Sapphire Foods India Limited (SAPPHIRE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to the Q4 and Full Year FY '22 Earnings Conference Call of Sapphire Food India Limited, organized by Orient Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Kapoor, Head, Investor Relations. Thank you, and over to you, Mr. Rahul.

Good evening, everyone, and a warm welcome to Sapphire Foods Fourth Quarter FY '22 Earnings Conference Call. I'm Rahul Kapoor from Sapphire Food's Investor Relations team. I hope everyone on the call is doing well and staying safe. Today on the call, I'm joined by Mr. Sanjay Purohit, who is our Group CEO and Whole Time Director; our CFO, Mr. Vijay Jain and Orient Capital, which are our investor relation advisers. We have uploaded our investor presentation and earnings press release on stock exchange and our company website. I hope everybody on the call got a chance to go through these documents. We'll begin the call with the comments from the management, which will be followed by an adequate session of our Q&A. This call may contain some of the forward-looking statements, which are purely based upon our beliefs, opinions and expectations of the company as of today. These statements are not at all a guarantee of our future performance and involve risks and uncertainties, which cannot be predicted at this point in time. With this, I'll hand over the call to Sanjay. Here you go, Sanjay.

Good afternoon, ladies and gentlemen. Thank you, everybody for attending our investor conference call. We're going to be announcing our quarter 4 FY '22 and our full year FY '22 financial results. Like Rahul said the presentation that I'm making is already on the SEBI website as well as our own website. So quarter 4 saw operational disruptions because of the third wave of the COVID pandemic. And January and February were impacted and things started to get somewhat to normal in March. And despite these operational disruptions, we've delivered a really strong performance in quarter 4 FY '22. We added 29 new restaurants. Revenue grew by 46% year-on-year, EBITDA by 66% up 260 basis points and PAT of 5.4% as against a loss of 4.1% in quarter 4 FY '21. Our adjusted EBITDA Pre-IND AS 116 rose to 12.9%, which was up 470 basis points year-on-year. From a financial year perspective, this has undoubtedly been by far the best year in Sapphire Foods short operating history. You would have known me to say that we started operations in 2015, '16, in this 5, 6 years, this has been our best every year. We added 142 new restaurants during the year. Revenue grew by 69% over 2021. EBITDA by 82%, up by 130 basis points. And for the full year also, we delivered a PAT of 2.7%. And this last year in FY '21 was a loss of 9.8%. Our adjusted EBITDA Pre-IND AS 116 has risen to 10.5%, up 670 basis points. So we delivered INR 180 crores roughly of adjusted EBITDA. When I look back 2 years to March '20, when the COVID pandemic struck us, we really expected this pandemic to have a very detrimental impact on our fledgling business. However, in reality, the last 2 years have actually helped us transform our business and significantly improve the financial performance. And in many ways, this positive outcome, I think, is a consequence of the perhaps rare values and resilience that has been shown by each and every Sapphire employee in just responding to the travails of this pandemic. Internally, we call this as a step-up year for us, and actually, all 3 businesses have delivered a step change in performance in FY '22. So KFC became INR 1,000 crore-plus brand for Sapphire with its highest ever Restaurant EBITDA of 19.5%. We have talked a lot about the Omnichannel strategy on Pizza Hut, and we are seeing it play out with the brand delivering double-digit Restaurant EBITDA of 13.4%, and with a more compact omnichannel stores that we have opened, say, from April '18 onwards that are delivering mid-teens restaurant EBITDA. The Sri Lanka business also is doing exceedingly well. We continue to be the biggest and the best QSR chain in the country despite the macroeconomic conditions being difficult. And in FY '22, is delivered the best ever performance, 25 new restaurant additions, SSSG of 42%, revenue growth of 60% and Restaurant EBITDA of 23.2%, up 360 basis points. Over the last few months, we are seeing inflationary pressures. All of you all will know that on all our inputs. And therefore, this has required us to do a very fine balancing act between increasing prices, ensuring that there is minimum impact on consumer wallets, how do we sustain revenues and revenue & profitability growth. As operating conditions have normalized in April and May to pre-COVID levels, we're actually seeing very strong consumer demand for our brands. And so we have taken price increases on both the brands and in Sri Lanka. Right now, we are seeing -- continuous to see transactions to improve. In fact, we're growing strongly. New restaurant additions are on track as we indicated -- as we've been indicating that we should be able to double our restaurant count over the next 3, 4 years. So that seems to be on track. And I think finally, we've been able to develop organizational muscle to be able to cope with volatile situations. And therefore, we'll find ways to get better. We'll find ways to manage the inflationary pressure, and we are quite confident about our future growth. Before I take you through the results, I just want you to -- I always like to reiterate the Sapphire story because we have such a young organization. We operate restaurants of the 2 of the largest global brands KFC and Pizza Hut. And in our short operating history, we've been able to build substantial scale in operations thereby leading to PAT profitability and scale among the top 3 QSR operators. As a restaurant operator, we pride ourselves on our execution mindset. We want to deliver great customer experience, great food, great experience, great value and our back-end operational capabilities aid this customer experience. We have worked hard to develop our capital allocation model to be optimized and therefore, have worked on with the new restaurant expansion model. So again, you would have heard us speak about this, our focus on smaller sized, omni-channel restaurants. This has started to play out improved accessibility and profitability. We've built ourselves to be a platform player. We have this capability and capital to drive both organic and inorganic growth. And I think underlying this is a value-based work culture, very high on governance, enabled by a professional management, professional board and professional promoters. Let me now take you through the quarter 4 results. Restaurant sales were at INR 494 crores, up 46%. EBITDA was INR 104 crores, up 6% and EBITDA margin was 21%, up 260 basis points, and we delivered a PAT of 5.4%. We added 29 restaurants, 13 KFCs, 10 Pizza Hut in India, 6 in Sri Lanka and nothing in Taco Bell for the quarter. It's also our best ever year performance, as I talked about. So we delivered INR 1,715 crores restaurant sales, up 69%, INR 325 crores EBITDA, up 82%, 18.9% EBITDA margin, PAT of 2.7% and totally opened 142 stores, 60 KFC, 57 Pizza Hut, 22 Pizza Hut in Sri Lanka and 3 Taco Bell restaurants and our total restaurant count at the end of March was 579. We have a very strong balance sheet and cash net of debt is about INR 400 crores. And you know we operate with negative working capital. This is the next slide, which is Slide #8 shows you the restaurant count across years. If you look at how our additions have gone during the year, we added 13 stores in quarter 1, 32 in quarter 2, 68 in quarter 3 and 29 in quarter 4. And we said in December, our restaurant count was 550 and our guidance or we expect that to double in 3 to 4 years. I think this year, we are on target to be able to meet that broad objective. I'll now hand it over to Vijay, Vijay Jain is our CFO, to take you through the specific financial details.

