Ladies and gentlemen, good day and welcome to the Sapphire Foods Q4 and full year FY2025 earnings conference call hosted by Vogabe Advisors. 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 this conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay from Sapphire Foods. Thank you, and over to you, sir.
Welcome to Sapphire Foods Quarter four and financial year 2025 consolidated financial highlights. I'm joined by my colleague, Vijay Jain, CFO. First, a quick briefing on the full year performance highlights. In what was a difficult year, we still delivered double-digit restaurant count and restaurant growth. The number of restaurants grew at 10%. We added 91 restaurants during the year to close at 963 restaurants. Our sales grew at 11%. Adjusted EBITDA declined by 4% in the entire year. KFC, for the full year, was at negative 4% SSSG. With negative 4% SSSG, we opened with our store openings, we delivered a double-digit revenue growth of 11%. Despite the negative SSSG and the operating deleverage as a result, still our EBITDA margins were healthy at 17.3%. We crossed a significant milestone of 500 restaurants during the year, thereby doubling our count over three years.
Pizza Hut had very good three quarters from April to December, and then we slid back in the fourth quarter, which we'll talk about a little later. We ended the year at -1% SSSG, and the quarter we were +1% SSSG. Sri Lanka had a very strong turnaround in the full year. We grew revenue in healthcare terms by 14%, and restaurant EBITDA margins were healthy at 15.4%, first time in three years that we have been able to clock about 15% restaurant EBITDA. We were rated the number one QSR in India for the second consecutive year on the Dow Jones Sustainability Index. It is a big achievement for the organization. In the recent Yum! Global Franchisee Convention, we were recognized as the world's top four Pizza Hut Franchisee.
Among thousands of franchisees, we were rated as "World's Top Four Pizza Hut Franchisee", "The World's Best Pizza Hut Franchisee" for people practices. Finally, the big award was that of the "World's Best KFC Franchisee". These awards mean a lot. As I said, many years ago, we aspired to be India's best restaurant operator. Certainly, we are among the top one to best global Yum! franchisees, certainly. Quickly, the quarter four highlights, we delivered a revenue of INR 710 crores, 13% growth, led by KFC, Indian Pizza Hut, Sri Lanka. We added six KFC restaurants and took our total count to 963 as of 31st March 2005 also. Consolidated restaurant EBITDA decreased 1% year-on-year, and margin was at 12%. Adjusted EBITDA of INR 50.8 crores was a 7% decline year-on-year, and our adjusted EBITDA margin was 7.2%.
Console EBITDA was 16% or INR 113 crores and increased year-on-year by 3%. Console PAT was INR 2 crores or 0.3%. Adjusted PAT was INR 3.3 crores or 0.5%. Let me now take you to the KFC slide. In quarter four, our SSSG trajectory was continued to improve versus the last previous two quarters. However, on the base of last year, where we had declined in terms of SSSG, our delivery mix continued to increase vis-à-vis Dine In and Take Away. Our big campaign for the quarter was to focus on what we call new consumers of KFC, and it centered around our epic core variety campaign with also value around our core offerings being called out. This is the going forward focus of the brand. How do we represent our core variety to consumers with value? Chicken bucket, Zinger burger, boneless chicken, and roll.
Apart from this, the other positive of the quarter was our own delivery business after two or three years of being stable or slight decline, actually improved and had the greater SSSG uplift in this quarter versus even the aggregator channel. It is still a small part of our business. The drop in ADS that you see from a quarter-to-quarter basis really reflects new store and some amount of seasonal movement from quarter three to quarter four. The brand priorities are quite clear. This is the slide number 21, and this is something that I have spoken about earlier. We have launched a premium burger called KFC Gold. Apart from being the premium burger, it has also been launched in our popcorn and in our boneless range. It is really a lot of sauces and a lot of dips that are very popular with the younger generation.
On slide number 23, you can see our emphasis on boneless that we are trying to drive. Kiosks continue to be digital kiosks continue to be rolled out. Now we've implemented in about 238 restaurants. Over to Vijay for the financial numbers.
