Good afternoon, everyone. Welcome to the quarter two FY 2027 business performance highlights of Sapphire Foods. You all must have a copy of the presentation that we uploaded this afternoon. We delivered the best quarter of revenue growth, 20%, and adjusted EBITDA growth, 39%, since the COVID period, that is, since the last 16 quarters. Our quarter two revenue was INR 885 crore, as I said, up 20%. We added 15 KFC restaurants, one Pizza Hut in Sri Lanka. Our total restaurant count was 1,086 as of September 30th. Consolidated restaurant EBITDA was up 21% YoY, margin was 11.5%, up 20 basis points.
Consolidated adjusted EBITDA was INR 62.4 crore, up 39% YoY, and consolidated adjusted EBITDA margin was 7.1%, up 100 basis points. Consolidated EBITDA was INR 128.6 crore, 14.5%, and this grew again 21% YoY. Consolidated adjusted PBT was INR 12 crore or 1.4%, and consolidated PBT, which is post-Ind AS, was INR -60 lakh or -0.1%. I just wanted to give some context to what we are thinking as an organization at the moment. We are facing a difficult inflationary environment. That inflation is right across all our cost lines, starting with food inflation, starting with minimum wage inflation.
In many states, minimum wages have increased quite substantially, led by, say, Karnataka, where minimum wages have gone up by 26%. Our utilities costs have also increased significantly, gas as well as electricity. This inflationary environment is faced by every consumer company. For us, it translates into pressure on costs. For the consumer, also translates into pressure on discretionary income. In such environment, typically, you find consumers going a little easy on spending on discretionary income categories.
Therefore, driving growth is of primary concern in an environment like this. Our mindful emphasis has been on driving transaction growth, and through transaction growth, same-store sales growth. We have done that through compelling value offerings and also spending additional marketing money behind these value offerings. That is the reason why we've delivered our best quarter of growth. If this growth sustains over a period of time, while perhaps in the coming quarters, there might be pressure on margins, we believe that we can recover costs.
Recovering growth is more difficult, and therefore the foot is on the accelerator pedal to drive growth first and foremost. Let me now look at KFC. I'm on slide number 19. KFC's SSSG was 14%, but after we factor in the Navratri change of dates, so this year, Navratri is in quarter three, whereas last year was in quarter two, we get an upside because of that. If I factor that into account, we are close to double-digit SSSG.
This, again, has been the best SSSG that we have seen over the last several quarters. What is heartening about this is that our dine-and-takeaway, or internally we call it DITA, dine-in plus takeaway, is higher than delivery. So our own assets, consumer coming to our own assets, that growth is higher than delivery, and this is again backed by a very mindful consumer recruitment strategy as we have outlined. This recruitment strategy, which is either focusing on everyday value at INR 99 or at INR 149 in Tamil Nadu or disruptive abundant value on select days, is driving transaction growth. We have also invested further marketing monies over and above what is typically committed to promote this consumer recruitment.
This is enabling KFC to drive a 14% SSSG, 26% overall SG, and after factoring Navratri, close to double-digit SSSG. You can see some of the pictures of the offers of the promotions, everyday promotions, as well as of the innovations. Digital kiosks, we continue to drive implementation in store, and today 80% of our restaurants have digital kiosks. Now I will hand it over to Vijay to take us through the financial numbers on KFC.
I am on slide number 25, which gives channel-wide sales mix. Dining and takeaway mix improved to 57% for KFC. This is on back of aggressive entry value promotions and offers in dining and takeaway exclusively. In terms of SSSG, 14%, but adjusted for Navratri impact, as Sanjay mentioned, high double digit. Overall revenue growth of 26% for KFC. Gross margin improved to 67.7%, up by 50 basis points over last year. Restaurant EBITDA came in at 14.5%, up by 70 basis points over last year. This is, as Sanjay mentioned, despite a high inflationary scenario on energy especially, and to some external raw material as well.
Slide number 28 gives you four year and five quarter trend. This is now fourth consecutive quarter of positive SSSG for KFC. The heartening part is that this is on back of strong transaction growth, and that too driven especially in dining and takeaway. This augurs well for the brand as we move forward.
Let us come to Pizza Hut, and I am on slide number 30. The Pizza Hut SSSG of 5% is the highest that we have seen in the last seven quarters. SSTG, as in same-store transaction growth, is double digit and includes positive transaction growth even in dine-in and takeaway. Again, backed by value offerings, late night, additional marketing spends. You can see some of the innovation that we have launched, the three-in-one Triple Spice Pizza, some of the value promotions, and Vijay will take us through the financials.