Thank you, Sanjay. Good evening, everyone. I'll cover from Slide #9, consolidated financial highlights. This is at our overall consolidated level. Restaurant sales, we clocked INR 494 crores, up by 46% over corresponding quarter. Gross margin of 69.1% a drop of 180 basis points on account of inflationary pressure. We will deep dive into each of these at a business level, at KFC, Pizza Hut and Sri Lanka level, to understand this in a bit more detail. Restaurant EBITDA we clocked 18.3%, up by 30 basis points. So in spite of gross margin under pressure through our cost efficiencies, we were able to deliver expansion on Restaurant EBITDA and mind you, this was a quarter where January and February was impacted by COVID. So inflationary pressure plus COVID, still we were able to drive Restaurant margin expansion. Company adjusted EBITDA, which is Pre-IND AS 116, at 12.9%, up by 470 basis points. Overall Company EBITDA post-IND AS 116 at 21%, up by 260 basis points and PAT at 5.4% for the quarter, up by 950 basis points vis-a-vis loss of 4.1% in the corresponding quarter. And if you look at the annual number of PAT, 2.7%, this was the first ever year for Sapphire to deliver PAT profitability, so quite an important milestone from the Sapphire point of view. Moving on to the next 2 slides, I'll not get into details of P&L and balance sheet. Moving on to cash flow, Slide 14. Again, the cash flow is based on the post-IND AS 116 representations who may not give a completely correct picture, the way one wants to look at it. However, if I give you 2 couple of important data points over here. Cash generated from operations, if I bring it up pre-IND AS 116, it would be close to INR 240 crores INR 250 crores, cash from operations. And when you look at the CapEx, which we incurred for the year, so while the investing activity shows INR 691 crores, it also includes the funds which we would have invested into FDs and mutual funds. So if I exclude that, the CapEx investment for the year would be INR 285 crores for the year. The closing balance of cash was INR 58 crores. However, if you include the investments which we carry, the overall cash balance net of debt is close to INR 400 crores at a consolidated level.