I'm on slide number 26, which presents general-wide sales contribution. Dining plus takeaway came at 57%, and the delivery was at 43%. Sanjay mentioned about our own delivery growth. Our own platform growth was 3x the growth which we experienced on aggregator platform. That was a big positive for us. In terms of SSSG, the trend continued to improve. We were at minus 1%, and overall revenue grew by 12% on back of 73 restaurant additions which we had in last one year. Gross margin dropped marginally. However, restaurant EBITDA dropped to 15.7%. This was a result of operating deal leverage, lower ADS which we experienced in Q4 compared to Q3, and higher delivery mix. Slide number 29 shows four-year trend.
Clearly seen that despite two challenging years now, back-to-back two challenging years in terms of SSSG, brand has still delivered a healthy bit of 17.3% in the last financial year.
Let me now take you through Pizza Hut, and I'm referring to slide number 31 in our deck. Our six pillars of the Pizza Hut strategy continue, as articulated earlier, to drive taste superiority through pizza and sides innovation, differentiated dine-in experience like casual dine-in restaurants, and a hot and fresh delivery experience. We should offer competitive value for money, mass media advertising to drive consumer awareness and consideration, and be cautious in terms of store expansion. This strategy actually resulted in improved performance in the nine months between April and December 2024, when our ADS moved from INR 41,000 to INR 48,000. However, starting JFM quarter or quarter four, we have not been able to invest in mass media advertising, and that's resulted in an impact on our transactions.
That is really arising out of a difference of view between two franchisees, between us and our sister franchisee, with respect to marketing strategy and the additional investment that we have been doing from April to December behind mass media advertising. Now, while Yum! is aligned with investing similar to us, the difference in opinion has meant that we have not been able to advertise in markets which are common markets. We still spent money, but we spent money below the line, and that below-the-line advertising was not as effective. We believe that this difference we should be able to resolve in the next couple of months. Having said that, one of the pillars of our strategy was a continuous innovation pipeline.
In accordance with that strategic pillar, we've had a really exciting refresh of our core pizzas, which is the Juicy licious Pizza that we launched in April 25. Now, while we are not able to do mass media advertising in parts of our market, which are common markets between us and our sister franchise, at least in Tamil Nadu, which is a Sapphire exclusive market, we'll be going behind mass media advertising, and then we'll spend money on below-the-line and other markets. Clearly, we see that Tamil Nadu is driving differential performance versus the rest of the market because consumers are being aware of this range before they come, and that's pushing them to come to our stores, and that's driving transactions.
Whereas in other markets, without the help of mass media advertising, we're not able to address new consumers and not able to tell them about this innovation. Like I said, we expect this to get resolved in a couple of quarters, and we'll see it play out. You can see the pictures of Juicylicious Pizza on slide number 33. We'll get Vijay to talk about the financial numbers.
Slide number 36, general-wide sales contribution. Dining-in takeaway mix at 48% and delivery at 52%, in line with the previous quarter. In terms of SSSG, positive SSSG of 1% for the quarter. However, the ADS dropped to INR 42,000, and overall revenue grew by 5%. Gross margin dropped by 70 basis points, and on back of the increased value and promotional offerings, this combined with low ADS meant that this combined with low ADS and increased marketing spends, although below the line, but we continue to spend behind additional marketing as well, meant that the restaurant EBITDA was impacted, which came in at 4.6% negative. Slide number 39 gives four-year trend.
The gains made in the first nine months of the last financial year, where we were able to clock INR 48,000 ADS and hit 5% profitability, clearly has been eroded in quarter four due to the pull-out of mass media campaign. As mentioned by Sanjay, we'll need a slightly longer horizon on the brand. Once we are able to resolve this in the next couple of quarters, we are sure we'll be again back on the path of recovery for the brand.
Quick update on Sri Lanka. Quarter four has capped a year of a very impressive turnaround for the Sri Lanka business. We have grown SSSG and TG double-digit, and restaurant EBITDA has crossed 15% after two years of coming well below 15%. From a new launches perspective, we continue to support melts has come out in a single form. We have introduced some really good fries. We opened one store in Indiramulla. For the numbers, over to Vijay.
Slide number 43, dining and takeaway mix at 62%, similar to previous two quarters. The SSSG was 16% backed by a double-digit transaction growth. Overall revenue grew by 19% in LKR terms and 31% in INR terms. Gross margin dropped. However, restaurant EBITDA improved by 250 basis points year-on-year and came in at 14.8%. Slide number 47, which gives a four-year trend. Clearly seen the business has made a strong comeback and has delivered the highest restaurant EBITDA margin in the last three years at 15.4%.