I'm on slide number 34, our channel-wide sales mix for Pizza Hut. Here, the delivery mix has improved from 50%- 52% in the quarter, and dining and takeaway came at 48%. SSSG grew by 5% for the brand. This is highest in the last seven quarters, and overall revenue growth improved to 7%. Gross margin was up by 190 basis points at 76.3%, and restaurant EBITDA, we made a loss of 2.8%.
This was largely impacted by high inflation on energy cost, especially in case of Pizza Hut, more than even KFC. This brand got impacted. Slide number 37 gives you four year and five quarter trend. This is second consecutive quarter of positive SSSG for the brand, and that too with double digit SSTG, and that's the most encouraging part, including positive SSTG for dining as well. This gives us confidence as we move forward.
The Sri Lanka business continues to deliver same-store sales growth. This quarter we came in at 5% SSSG. Inflation, however, is a challenge in the short term, given the fallout of the Middle East war. However, we remain confident as in previous instances of when the economy has faced a challenge, the strength of the brand in the country and our focus on driving growth has resulted in stronger performance as the economic conditions improve. There are several innovations that you can see on page 39, where we launched the Pasta Pizza, and then some of the branding and promotions. We opened one store in Dehiwala, and Vijay just take us through the—
Slide number 42. Lanka business channel-wide sales mix. The mix was largely stable, dining and takeaway at 61% and delivery at 39%. SSSG of 5% and overall revenue growth of 9% in LKR terms. Gross margin largely remains stable, and restaurant EBITDA came in at 12.5%, impacted significantly by high energy and wage inflation that country has seen over last few quarters. Slide number 46 gives four year and five quarter trend, and while SSSG continues to be healthy, inflation has certainly created short-term margin challenges.
In conclusion, when we look at our quarter two results, we've delivered again the best quarter of revenue growth, 20% and adjusted EBITDA growth of 39%. KFC 14% SSSG, close to double digits, factoring the timing shift of Navratri. Pizza Hut India 5% SSSG, 7% overall revenue growth. Sri Lanka 5% SSSG, 9% revenue growth. When we look in the future, cost inflation, we believe, will peak in quarter three. However, we will be cautious from a pricing perspective because driving growth is paramount.
Again, I want to repeat what I said right in the beginning. In such inflationary environments, while there might be pressure on margin, there's also greater pressure on growth. Our focus is on driving growth through value offers. Most companies will be cautious and reduce marketing spends. We are going against the tide and actually increasing marketing spends because we believe we've got strong everyday value that entices the consumers to come to our stores. That is helping us in quarter two, and we believe this momentum will continue in quarter three. That's all from Vijay and me. We'll now take questions.
Thank you very much, sir. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touch tone 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.
Yeah.
The first question is—
Go ahead.
Yes, sir. The first question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Hi, sir. Congratulations on a great performance, and thanks for the opportunity. Sir, we have indicated almost a 4%-5% kind of benefit of festive shift. Does that imply a mid-single digit kind of a trend that we can expect for December quarter? Is this the right read-through this quarter?
Devanshu, if you can repeat that. We have indicated 4%-5% of what? We missed out.
Of positive impact of festive shift.
Uh-huh. Yeah.
So does that in Yeah.
So when I look at quarter two plus quarter three, both quarters put together, we should come in high single digit.
Understood. Got it, sir. Got it. Wanted to check on Pizza Hut perspective. It is a great turnaround from SSSG perspective. Is there a benefit that we get in Pizza Hut as well from festive shift or—
No, we do not get any. There is no impact at all.
Okay. Sir, a couple of questions on gross margin front. There is this divergent performance across both formats, right? We were fairly aggressive in terms of promotions in Pizza Hut as well. What is the reason which is driving this divergence from a gross margin perspective?
From a gross margin—
Yeah, in one format, we are seeing an increase, and in another, we are seeing a decrease sequentially.
Sequentially, because Pizza Hut, there was a price increase, which we took towards the end of quarter one, hence the benefit flew of that price increase in quarter two. There was around 2%-3% price increase, which we took somewhere in June. Hence your quarter one was not fully loaded in terms of the benefit. That is the only reason. Additionally, we have seen a poultry inflation, which has impacted KFC. Cheese, from an inflation point of view, we were covered till quarter two at least, and hence you have not seen that much impact on Pizza Hut. Having said that, as we move forward in quarter three, we do see a slightly higher amount of inflationary pressure on both brands from the current levels.