So let me talk now about the KFC performance. KFC, despite the operational disruption had a strong quarter, we grew SSSG by 15%, so if you look at Slide #16, we talk of the recovery versus FY '20. So delivery is tracking at this ADS level double of FY '20, dine-in has come back and is slowly coming back, but it's still at 67% of FY '20 level. And as in April and May, this is starting to further improve. There are several branding and promotional initiatives that we had during the quarter, I think the launch of the Biryani Bucket was a very important innovation, and that's really doing well. From the operational perspective, the 7 minutes Express Pickup or get a free piece of chicken is really quite successful helping our operational people to really hustle in the kitchen and drive customer satisfaction. So that's worked well. There's a lot of work happened on digital activation. We won the Brand Disruption award for the value burger campaign with Mr. Anil Kapoor. Here are some of the pictures of our new restaurant launches, as you can see, they look really beautiful. When you see the Attur Salem store, for example, a 1,500 square foot store, but looks really imposing and beautiful. And then we've got some pictures of a Mumbai store and our Pathankot drive-through and then an Indore store.

Moving on to KFC Financial. Slide #21. The SSSG for the quarter was 15%. ADS was at 132,000, growth of 12% over corresponding quarter so in spite of the first 45 days impacted by COVID, quite a healthy SSSG and ADS growth. Overall revenue for the brand at INR 296 crores, up by 43%, and we added 13 restaurants during the quarter. Moving on to the next slide, gross margins, which dropped by 70 basis points on account of inflationary pressure. The last price increase which we took was in September, since then towards last week of March, 1st week of April, we have taken another price increase of close to 9-odd percent in KFC. But the quarter had no price increase. And despite the drop in gross margins, we were able to improve our Restaurant EBITDA by 90 basis points at 19% for the quarter. Overall, KFC, again had a very strong year, the best year, it has become INR 1,000 crore brand for Sapphire and a restaurant EBIT of 19.5%.

From a Pizza Hut perspective, our pizza at was slightly more impacted by the third wave of COVID. And this is largely because of our strong mall presence and malls in quarter 3 and quarter 4 was still not operating at 100%. The third wave of COVID has also impacted our business. And the fact that we are in South and West and South and West has had the most operational disruptions. So the Pizza Hut business was a little more impacted than KFC in the quarter. Having said that, we had a SSSG of 3% year-on-year. We launched the San Francisco style crust. I encourage any of you all to have this, this is an absolutely fantastic product. And it expands our -- it expands our crust options that we are offering to consumers. So you all know the Pan pizza -- deep dish pan pizza is signature Pizza Hut crust but this one, the San Francisco style crust which is a global innovation also starting to do quite well. It's just a lighter, little airier, a little crispier product. It has the same price point as the deep dish pizza. And as innovation offers little better -- a little better margin than the deep dish pizza. Again, from a promotion perspective, we've shown a couple of pictures. There's a lot of activity around the San Francisco Style Pizza on digital. On Slide 28, there are new restaurants there, some pictures. Again, each of them is roughly in the region of about 1,200 square foot or so, the Magadi Road store in Bangalore or the Bhayandar store in Mumbai, having about 50 seats. We've got a beautiful store in Fort Mumbai next to Sterling [ Talkies ]. You can see the Waluj, Aurangabad store also.

Moving on to Slide #29, start with Pizza Hut financials, SSSG of 3% for the quarter. And as Sanjay said, the Pizza Hut was probably a bit more impacted compared to KFC, for the simple reason, which is the territories which we operate in South, largely South and West and the mall portfolio but still 3% SSSG, ADS growth of 2%, overall ADS at INR 55,000, Restaurant revenue of INR 103 crore, up by 33%, restaurant additions of 10 during the quarter and while gross margins dropped by 180 basis points, the Restaurant EBITDA we were largely able to have in spite of both COVID impact and inflationary impact with restaurant margins at 11.5%. And within this entire cohort of stores, which we have opened from first April '18 onwards. So stores opened over the last 4 years, they have delivered profitability in the range of mid-teens. And this is now the compact omnichannel format stores, which we have, which as a company, as our strategy, we will be rolling out as we move forward as well. Overall, for Pizza Hut also, this was the best year. We have moved from single -- low single-digit EBITDA to a double-digit Restaurant EBITDA. And within that double-digit restaurant EBITDA, the entire cohort, as I said, which is the recently opened, since April '18 onwards compact omnichannel format stores delivering mid-teens level of profitability. And this is in spite of the fact that the dining has been a bit constrained over the last 1 or 2 years. So we are quite confident about this particular format and the model as we move forward.