That's the update for the quarter. It's been a difficult quarter, especially on Pizza Hut, but we expect that we believe that the strategy still is the right strategy to pursue, and we will sort the differences in opinion that we have. The good part is that Yum! is aligned on what we plan to do, and we should see an uptick in performance in the coming months to quarter. I'll stop here now and open this to question.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchstone 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.
We can start, Harshad, with Vidisha from Ambit Capital.
The first question is from the line of Vidisha Set from Ambit Capital. Please go ahead.
Hi, good evening, team. I hope I'm audible. My first question was if you can give some color on the broader demand scenario, and specifically on KFC SSG, although the momentum of SSG has improved, it's still in the negative territory. If you could comment on whether, with the high single-digit decline in the base, is it logical to assume that SSG would turn positive in the first half of FY 2026?
Yeah, so the demand situation continues to be neutral. It's not improved, or it has not worsened over the last three or four quarters. It's still a tight demand situation. Then coupled with heightened competitive pressures has meant that growth has been difficult to come by. You are seeing - 1% SSSG in quarter four on the back of, I think, again, very low single-digits the previous year. As we move forward, certainly we'll see a more stable SSSG, but it is on the back of earlier low SSSG quarters.
Understood.
The current trend is flatish SSSG. That's the current trend which we are experiencing.
Got it. Got it. Right there. The second question was on a commentary on Pizza Hut. You've talked about the longer horizon required in terms of surviving the brand. Is the visibility on even early double-digit margins deferred, given that attaining the INR 50,000-INR 55,000 ADS threshold would be difficult in the medium term? Basically, how should one think of margins when it comes to Pizza Hut? Those were the two questions for myself. Thanks.
I think you've got the intention right that once we move towards INR 55,000 ADS, that's when we'll deliver double-digits. We were expecting in a scenario when all of us were aligned, we would have expected this to happen between 12 and 18 months. I think perhaps that has got extended a bit.
In the immediate scenario, when I look at the coming year, I think it would still be rangebound to a flatish kind of low single-digit restaurant EBITDA, which we experienced last year. Because the first step would be then how do we get the momentum back from that INR 41,000-INR 42,000 level, very INR 42,000 level? It's the same place where we were probably a year ago. So it's the same journey we have to start again. In the next 12 months, I don't see this EBITDA moving beyond the low single-digit number.
Thank you for your answers. I'll get back to the queue for follow-up.
Thank you, Vidisha.
Thank you. The next question is from the line of Gaurav Jogani from JM Financial. Please go ahead.
Thank you for the opportunity, sir. My first question is with regards to the network addition guidance. In the current week in the environment scenario, if you can help us, how are you looking to now alter the store leadership both in the KFC and the Pizza Hut format?
I think that last guidance still stands. In the previous quarter call, we said KFC, we can look at opening 70-80 stores or anywhere between 60-80 stores. That guidance still stands. And that's a medium-term guidance, not just for this particular year. I think we can continue to add 60-80 stores. For Pizza Hut, we said our external expansion strategy will be extremely cautious, and that's what we continue to follow. So we do not see additions which are, let's say, beyond 20-25 stores in a year max.
Would this be the net addition or the gross addition that you would be guiding?
These are net additions.
Net additions.
Sure.
The next question is with regards to KFC margins. We have been doing a very resilient performance when it is coming to the margins. Despite that ADS remaining where it is, still the 17.5% margin is recommended. Now, I just wanted to take your sense that given the environment, as you mentioned, this is where it is right now, what kind of margins can we expect in the next 12-18 months going ahead?
I think holding on to the current level margins would be a good achievement. For holding the current level margins, we will require some SSSG, even if it means low single-digit SSSG. I think that's what our immediate task would be to get back into positive SSSG territory. Currently, we are experiencing flatish, but as we move into a territory which is positive SSSG, holding these margins would be important. I think the near-term 12 to 18 months guidance would be that.
Just to follow up here, I mean, given that I'm assuming that you would have peaked your cost structures, which would have helped you to achieve this kind of a margin despite the lower ADS, won't experiencing a better ADS then flow through the margins and then improve the margins slightly going ahead?
