Sapphire Foods India Limited

Sapphire Foods reported a 'reasonable' Q2 FY26 with overall revenue growing 7% year-on-year to ₹740 crores. Despite this growth, consolidated EBITDA declined 8% YoY to ₹106.2 crores, resulting in a margin of 14.3%, down 230 basis points. Adjusted EBITDA also saw a significant decline of 24% YoY to ₹45 crores, with its margin at 6.1%. The company recorded a consolidated PAT loss of ₹12.8 crores (-1.7% margin) and an adjusted PAT loss of ₹3.6 crores (-0.5% margin).

KFC revenue grew by 7% in Q2 FY26, which management noted would have been double-digit excluding the impact of Navratri. The ex-Navratri SSSG remained flat, supported by low single-digit same-store transaction growth. The company added 19 new KFC restaurants during the quarter, contributing to the inauguration of the 1000th Sapphire restaurant. Gross margins for KFC dropped 110 basis points year-on-year, primarily due to continued investment in value offers like the 'Epic Saver' campaign, with approximately 100 bps invested in H1.

Pizza Hut revenue declined by 6% overall, with negative SSSG. However, the Tamil Nadu region, a Sapphire exclusive territory, demonstrated strong performance with double-digit revenue growth and mid-single-digit SSSG. This performance showed a mid-teens delta compared to the rest of the country across SSSG, SSTG, and overall revenue growth. The company is investing 150-170 bps in gross margins for H1 on innovations like Ultimate Cheese Pizza and value offerings such as 'Buy 1 Get 3' and 'Unlimited Pizza Fridays' to revive the brand, with a commitment to continue this investment for at least two more years in TN.

The Sri Lanka business continued its robust recovery, with revenue growing 18% in LKR terms and 23% when converted to Indian rupees. SSSG in LKR terms was a strong 14%. The restaurant EBITDA margin reached 15.4% in Q2, a significant improvement from 12.7% in Q1. This recovery was driven by a 220 basis points year-on-year improvement in gross margin and a 4-5% price increase implemented in Q2, effectively mitigating the impact of a 27% minimum wage increase from April.

The dine-in and takeaway mix for KFC stood at 55%, with delivery at 45%, showing a 300 basis points improvement in delivery share year-on-year. This shift is attributed to the strong performance of the company's own app (growing 2-3x faster than aggregators), increased late-night operating hours, and a structural change post-COVID with more high-street restaurants and struggling mall performance. To counter this, management is focusing value campaigns like 'Epic Saver' and 'Unlimited Pizza Fridays' on dine-in and takeaway channels to drive footfalls back.

Management acknowledged that consumer discretionary spending has been muted for the past two years, compounded by increased competition in the food QSR sector. However, they expressed optimism for improving consumer sentiment in Q3 FY26 and calendar year 2026. This positive outlook is based on government initiatives such as GST reduction and income tax cuts, which are expected to put more money into consumer wallets and boost discretionary spending.

The recent GST rate reduction provided a marginal benefit of 0.5% or less on input prices. Instead of retaining this benefit, Sapphire Foods decided to pass it on to consumers to stimulate demand. This was achieved by implementing a 5-10% price reduction on the top 7-10% of their highest-selling products, effective from September 22nd, ensuring a meaningful impact for consumers rather than a diffused, insignificant reduction across all products.