Let me then now talk about the Sri Lanka business. The Sri Lanka Pizza Hut business is the biggest QSR chain in that country. And is also perhaps the best QSR chain. In terms of our number of stores that we operate, the average daily sales, our customer experience is absolutely top notch. During this period from a local currency perspective, we've continued to go from strength to strength. In fact, if you look at the business, it delivered a 29% SSSG in Indian rupee, but from a Lankan rupee perspective, which is really what local consumers are paying, there was a 47% SSSG in this quarter. So this business continues to do well. We also opened 6 stores. Like I said, again, and Vijay will talk about the financials, is doing really well. And if you look at the channel sales contribution, which is the Slide #32, recovery even on dine-in now has come to almost 100% of pre-COVID levels and delivery and takeaway continue to do exceedingly well. We've had a slew of new product launches. So we did a meal for one, which is the My Box launch. That's doing very well. And we have quite an innovative product, which is Pizza and Biryani combined, which is limited just to our dine-in -- just to the dine-in occasion during lunch, again, it's a very, very nice innovation. Lot of work on digital. The new store launches you can see. All these are, I would say, smaller town outside Colombo or outside the main cities. So our recent expansion of the brand continues. It continues to occur at a reasonably fast pace. So if you see during the year itself, we would have opened 22 Pizza Hut stores on a base of close to about 67 or so. So really strong number of additions, and that we are quite confident will continue.

Moving on to Slide #36, Sri Lanka business financials. SSSG of 29% in Indian rupees as Sanjay said, very handsome growth, in Lankan rupee 47% SSSG and this is not just led by -- sometimes you feel that it's led by inflation, but that's not the case. We are seeing a very handsome transaction growth also over their in Sri Lanka business, 30% plus transaction growth. So that's the real test of the business, and we are seeing a very good transaction growth over there. Overall, ADS, 30% growth in LKR terms, Restaurant sales at INR 92 crores, up by 82% in Indian rupee terms and up by 105%. So we have almost doubled the business over last year. And mind you, last year, Q4, in Sri Lanka, we were not trending below pre-COVID levels. So last year itself was also at a largely at a pre-COVID level. So on that number, we've been able to double the business in Sri Lanka this quarter. Gross margin dropped of 530 basis points. I'll just try and bifurcate this into 2 parts. Last year, FY '21, when we showed 70.2% as a gross margin that has a 200 basis point annual benefit, which was accrued in quarter 4. So the drop is more like around 330 basis points. Yes, because of inflationary pressure. But in spite of that, we have delivered a very high Restaurant EBITDA of 24.4% for the quarter. And even if you look at the year, Restaurant EBITDA of 23.2%, which has been the best ever year for even Sri Lanka business, both in terms of revenue as well as profitability. And if I convert this into a growth at absolute value, the Restaurant EBITDA for the quarter has grown by 69%, and the Restaurant EBITDA for the year has grown by 79%. So a lot of times when we see that Sri Lanka is a rather small contributor. The answer is no. It continues to grow very fast, and it continues to contribute very handsomely to the overall business.

Let me take a minute or 2 to talk about our other initiatives. Last time I spoke of our ESG initiatives, and there's a lot of work that is actually happening on ground. But what we thought we would benefit from was to onboard a professional firm, and therefore, we are starting to work with PWC and -- so fine-tune our charter and review our progress on ESG. I'm not going to be talking about this every quarter. So to make meaningful progress here, we'll start to talk about it every half, every 6 months, we'll talk about some of our ESG initiatives. But if you look at just one or two -- the small shoes that we are now starting to take on a larger scale, we implemented solar panels in a couple of stores. They have -- the solar panels are giving us benefits and providing us a payback of in the region of 3 years, -- and therefore, now we are expanding it to more number of stores. So we will see that happening over the next couple of months. We launched a very beautiful store in T NAGAR, we refurbed a very beautiful store in T NAGAR Chennai, which is a sustainable store. So a lot of local cement texture handmade tiles used, laminates from vendors that follow sustainable manufacturing processes and so on and so forth. So this is [ small step ] initiatives that we are doing in ESG. [Technical Difficulty] we won a Equity & Inclusion award at the pizza Hut global summit in '21. We were awarded Best Workplace for Millennials in Sri Lanka. And I think this agenda will just get stronger and more focused as we go forward. That's it for me. I'm going to stop here. And now I hand it over back to the Diksha, for Q&A.

[Operator Instructions] We take the first question from the line of Percy Panthaki from IIFL.

Congrats on a very good set of numbers. I just wanted to understand your plans for next year in terms of what is the total CapEx that is planned for the year on a consolidated basis? And if possible, if you could also give an idea on how many stores you would be opening across formats?