If we start getting SSSGs of 5% and plus, then definitely we can see improvement in margins. It is all linked to the SSSG. I said that if we are experiencing flatish and maybe even low single-digit, if we are getting a low single-digit, we should be able to hold margins. If we are able to get beyond 5%-6%, we should be able to improve margins as well.
Just this last question from my end on KFC only. If you can highlight what really is the problem that you're facing with the KFC franchise? I mean, is it the macro slowdown which is impacting the business here? Is it competition, or is it something else that is taking longer than expected for the brand to recover?
I think it's a combination of macros, a combination of also competitive intensity. I don't think we were expecting in the coming financial year because of tax swaps and inflation reducing, we are expecting discretionary spends to increase. However, quarter four, the earlier trend continued, and that's reflected really in the SSSGs that we saw, and hence in the EBITDA margins.
Okay. Okay. If I summarize it right, you're saying that it's a combination of slowdown and the competitive intensity, which is kind of leading to this slowdown. You're still hopeful that these tax swaps and inflation should reduce inflation rather than should help to drive the demand improvement going ahead?
Correctly captured.
Sure. Thank you for this.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please limit your questions to two per participant. The next question is from the line of Saurabh from Goldman Sachs. Please go ahead.
Yeah. Thank you very much for the opportunity. My question is on the comment made earlier by Sanjay that you're confident that in the next one to two months, this sense of opinion in Pizza Hut will be resolved. Just wanted to ask what gives you the confidence that in the next one to two months, you will resolve that difference with the sister franchise?
No, I never said one to two months. I said in the coming months, and it might take one to two quarters rather than one to two months.
All right.
I guess what gives us the confidence is the fact that the difference of opinion really stems from our belief whether spending on or investing behind mass media advertising is resulting in increased transactions or not. We have certainly seen that joy. If there are questions in someone else's mind on that, that is perfectly all right. I think the only way to do that is through data and through actually proving that this can work. Therefore, we continue to invest behind mass media advertising in Tamil Nadu, which is a Sapphire exclusive territory. Being able to showcase differential performance there should convince everyone that this indeed is the right strategy to adopt. Therefore, perhaps let's look at internal execution and see what can we do to actually capture the additional footfall that this can offer us.
Understood. Understood. My second question is on the CapEx number. I'm just looking at the cash flow statement. It appears that simply on a net store addition basis, which is again close to INR 3 crores per store, I'm taking on net basis. Now, can that trend be expected to continue, or were there any extra investments this year other than store additions?
Again, I don't think that's the right way to look at it. Even if I look at the net stores, we would have added roughly 100+ stores this year, including our Lanka. If I remember the number correctly, I think it's INR 265-odd crore, which is reflected in the cash flow. Even if you do the math on a gross basis, which is over a year, it does not touch INR 3 crore. Let me just clarify that. I think that the number consists of multiple things, not just new store additions. It also consists of the refurbishment of old stores, which have completed 5 years or 10 years. It also consists of tech investments as well. There are a lot of components to it.
If I come down to the breakup in terms of the new store, the KFC is still in the range of INR 2.1 crore for KFC, and Pizza Hut is in the range of INR 1.35 crore per store.
All right. Thank you very much.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Globa l. Please go ahead.
Hi. Thanks for the opportunity. Sir, a question on KFC. Q1 typically is the strongest quarter, with the last three quarters having some days where the consumption is weaker. This time around, it was also preponed to Q4, where I am suspecting that consumption may be lower. We have a relatively cleaner Q1 this time around versus last year. How should we read this flat SSSG? Is there actually some demand improvement happening, or has it further worsened in April so far?
Sure. Again, April is April, we had Navratra this year. On top of that, the flat SSSG really says that there's no material improvement or deterioration in the demand conditions. That's all that it says. It's really too early. May, June, are in the quarters, the better months. It's too early to comment on May.
Understood. Sir, we are sustaining with this FA campaign for KFC, which was launched last quarter also. What are the key benefits that we have gained during Q4, and what are the expectations from this campaign going ahead?
The campaign is really focusing on the variety that we offer in our core range. Through that, we expect to get more consumers who are aware of the brand but have not tried the brand to come into our stores. That we have identified over the medium term as the biggest opportunity on KFC, increasing consumer penetration, while continuing to hold on to brand loyalty. That is what really this campaign is aiming to do. This is not going to happen in one or two campaigns and one or two quarters, and we should sustain the intensity and the thought behind this idea that we present our variety in core and offer great value on core to pull new consumers in. This is the intention. You will see this continue for over a period of time.