Okay. If you could just ballpark, give us some idea, as in what is the kind of inflation that you are foresee from an input basket perspective?
It has been quite evolving, to be fair. So very difficult to put a number to it. But yes, from present levels, you do see an increase, which is likely to happen.
Okay. Lastly, sir, have you taken any price hikes in KFC as well?
Yes. We did at the beginning of this financial year, somewhere in April, May. That was also in the range of 2%-3%.
Okay. The commentary suggests that now you don't plan to sort of take any price increase, right? Because of inflation—
We will be very careful, Devanshu.
Yeah. Very careful. Okay. I have more questions. I'll join back in the queue. Yeah.
Thank you, Devanshu.
Thank you. The next question is from the line of Harish Advani from Axis Capital. Please go ahead.
Hi. Congrats on a great set of numbers. My first question was on the KFC SSSG. How much of this improvement was transaction-led versus ticket-led? I am just trying to understand if there was some element of ticket improvement which has also happened. A sub-part to this question is that the customers who we are recruiting from the INR 99 meal and the BOGO promotions, are they coming back and repeating at, say, some of the non-value-led offerings? That was my first question.
Yeah. More than 50% of the SSSG would be transaction driven, and the balance would be the APC driven. In terms of the repeat, yes, we are seeing repeat. Almost 60%-70%, I would say, there are repeat transactions from the customers who have come in for the first time, experienced this INR 99 offer or a INR 149 offer, and that is the heartening part. What we are also observing is that as they come in back to our stores, the ticket size is definitely on the rise for these customers.
So, Harish, you have seen us talk about this in the past several quarters, that we believe that the greatest opportunity on KFC is being able to recruit the next set of consumers. Typically, the brand addresses about 40 million- 45 million consumers a year. If we are able to take it to 100 million, that's the next phase of growth. All of our value offerings are really trying to get a set of people, especially in some markets like Maharashtra, U.P., Punjab, to first come into our stores and come in and use us in the dine-in takeaway format. And once people come in and sample the brand, then we find that they stick, and they upgrade also.
Perfectly clear, sir. I was just getting a sense of if the recruitment initiatives are beginning to pan out over the medium term. The second question again, I had on the KFC business. Given the success of the INR 99 and INR 149 meals, how are we deciding to balance between the traffic as well as protecting the gross margin? And is there a point at which we will look to maybe moderate that promotional intensity? That's my second question.
The objective of the promotion and this entry value offers was to drive recruitment and drive transactions, and we are seeing a great success, something which we have not seen in the last several years. And as we are able to drive this traffic, the positive SSSG, especially upwards of 5%, helps us negate the margin impact, the gross margin impact, and eventually helps us deliver the flow-through and a restaurant EBITDA margin. So we will be less concerned about where the gross margin is.
I think the focus is on making sure that can we deliver first, the growth SSSG, and that too through transaction, and then eventually it will lead to restaurant EBITDA margins, which we are already seeing. So from a gross margin perspective, we would not be too concerned. If this can lead to a higher growth, and we don't mind losing a few basis points from here on gross margin, if it can give us even better SSSG.
Thank you. Those are my questions and I will rest.
Thank you.
Thank you. The next question is from the line of Saksham Tyagi from Desvelado Advisory. Please go ahead.
Hello. Am I audible?
Yes.
Yes, sir.
Please go ahead.
Okay. First of all, congratulations for a good set of numbers. I just wanted an update on the KFC store expansion. Since you have added 15 new KFC restaurants, is there any change in the earlier guidance of 60 to 80 stores this year?
No, that remains 60 to 80. Yes, it remains 60 to 80.
Okay, so there's no change in that?
No.
Okay. My next question is related to the expansion of Pizza Hut. Since during the last quarter, the management was facing issues in expanding the Pizza Hut stores. Now has the management come up with any strategy to fix the overall brand challenge or something like that?
See, on the Pizza Hut expansion, we called out that the last calendar year, we did not open any store. Even this calendar year, largely it will be neutral in terms of store opening. As you rightly pointed out, the focus is first on getting the brand going in terms of the revenue, in terms of the SSSG. What we are waiting for is right now, once the CCI approval comes in. Sorry for that.