So Percy, Vijay here. Again, we will not like to give a year specific guidance. As Sanjay mentioned, 550 restaurants we had as of 31st December, we plan to double that over 3 to 4 years. So if you average it out, it would be anywhere between 130 to 160, right? And in terms of CapEx, currently incurred INR 285 crores CapEx for the stores that we actually added. That will give you a broad indication on where our CapEx is headed for. But we would refrain from giving a very specific number. We are on track on this particular -- our projections of doubling it over 3 to 4 years. This CapEx of ours, which is INR 285 crore includes refurbishment of our stores. And this is one of the big things which we do to make sure that customer satisfaction levels are always high. So this CapEx of current year, which is FY '22 of INR 285 crores includes new stores, refurbs plus IT CapEx as well.

As we are going forward Percy, many of the stores that we have opened now are 5-6 years. So they come into the refurb cycle, and we've always found that when we do a refurb and an overall facelift of the store, it has a very positive impact on customer experience. So refurbs also will start to increase in numbers going forward.

So if I look at your this year's CapEx of INR 285 crores and a store addition of about 142. On an average, it works out to be about INR 2 crores per store, including the refurbishment, IT, et cetera. So given that your metals prices, commodity prices are also up, do you think this INR 2 crore per store will see inflation in FY '23? And if so, by how much?

Percy, again, the way you did the math, INR 2 crores, first is not the right way to look at things because you have included the total CapEx and divided by just the NSOs over here, the new stores over here. So not really the right way but just to answer on your inflation part, we are seeing a inflation in the range of 3% to 5% on the CapEx front at overall CapEx front. Again, but there is always an end over that how do you create more efficiencies internally. So that's not everything eventually hits us, but 3% to 5% inflation is what we're seeing.

Okay. But given that your refurbs will continue, it would be fair to say that on a per-store basis, whatever number of stores you opened in FY '23 multiplied by about INR 2 crores to INR 2.1 crore would be the total CapEx that you would sort of require? Is that understanding correct?

I would still say that INR 285 crores plus adjustment for the stores increase or inflation is the right way to look at because when you label it INR 2 crores per store, it gets labeled somehow that it's a per store cost, so I don't want to label it that way Percy.

Okay. Understood. Secondly, on Sri Lanka, I just wanted to understand while the Q4 figures, obviously, you've given in the presentation, and they are very good. But on the ground, what is happening currently? Are you seeing any kind of disruption in terms of demand given the heavy inflation that the economy is going through and therefore, the pressure on the consumer wallet leading to a demand compression. Or secondly, any sort of demand issues because of the disruption of daily life? And on account of that, if there is any sort of decline in the constant currency sales per store? Would that have a negative operating leverage on the EBITDA margins also?

So Percy, again, the advantage which we are getting in Sri Lanka right now is somewhat similar to what happened in India when COVID striked. When COVID striked, as Sanjay said initially, everybody thought that probably this was -- this would put us back by 2 years. But eventually, it gave us an advantage when we came out of COVID. Something similar is happening in Sri Lanka. And a lot of times, we're looking at just 1 month back, but the problem started even 9 months back. But over 9 months, whether it is inflationary pressures, whether it is other things which are happening in the -- on the macroeconomic front, the quarter 4 performance is in spite of those macroeconomic pressures. Yes, the things have got worsened on the macroeconomic front over the last 30 to 45 days. But even when we look at our April trajectory, we continue to see very high double-digit SSSG. So our quarter 4 was in the range of 40-odd percent, SSSG we are seeing similar numbers -- in April and May -- the real barometer is the [ SSTG ], we continue to see very high [ SSTG ] in that particular market. While the macroeconomic situation is tough. The business-wise, we are very strong. The advantage over there is that 90% of our deliveries, we own the fleet, we deliver ourselves. So that's another advantage over there, we being the biggest brand and the largest brand over there, gives us a unique advantage over to us. So as long as the stores are operational, which have been the case throughout, we are very confident that we should be able to generate very high throughput from those stores. Yes, there were a couple of occasions of disruptions on account of curfew or emergency, but barring those, as long as our stores are operational, we are confident of the revenue being generated.

We take the next question from the line of Richard from JM Financial.

Can I request you to give some perspective on the movement in the non-restaurant costs, so I'm really talking about the difference between Restaurant EBITDA and Company Adjusted EBITDA. That cost used to be about INR 95 crores and in each of FY '20, '21, which has gone up significantly to about INR 140-odd crore in FY '22. Can you help us understand the reason for this quantum jump from INR 94 crores to INR 140 crores?

The difference, also includes the ESOP cost. So if you actually chip off the ESOP cost, ESOP cost for the year was in the range of INR 35 crores. So that's the reason you will be looking at a big jump when you are looking from a Restaurant EBITDA to adjusted EBITDA because adjusted EBITDA is post ESOP cost.