In terms of the benefit, we have definitely seen transaction improvement. While our SSSG was negative in H1 of last year, our transactions were also negative. What we did experience in the last two quarters of last year, which is H2, is that the decline in transactions was definitely lower than the decline in the overall revenue for the same stores. Definitely, the focus on the value has helped us arrest the transaction decline. Now we're largely neutral on the transactions. Hopefully, from here, we can grow the transactions as well.
Understood.
Sir, last question from my end.
Sorry to interrupt you, sir, but I may request you to rejoin the question queue.
Sure. No issues.
Thank you. The next question is from the line of Ashish Kumar from Infinity Alternatives. Please go ahead.
Thank you, sir, and congratulations for a decent set of numbers in a very tough environment. Sir, a couple of things which I wanted to understand that given the fact that Pizza Hut as a brand is changing, seeing some challenges, are we looking to add more brands to our repertoire? Secondly, sir, when I'm seeing the percentage of delivery from Dine In, even for KFC, it's down to 30%, and it's constantly declining. Is a pure takeaway or a pure cloud kitchen concept something which you might want to think about for some part of time?
The second question pertains to Pizza Hut or KFC or both?
Both. Pizza Hut is at 26%. Basically, our business is starting to become more and more takeaway business.
Okay. Let me just take it one by one. On multi-brand retail strategy, we have always called out that our people, tech, process investments over the years are in a way to handle multiple brands. While we believe both KFC and Pizza Hut has a multi-decade runway, we would love to add a third brand at some point in time. However, the parameters and the benchmarks which you have laid out are quite high so that we do not end up wasting resources and the bandwidth behind a third brand, which becomes inconsequential. The two key elements are that it has to be scalable or a scaled brand which can give us success. We are only interested in success at scale. Anything which is either of the two stuff is missing, we will not be too keen to adopt that third brand or acquire that third brand.
To identify whether a brand can be successful at scale, we have called out seven specific filters or seven Sapphire Mantras. I'll not go into the details right now. You can refer to the annual report, or we can have a separate conversation. Each of those seven parameters are key for us to ensure that we achieve success at scale. That is the view on the third brand. On the second part, to do a takeaway or a cloud kitchen, we have always called out two things. First, from a brand or customer proposition, and especially this works in the case of Pizza Hut, we want to be different compared to the number one brand. I think that the positioning of just a delivery brand is taken by somebody else.
If we have to be relevant number two in the long run, we need to offer a point of view of difference. Hence, a dining-forward omnichannel strategy, I think, works best for us in the long run. While currently we are seeing challenges on the brand, I'm sure by having a differentiated positioning, it will help us come out stronger or emerge stronger in the long run. That is first on the customer perspective. Second, from a financial perspective, even if you look at a cloud kitchen or a takeaway, we do not think the economics works clearly because 70% of our CapEx goes into the back of house, which is kitchen. Your delivery takeaway component, let's say, is today 50%. Profitability in those channels is lower compared to dining profitability. The economics does not work as far as we believe. No, the answer is no.
We'll continue with our dining-forward omnichannel strategy on both the brands.
Okay. Thanks a lot.
Thank you. The next question is from the line of Tejas Shah from Avendus Spark. Please go ahead.
Hi. Thanks for the opportunity. Sir, I just wanted to understand if you had to break down the slowdown across footfalls, conversion rates, bill cuts, and ticket size, where are you seeing the highest pressure in terms of consumer sentiment?
Sorry, Tejas is not able to understand your question because his voice broke. Can you just repeat it?
Sure. I was just looking further down on the slowdown or consumer sentiment. I'm seeing the max pressure. Is it that footfalls have been compromised, conversion rates, or they are coming and they are not actually consuming more in terms of ticket size or bill cuts?
Footfalls more than anything else. APC is all right. Dining footfalls, especially, have been challenging. Delivery, while it's growing, is not really growing to the extent that it used to also.
Okay. Thank you. Second, if I heard you correctly, we—
Sorry to interrupt you, sir, but if you're connected to your headset, then you may please switch to your handset as your voice is breaking.
Is this better?
Yes, sir.