Once the CCI approval comes in, I think there could be a larger coordination between the two entities, Devyani and Sapphire, and that will help us arrive at a common strategy. Yes, we are waiting for the CCI approval to come in before we can align on the brand strategy and move faster in terms of resolving the brand issues and driving the growth.
So there won't be any expansion related to the Pizza Hut segment this year, right?
No. This calendar year, no. When I say this calendar year, I am talking about 2026.
Yes. Okay, sir. My last question is that the consolidated finance cost has increased from INR 31.9 crore in quarter one to INR 33.1 crore in quarter two, while the borrowing stood at approximately INR 35.9 crore at September end. Could you clarify the purpose of this additional borrowing and how much further increase in finance cost can we expect this year?
See, the finance cost which you are looking at in the financials is post Ind AS 116, where the lease rentals get discounted and get accounted as depreciation and under finance cost. That increases because of the increase in the stores and the store additions. The borrowings of INR 30 crore does not lead to a INR 31 crore finance cost. The borrowings of INR 30 crore is just a small number on the balance sheet. We are, in terms of cash balance, quite positive and healthy, close to INR 250 crore cash balance on the books. We do not see any additional borrowings in the near future.
Okay, so this borrowing was for the purpose of expansion, right?
Yeah, it's a purpose of expansion, but it's a multipurpose long-term loan.
Okay, sir. Thank you.
Thank you. The next question is from the line of Saurabh Kundan from Goldman Sachs. Please go ahead.
Congratulations on a great quarter, sirs. I joined a little late, so I hope this is not a repeat question, but you've done really well in KFC improvement and Pizza Hut as well. Would you say that most of it has come from your own efforts and your change in strategy to go towards value? Or would you say there is some improvement in the general consumption environment? If you could just comment on that, perhaps in both the formats.
Yeah. So it is a repeat question, Saurabh, and we took it both in my commentary as well as in questions. The short answer is, yes. This is in an inflationary environment. We believe that discretionary spending is likely to be constrained. Therefore, we are pushing growth through value as well as additional marketing. So that's the mantra on both the brands. You can see in the presentation specific actions on value offerings.
Great. Thanks, sir. Thanks a lot.
Thank you. The next question is from the line of Anuj D. from Antique Stock Broking. Please go ahead.
Hi, team. Great set of results. I think just one question on specifically to the Pizza Hut gross margin. I think we have seen a near complete flow-through of the 2%- 3% price hike that was taken in 1Q. In this regard, there was also a lot of mention of the value proposition. So is it right to sort of understand that the value proposition gross margin profile is similar to our existing portfolio? Secondly, on the delivery channel, how is the gross margin portfolio in terms of the delivery channel? I mean, on a broader sense, I want to understand how sustainable are our current gross margin levels going ahead for Pizza Hut specifically.
Yeah. You are right. First of all, the price increase, because it happened towards the end of quarter one, the benefit flew into quarter two. There was also a discount reduction, which happened, small amount of discount reduction, especially the online discounting, which has helped us in quarter two. The other part was, how does the value offer fit into all this, and what kind of impact? When you compare quarter-on-quarter, there is not a material change which has happened in terms of the values and offers and promotion mix with INR 99 four-course meal, buy one, get one, having there for last few quarters, I would say.
The mix profile has not significantly changed, hence, we don't see additional impact, especially in quarter two, if that was the question which you meant. In terms of the sustainability of this particular level of gross margin, again, as I mentioned on a previous question, which was more to do with KFC, I think we will be less concerned on an immediate basis about the gross margin percentage.
I think our focus is, as Sanjay pointed out, in an inflationary scenario, can we offer real good aggressive entry value? If that can help us drive transactions and thereby SSSG, we will be more than happy to lose a few basis points on gross margin because that overall throughput increase will help us deliver the requisite bottom line. That is how the focus is as we move forward.
Great. Got it. Thank you so much.
Thank you.
Thank you. The next question is from the line of Naman from Sanghvi Family Office. Please go ahead.
Hi. I hope I'm audible.
Yes, you are, Naman. Go ahead.
Great. Congratulations on a good set of number. Again, a strong performance. Just wanted to understand, in Pizza Hut, what would be the veg and non-veg mix. Do we track that?
It is typically about 75, 25 or 70-20. I am saying pretty between there.
70 is veg and 30 is non-veg, is it?
Yes.