Okay. So that INR 140 million, minus INR 35 million, which is 105 million, that is the real ESOP cost?

Yes.

Okay. And Vijay, Sanjay, can you -- Obviously, the margin picture at the restaurant level have turned out to be much better than what one would have anticipated maybe about 1, 1.5 years back. Can you give us some guidepost in terms of how are you looking at this? I mean given that it turned out better than what it is, are you looking at further expanding to this? Or you think that this is really the optimal level that you would like to operate at?

So again, when we look at restaurant EBITDA, we would like to see it as a business level rather than an overall level. A lot of times the overall level actually gets skewed because of the mix each business would play out. So if you'll take business by business, KFC right now at 19.5%, I think we are quite happy where it is closer to 20-odd percent. We always maintained that we'll continue to see some efficiencies as we keep building more stores and we keep generating operating leverage, but quite happy where the range is right now close to 20-odd percent for KFC. Pizza Hut, while the overall brand is at around 11.5% for the year. I'm now stripping off the additional incentive which we have received during the year. So it's 11.5% for the year. Within that, the new stores opened from April '18 onwards at mid-teens, this set we believe will start moving towards high teens as the dine-in comes back strongly for us. And as we keep adding more and more the smaller and the tighter omni-channel format stores, the overall brand profitability, which is currently around 11.5%, we see this moving towards mid-teens, entering teens and eventually moving towards mid-teens. Sri Lanka currently at 20% plus, I think we are quite happy if it remains in the range of 20-odd percent. As long as the kind of growth we are getting over there of 40%, 50% SSSG because the idea is to manage inflation and we don't take price increases, which is equal to inflation, we normally try and take it below inflation so that we become more attractive to the customers. We remain competitive and we continue to offer more value. So as long as we're able to deliver 20% plus Restaurant EBITDA on Sri Lanka, we are quite happy.

And just to confirm again, with regards to the store ambition, if I heard you correctly, you basically said doubling versus that 550 stores of December '21 over a 5-year period?

Over a 3- to 4-year period.

Over a 3- or 4-year period.

[Operator Instructions] We take the next question from the line of Jaykumar Doshi from Kotak.

Question on Sri Lanka. If you can let us know how are you managing the operations? What are the risks that you are facing at this point of time purely from a supply chain perspective? And what's the base case in worst case scenario for Sri Lanka? That's number one. Another is usually when countries go through such difficult macro situation and default. How do -- does the QSR business perform over a 2- to 3-year period? What are your learnings if you have looked at similar situations in other countries, how has Yum franchises perform in those countries?

So from a operational perspective, we have a really strong team there in Sri Lanka, Jay, and I have done extensive visits in Sri Lanka. I will say that this is perhaps the best QSR scheme.

I meant availability, right? So the other day, there was a headline article saying that they don't have more than -- petrol supplies of one day or power cuts of 15 hours in such situations.

Correct. So what are the issues there, the issues are, for example, getting fuel and getting electricity to be able to run our stores. So there, operationally we have been able to still manage to get [Technical Difficulty] run our generators and [Technical Difficulty]. Yes, there has been disruption, but perhaps it might be for few hours that we need to close down the stores. Those -- so we normally do that during the lean period. So apart from that, we have been able to manage the operational disruption. From a supply chain perspective, from an import standpoint both, so cheese is our biggest import. And again, there, we've been able to -- we have stocks in hand. We have been able to manage imports, plus we are helping through India also. So typically, we have to get cheese from Fonterra in New Zealand. Now we are getting some cheese from India also. So apart from that, most of the other products are local, capital equipment also we've been able to manage. So on ground, this transaction growth that you are seeing is a result of us -- and being able to manage that situation really, really well there. And I know we read a lot in the newspapers about violence, et cetera. But in general, it's a piece loving country, citizens are peace-loving and I think very disciplined. So even if you go to a fuel station there, you won't find the kind of -- you will find a disciplined line and therefore, we'll have one person on the station -- at the fuel station to ensure that we get the right amount of diesel for us to run our generator sets. So I think overall, all our operational parameters of the business continue to do well. We see an actual opportunity here. And again, we have talked informally to other people in the Yum system. We have also talked to some other people who have been perhaps exposed to higher inflationary environment. So contrary to what people say we think that this is a great opportunity to strengthen our business, improve our accessibility further. When I look at, say, even close by, say the Pakistan business of Yum seems to, again, be doing fairly well. So I think apart from the -- so we've got a team that is very capable. We've got certain operational strengths that are unique to us really in that market. And we believe that from a macro perspective also, things will start to stabilize over the next 6-months or whatever, whenever they start to stabilize. We remain confident about this business and what it can do from a constant currency perspective. Sri Lankans are paying in Sri Lankan rupees, they are paying -- they are opening their wallets and spending on Pizza Hut, and I think that's what we have to focus on, if the currency depreciates versus the Indian rupee and therefore, from our consolidation of accounts, what that does, it doesn't impact the Sri Lankan consumer. So overall, we continue to be bullish on that business.