Go ahead and we will find out. Figure out, Tejas. Go ahead.
Yeah. Sure. I'll give it a try. Yeah. So I just wanted to know, Sir, from your commentary, do you believe that the split franchise ownership structure in India is somewhat limiting our ability to drive any targeted payment interventions to reliable SSGs and sentiment?
Sir, it's not ideal, but that is how it is. We have lived with it for seven, eight years. I think we can still deliver good outcomes even with a structure like this.
Those were relatively easier times. That's why I'm wondering now when times are challenging in terms of consumer sentiment across, not only for us, but other basketed large also.
To be fair, when we took over the brand, both the brands were just—I do not think the numbers were easy then. If I remember correctly, KFC was low single, 7-8% restaurant EBITDA. Pizza Hut was still 5-6%. Even those were tough times. I think we have been able to negotiate, navigate quite well through the situation. We are confident that even right now, we are hopeful of solution, and we will be able to navigate through the situation as well.
All the team found great joy in this strategy. Someone else might have found a little less joy. I think the only way to—fundamentally, there is no major misalignment. It is how one wants to spend money. We believe that this still is the best way to go forward.
As we continue to spend in our exclusive market, this will play out over the next couple of months.
Next couple of quarters.
Perfect. Perfect. If I may squeeze in one more.
Please.
Regarding the—
Sorry to interrupt you, sir, but I may request you to rejoin the question queue for follow-up questions.
Thanks.
Thank you. The next question is from the line of Aditya from JP Morgan. Please go ahead.
Hi, sir. Thank you for the opportunity. My first question is on the delivery channel for KFC. It was good to hear that your own channel grew much faster than the 3P aggregators. It would be great if you could highlight what will be the contribution of your own channel to either the overall revenue of KFC or to the delivery revenue. As an extension to the last question as well, how do you think about scaling up the own delivery channel? Is there any misalignment in that strategy versus either Yum! India or versus your sister franchise? Thanks.
The contribution of our own channel is still small. It is closer to now double-digit 10%, I would say, for KFC. I think that is a similar number for Pizza Hut as well. That is the first part of your question. The second part, I was not very clear on the query. You were talking about whether there is any misalignment on the own channel delivery strategy between us and anybody else. That is what you were referring to?
Yeah. Do you want to scale it up aggressively? How important is this for you?
Own channel has always been a very important focus for us over the years. While the results would not have been there because no matter whatever we do, I think the aggregator channel grew considerably faster compared to us. During those times, our own channel also performed very well. Yes, the aggregator channel performed much better. Especially, of course, with the kind of money and the horizontal play, sometimes could be a tough one to beat. It has always been an area of focus. We have been always investing behind the app, as well as a lot of product or promotional offers are sometimes unique to our own app. Those measures have always been there previously, and we continue to work on the similar means going forward as well.
Thanks. My second question is a bookkeeping question on the depreciation charge. It was lower sequentially and year-on-year this quarter. Is it because of accelerated depreciation because you had some store closures for Pizza Hut? And do we expect it to revert to the Q3 rendered in the next quarter?
The depreciation charge was lower, right? That charge was lower because we had reversals on some of the—this is now post-India accounting. It could be difficult probably to understand over a call. I'll try it. When you do a post-India accounting, you basically book higher amount during the initial period of lease under depreciation and the finance cost. If there are store closures or you have taken a provision for store closures, those provisions get reversed. What we have seen is the benefit of some reversals coming in this particular quarter. You are right. We will go back to the earlier quarter trend. All right? We'll go back to the earlier quarter trend.
Thanks. That was very clear. I have a few more questions, but I'll come back on the queue.
Yep.
Thank you. The next question is from the line of Subhrata Sarkar from Mount Intra Finance. Please go ahead. Mr. Subhrata, please go ahead.
Hello.
Yes, sir. Go ahead.
Yeah. My question is more so from an industry perspective. We have observed the emergence or development of this industry in other Western countries. Particularly this Western QSR, what is our observation? If consumption generally goes up, at what rate to that of a, let's say, premiumization or increasing the per capita income? Is there any study when we move to, let's say, $2,500 to $5,000 per capita bracket? What is the elasticity of QSR generally to that of the income?