Okay. Even adjusting for that, the SSSG would have been squarely above 3.5%, 4%, right?
We should not adjust for non-veg in case of Pizza Hut because over the years, we have not seen any material impact because of the vegetarian festivals in case of Pizza Hut. Probably at that time, people would move to a vegetarian pizza or mix would slightly change. But we do not really see, unlike in KFC, a material impact. You should read Pizza Hut SSSG as 5%.
Okay, great. Thanks.
Thank you.
Yeah.
Thank you. The next question is from the line of Rudraksh Raheja from iThought Financial Consulting. Please go ahead.
Yeah. Thank you for the opportunity, sir. Sir, on the Pizza Hut side, do we see any timeline on getting to store-level profitability?
As I mentioned, I think the immediate priority would be to make sure that both companies align on the Pizza Hut strategy as we move forward, which should start happening pretty soon once the CCI approval comes in. I think once that comes in, probably you can expect couple of quarters from there before the brand should start firing on all angles.
Understood, sir. Sir, on the KFC store expansion side, we are going to expand 60 to 80 stores this year.
Yes.
Could we get a split on the city mix for that? How much of that would be in tier one and metros, tier two, tier three cities?
Typically, over the years, called out that almost 60% to 2/3 of the stores which we open are in metros, towns with a population of more than 1 million. I don't see this mix changing materially as we move forward.
Got it. And sir, on the tier two, tier three towns, are we seeing more expansion in the new cities we are not present or more stores in the same cities we are present?
Here, almost 70%-75% of our stores we end up opening in towns where we already have stores or cities we already. So it's always that last 20%-25% where we would go into a town which is completely new and open our store. But 80%, 70%- 80%, it's in the same town, same city.
Got it, sir. Got it. Thank you.
Thank you, Rudraksh.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Okay, sir. Hi. Thanks for the follow-up opportunity. Sir, you mentioned that SSSG has almost 7% contribution from APC increase, right? So if your adjusted SSSG, Q2, Q3 combined is high single digits, does that imply a normalized low single-digit SSTG in KFC? Is this the right way to look at it?
Again, I did not give out the exact number, but yes, we said more than 50% came from SSTG. So if the combined number is high single digit, yes, the SSTG would be slightly lower than that. Yes, you are right.
Okay. The price hike is only 2%-3%, right? So we are launching a lot of value offers which are there. What is exactly driving this 7%-8% kind of increase in check size? Is it more units people are consuming? If you could just help us better understand that.
Yeah. First of all, you are conflating two parts. One is, if suppose you are taking 14% SSSG and then apply that, what Vijay said, the transaction growth well above half being contributed by transaction, then APC growth is significantly lower. We are looking at a base of, say, close to double digit, in which case, low single digit APC growth largely coming from mix.
Largely coming from mix, you are saying? Okay. The other question that I wanted to understand, typically, during this Navratri period, which has been the shift. How is the gross margin during such periods? Do you end up giving more offers because the consumption is relatively lower? Or how is it? Did we also benefit on the gross margin front because of this shift in festive period?
No, we did not. There is no material change in the gross margin profile during festive period. During a period like this when there are few people who have chosen not to consume non-veg, I don't think any amount of offers to that consumption. There are no specific promotions trying to drive consumption during such festival period.
Got it.
Good.
Vijay, across on-premise and off-premise channels, how is the gross margin profile different? There is a shift towards on-premise beta channels.
The way to look at is not the gross margin profile across the two different channels because while dining and takeaway have slightly lower gross margin profile compared to delivery, the flow through and the final restaurant margin or final margin from the channel, dining and takeaway is significantly ahead of delivery channel because of the absence of a delivery commission and the delivery cost.
Got it. Annually, marketing spend-wise, what is the level that you foresee for FY 2027, and then how much increase do you foresee in FY 2027 versus FY 2026?
It is in the range of 50 basis points-100 basis points in case of KFC and in case of Pizza Hut, anywhere between 100 basis points-150 basis points. That is what we are doing.
Got it.
That's it, Devanshu. Thanks so much.
Thank you. That was the last question for today. I now hand the conference over to Mr. Sanjay Purohit for closing comments.
Yeah. Thank you everyone for attending the conference. Our best wishes for Diwali. Diwali is in two weeks' time, and I wish you, your family, a wonderful festive season ahead. That's it from me. Thank you so much.
Thank you, sir. On behalf of Sapphire Foods India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.