Understood. If I may ask, as of today, have you managed to pass on all the inflationary pressures that you are facing on the raw material input side in terms of price increases. So are your gross margins and EBITDA margins as you speak today comparable to what it was before depreciation of Sri Lankan currency?

Jay, as a Strategy, we would never pass on the entire inflation to the customer. We will always want to pass on something which is lower than the inflation, which makes you more attractive to the customer which gives you -- it brings out value for attracting the customers, it makes you more competitive in the market. That's the general strategy we always follow. For example, last year, the inflation in Sri Lanka business was probably 20% plus, 25% maybe. And again, I'm giving you very approximate numbers over a year, just to make a point, we would have taken a price increase of around 15% last year. And we dropped our gross margins last year. If you look at the annual number, we have dropped our gross margins last year. But we've been able to improve our EBITDA, so the way to improve or hold or improve EBITDA is not just the gross margin line, how you can make sure that you deliver other cost efficiencies, thereby, you don't pass on everything to the customer and still continue to hold and improve the Restaurant EBITDA margins. And this would be, again, the way forward. So again, we will not be passing on the entire inflation to the customer. But again, very confident of trying to hold the restaurant margin. As I said, 20%-odd Restaurant EBITDA, we are quite comfortable and confident of.

Understood. And a couple of bookkeeping questions. One is when I look at your India performance, KFC as well as Pizza Hut. On a sequential basis, there is about hardly any dip in gross margin for KFC, marginal decline in gross margin for Pizza Hut and I'm talking about sequential December to March. There is definitely a seasonal drop in ADS for both the brands. But when I look at your EBITDA margin drop on a sequential basis, it's slightly higher than what we usually see in sequential performance of other QSR players. I was just wondering, is this natural or seasonal decline in the margins. And so this -- should one look at this quarter's EBITDA margin of brand level margin of 19% of KFC and 11.5% of Pizza Hut as more representative of your full year potential or is there any scope for -- especially Pizza hut, we were sort of after last quarter's performance. My expectations were it probably will inch closer to 15% as the mix of new stores improve but it's gone closer to 10%, sir?

So there's a twofold impact, right? It's not just the seasonal impact. You rightly said the seasonal impact would be there in quarter 4 versus quarter 3. And if you and for the benefit of everyone, we had called out that quarter 3, typically is anywhere between 100 to 200 basis points higher than the annual average. And this will again depend upon where the Navaratri falls, where the Diwali falls, where the Sravana is, and Shadis. Sometimes it's in Q2, towards the end of Q2, sometimes it falls in quarter 3. But industry level trend is that quarter 3 margins are 100 to 200 basis points higher than the annual average. So this is the one impact which you see the other impact, which probably your discounting is on the COVID impact, the 45 days impact of COVID, which has impacted Pizza Hut more than even KFC over here. And as I said, because of the territories which we operate, and that's reflective in the margin of Pizza Hut as well. On your other part that how much drop we have seen, if you look at KFC, if I reflect the number correctly, between 21 was approximately the number in quarter 3. We have delivered 19-odd-percent for KFC. It's a 200 basis points drop. Yes, if the COVID impact wouldn't have been there, I think we would have been more closer to 20-odd percent for KFC. Pizza Hut, we have delivered 11.5%, versus quarter 3 14.9%. So while you expected 15% quarter 3 itself was 14.9%, if I chip off the additional incentives, which we called out in quarter 3. So 11.5% probably would have been around 12% to 13%, if we wouldn't have had impact of COVID in quarter 4.

That's very helpful. I have a follow-up question, but I'll go back in the queue and come back later.

We take the next question from the line of Akshen Thakkar from Fidelity International.

Congratulations to the team on a good set of numbers. And thank you for clarifying on the Sri Lanka business operations as it were in this quarter. Is there a question around how do you now read the translation impact of currency, the currencies weakened, right? So could we just talk through how does it impact P&L and also balance sheet right now? That's the question one.