I'll try and answer the question to the best of our understanding. $2,500 to when it moves towards $3,000 per capita income, that's the time when we see exponential growth in the QSR industry. That's what we observed across the various economies. That's one parameter which is on per capita income. Especially in the case of KFC, there's another angle which is the protein consumption increase. We have seen that, especially in Asian economies, where chicken is a preferred source of protein compared to Western economies where beef is more preferred. That's another angle which is headwind or not headwind, tailwind, which actually helps us as the per capita income grows, the protein consumption also grows. For a QSR which operates in a chicken segment, KFC, this is another area which helps grow the number of restaurant counts and the brands faster.
These are the two angles which we have seen in some of the Asian economies, especially.
Okay. Sir, again, your thought on that. Let's say the way we derive this kind of analysis, do you think that the market which we have observed, let's say, in developing countries, like that discretionary consumption bucket, and right now the discretionary consumption bucket which India will experience, is there a change in that? The way it was at that point of time, the discretionary consumption out of that QSR used to get one of the primary consumption was increasing QSR. Is it still relevant in today's context? I think I'm clear with my question.
Not too clear. I'll still give it a shot. Discretionary income is always a component which our industry, like ours, is dependent on. As the per capita income goes, that's the bucket of the consumer which grows faster. That's where we tend to benefit and grow faster along with it.
Can you reframe my question? Maybe it will help you. What I mean to say, let's say 20 years back or 25 years back, let's say 30 years back, when you observed the increase in per capita income and because of that lead to a higher discretionary expenditure and QSR gets one of the prime share of that. My only question is, does assumption hold good with the increase in per capita income? Discretionary expenditure will go up. My only point to understand from you, the way QSR was relevant in terms as one of the components of discretionary expenditure, does it still hold good in terms of share of discretionary consumption, QSR expenditure? Or there are other expenditures which will now become more relevant in the bucket of discretionary consumption, and that's why QSR growth may get hampered?
I don't think we have done such detailed analysis of one category versus another category. I'm saying in general, when we observe the correlation of per capita income and eating out occasions, you find, as Vijay was saying, that once you go above a certain threshold, there is exponential growth that starts to happen. I think we should just leave it at that for the moment.
Subhrata, maybe we can connect offline again so that we can understand your query better as well.
Okay, sir. No issue, sir. No issue.
Thank you so much, Subhrata.
Okay.
Thank you. The next question is from the line of Saurabh Kundan from Goldman Sachs. Please go ahead.
Thank you for the opportunity to ask a question again. I just wanted to double-check that we have generated positive free cash this year, right? If I'm not mistaken.
Yes.
Okay. I mean, and this should continue, I believe, because margins, let's say, even at a low single SSSG margins, you said will be more or less stable. Your CapEx requirements are only coming down because you're adding fewer stores than last year. Free cash generation should continue into the next year at least also, right?
Currently, our CapEx and our EBITDA was largely similar this year. Again, it was a year where we opened, from a financial perspective, we opened 70 stores only for KFC, and Pizza Hut was 15 stores only. Apart from that, there were a couple of other components. For example, we had a loan which was made to our Sri Lanka subsidiary during tough times when they were facing macroeconomic crisis and there was a dollar shortage. There was a repayment of that loan which came in. That is roughly INR 25 crore. We were able to generate huge positive on a working capital cycle as well, and that gave us INR 30 crore. There were a couple of other factors as well.
Yes, we do not anticipate our cash flow with our EBITDA to be—I would not say neutral next year, but yes, we may have to dip into a small amount of our cash reserves.
Okay. You might have to dip into some cash reserves next year.
Yes. Because apart from, let's say, there could be renewal fees which are coming up. As Sapphire Foods, we would be now completing 10 years since our acquisition of the store. There would be a renewal fee which would be coming up for Yum! payment coming year. Apart from new stores, there are always agenda on refurbs. Typically, when you try and complete—when you complete 10 years, there are a lot of refurbs which are on major type, major refurbs rather than minor. We do not expect the cash flow to be positive coming year. We expect we will marginally dip into our resources of cash.
Okay. Okay. May I know about the renewal?
Sorry to interrupt you, sir, but I may request you to rejoin the question queue for follow-up questions.
One more.
