giving Percy annual guidance. We said, when we had 550 restaurants across the three verticals, we said we'll double it over three-four years. We are holding on to that guidance. This year we don't want to give out a specific number, but hopefully double-digit number even this year.
Okay. For KFC and Pizza Hut, you're not giving an annual guidance for the Indian addition?
No, none of the businesses.
None of the businesses we give annual guidance.
So again, three-four years we'll double the count, and I think we're on track for that particular.
Okay. I just wanted to ask, your store openings, this quarter, they should not be treated as a run rate for the annual number, right?
No, Percy, you are asking the same three.
Same question.
... three different ways, but I'm not giving you annual number. 550 restaurants as of 31st December across the three verticals. We'll double it over three-four years.
Okay, sir. Thank you.
Thank you. The next question is from the line of Srinivas Aiyar from Rockfort Consultancy. Please go ahead.
Yeah. Good evening, and congratulations on excellent numbers. My question, you have already answered to a few companies. Again, I will ask you, in Q2 last year, we opened the 68th store. Why have you slowed down?
Mr. Aiyar, could you please use the handset mode. The audio is not clear from your line.
Okay. Am I audible now?
Please go ahead.
Yeah. In Q2 last year, we opened 68 stores. Why have you slowed down and you opened only 37 in this quarter?
Srinivas , we said this that it's not a quarter-by-quarter number that we are putting out there. We are saying the 550 restaurants at the end of December, we will double that in three-four years' time. I think we have spoken enough now about quarter-to-quarter performance. The 68-37, again, is a comparison that is really not what we want to get into. We are still holding on exactly what Vijay Jain talked about. And I think you can make your inferences from that, is my submission.
Again, just to add to that, Srinivas, you cannot really deliver exact number of numbers divide by four in each quarter. So you will have quarter which will have a lower number, a quarter which will have a higher number. Largely, we should be able to hold on to the number annually and over a three-four year period.
Okay, understood. Second question. Compared to other QSR stores or QSR company, we are at a significant discount. What is your plan to address this issue?
You are the person who will tell us why we are at a discount. All that we can do is stay focused on our business. We are focused on our business. I've said this earlier also, I don't look at the share price on a day-to-day basis. I think people will understand our story and, you know, our, the way that we execute. So that's it, Srinivas. Once you put out a buy order on the, you know, on the stock, perhaps it will. I'm just joking, Srinivas. Yeah. I think we are just focused on the business and to do well here. That's it. That's only thing that we can do. Yeah.
I'm just saying from an in the interest of time perspective, perhaps we'll try and close this conference call. Anyone wishing to understand more, you know our channels. Rahul is our Head of Investor Relations, and he'll help any of you all understand any specific things. Again, I want to reiterate, we've had a really strong quarter in Sri Lanka. While we have grown well from a Lankan rupee perspective, translated into Indian currency, you know, we have dropped. We believe that we should be able to hold on to this absolute level as we move forward. But both KFC and Pizza Hut has had a very strong quarter.
We've overall from a sales, revenue, restaurant EBITDA perspective, from the outlook on brands, we are very, very positive and confident about the future going ahead. So thank you all for joining in on the call. I appreciate your patience and your efforts in understanding our business. Thank you.
Thank you.
Thank you. Ladies and gentlemen, on behalf of Sapphire Foods India Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.