The next question is from the line of Ashutosh Prashar from Mirabilis. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Just a couple of questions. Firstly, on Sri Lanka, now that the SSSG turnaround has sustained over the last few quarters, what do we see in terms of store additions? Are we going to—do we have the opportunity to accelerate from high-intensive distributing to earlier couple of digits over the next couple of years? Any outlook on that? And QQ, we saw a bit of moderation in both Pizza Hut India as well as Sri Lanka in the gross margin. Any comments on that? Secondly, on the corporate cost side, we have shown a remarkable constraint. Last two years, we have grown only by single digit. Should we expect that victory to continue? Those are my questions. Thanks.
I'll try and remember all the three questions. The first was on the Sri Lanka store additions, which was—I think, yes, now that it's more stable. Earlier, we were looking at a low single-digit restaurant addition. I think now we can look at high single-digit restaurant addition, at least in the coming year and maybe next two years as well. That's on the Sri Lanka store addition. On a gross margin perspective, you refer to both Sri Lanka as well as Pizza Hut India. I think our focus on driving value and our promotions are also tailored accordingly. That's what has led to the decline in the gross margin for both the brands. Sri Lanka, we have been able to see the joy which has come along with it, which is double-digit SSSG backed by transaction growth.
Hence, despite the dip in the gross margins, we were able to deliver a 250 basis points improvement in restaurant EBITDA. Unfortunately, while margins dropped in India for Pizza Hut, we were not able to see SSSG. That has led to a deterioration in our restaurant EBITDA. We believe the current level of gross margins are stable level, and we do not anticipate this either going upward or going downward materially. There was a third question, which was—I guess that I missed the third one.
On the corporate cost side.
On the corporate cost. Yeah. So corporate cost was single-digit. Typically, the kind of thumb rule which we use is, can the corporate cost grow at a two-third to three-fourth of the overall revenue growth? Our revenue growth last year was at a consolidated level, 13%-14%. Yes, single-digit growth was a good outcome. I would say if the brand—and we do not target to grow revenue at low single digit or low double digit. We typically target whether revenue can grow towards 15%-20%. Our typical target would be then to grow the corporate cost would grow at double digit. Let's hope this year we do not see a situation where the revenue grows in low single digit or low double digit.
Sorry. If I may follow up on the value offerings. The Pizza Hut joint with the gross margin.
I may request you to rejoin the question queue for follow-up questions.
Sure.
Thank you. The next question is from the line of Aditya from JP Morgan. Please go ahead.
Hi. Thanks again for the opportunity. My question is on any regional or statewise, citywise divergence you are seeing, who you are seeing in terms of SSG and in the coming financial year. Do you expect to shift your store expansion in any meaningful way in terms of city tiers or regions or states versus, say, what you did in FY 2025? Thanks.
We are not seeing too much variance between various cities and states in terms of the SSSG performance. Yes, in case of Pizza Hut, we are investing as Tamil Nadu is an exclusive territory. We said we will invest there heavily on our mass media and through our mass media campaign as well. It is very initial days. We are seeing slightly differential performance in terms of SSSG for our Tamil Nadu territory. Again, as I said, initial days. Coming to store expansion, 70% of our stores which we had even in the last two years are in metro and tier-one cities. I think that ratio and mix will continue even going forward, at least for the next two years.
Thank you.
Thank you. We will take that as the last question. I would now like to hand the conference over to the management for closing comments.
There's one person, so Ashutosh Prashar. We can take that one question, Hamshad.
The next question is from the line of Ashutosh Prashar from Mirabilis. Please go ahead.
Yes. Thanks for the follow-up. Just a question on the value offering. While the impact on gross margin of the value offering is visible in Pizza Hut, the same is not there in KFC. We have held up the gross margin quite well. Any comments on that?
Actually, when you look at quarter on quarter, we would have dropped a very small amount of gross margin over there in case of KFC. Also, there is always an opportunity where on a few product compositions or can we do some tweaking so that we can hold on to gross margin? Some of the value offering impact has been negated by small tweaks here and there in terms of our product composition. There is certainly a drop even in KFC when you compare Q4 versus Q3.
Got it. Thanks for that follow-up. Thanks.
Thank you.
Thank you very much. As there are no further questions from the participants, I now hand the conference over to the management for closing comments.
Yeah. Thank you, everybody, for joining our conference and being patient with your questions. We will see you in three months' time to announce our first quarter results. Thank you very much.
Thank you. On behalf of Sapphire Foods, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.