So on quarter 4, the P&L impact is not too big because what we saw the depreciation started happening from second week of March onwards and till April you would say, so the Sri Lankan currency was anywhere around 37 paisa, Indian rupee to a Sri Lankan rupee. This was somewhere around end of Feb. By the end of right now, we are at 21 paisa, so almost a 40% depreciation has happened on the currency front. However, the impact in the Q4 P&L is less than 10% I would say, in terms of currency translation for the P&L. Going forward, yes, quarter 1, if you see we would have a 40% impact in terms of translation. Sri Lanka business delivered roughly INR 50-odd crores for the current financial year, in terms of overall EBITDA, I would say. And again, I am giving you a very approximate number. If you try and apply a depreciation of 40%, but we are growing there very handsomely by almost 40-odd, 50% SSSG, the overall quantum could be in the range of INR 10-odd crores for the year FY '23. As long as the stores are operational, I think we don't see a big impact. Yes, if the stores shutdown, of course, the impact would be higher. But as long as the stores are operational, this is the impact we are seeing on Sri Lanka business for FY '23.

On the balance sheet, assets that we have, net translation?

On the balance sheet, Yes. So on the balance sheet front, the closing rate has to be used on the balance sheet side. So when you translate your net assets on the balance sheet, we have taken a INR 20 crore impact on conversion of assets, and this is reflected under OCI, which is other comprehensive income. A major impact has already been taken because this was done at -- when the currency was at 24 paisa. Right now, it's standing at 21 paisa, 22 paisa. So a big impact has already been taken account under the OCI.

Sorry to interrupt, your voice is not clear, Mr. Thakkar? The audio is not clear, we cannot hear you clearly. We are unable to hear you. So we'll move on to the next question. From the line of Mr. Prateek Poddar from Nippon India Mutual Fund.

Congrats on a great set of numbers. I just wanted to check, in Sri Lanka, how much of the benefit you've got from competitive pressures in the sense because of such high inflation? Have you seen competition shut down and given our scale, has that played to our advantage, which explains this high SSG?

So competition from a QSR perspective, no one has shut down stores. The unorganized market in Sri Lanka definitely has got impacted. Because they are not able to operate in the same manner that we are able to. And therefore, for certain, there will be some benefits that we have got from there.

There has been a shift from unorganized to organized which has helped the QSR industry in general, and we have been a bigger beneficiary at that given our scale.

Yes. And I think -- so our benefit is also on the delivery side Prateek here. So they don't have a -- so in Sri Lanka, there isn't an ecosystem of aggregators and so on. And therefore, it is important to own the delivery channel yourself and our delivery capabilities in that market are by far the best. Therefore, even with respect to other QSR brands, we would have gained a little bit.

And can you quantify this impact from unorganized to -- Is it possible to break down on that front?

I mean just look at the SSSG. So that just gives an idea. But other than -- it is impossible to quantify how much is coming from unorganized or organized. There's no numbers to track the sector as such. isn't it?

We take the next question from the line of Devanshu Bansal from Emkay Global Financial Services.

You indicated that you have expanded addressable market by launching a thinner crust, which is San Francisco Style. So I wanted to check if you can share the division of industry pizza sales in terms of thicker and thinner crust in the pizza category to understand it better?

I think you misunderstood. It's not a thin crust. It's a similar crust the way it is, but it's different in taste. It's more crispier, it's more lighter, but it's not thin crust pizza.

Okay. But I guess, Sanjay mentioned that you have sort of increased the addressable market with this launch?

Yes, we have but it's not a thin crust pizza, it's not a thin crust pizza. It's a [ hand-tossed ] pizza but it's not a thin crust pizza.

Devanshu you must have it. I mean, it's very difficult for -- all of us are trying to find the right words, but if you -- I think texturally it's quite different from the -- from our Pan pizza and it is hand-tossed, therefore, I think I'd just encourage you to perhaps try one out. You'll -- I'm sure you love it.

Sure, sir. Sure.

It's not thin crust.

Secondly, I wanted to understand dine-in recovery has been about 60% to 70% for the entire Q4. So if you could share the trends post opening up in late Q4, early Q1 across dine-in and delivery channels, it would be really helpful.

So 67% is again average for quarter 4. If you look at our quarter 3 numbers, we said it's already hitting 80%, close to 80% for all the 3 businesses in Sri Lanka Pizza Hut, India, KFC India. So towards the end of quarter 4, we are again seeing similar numbers, things reaching 80% plus for both the brands in India. And in fact, Sri Lanka already in quarter 4, they are seeing it hitting close to 100%.

Sure. And lastly, I wanted to understand that you were in the process of implementing a new POS system across your restaurant chain. So I wanted your thoughts on the benefits that we expect to accrue from this in terms of growth or operational efficiencies?

First of all, the POS system that we used to operate MICROS was an end-of-life product. Oracle had bought over this company and then they had sun-setted it. And hence, it was imperative for us to look at a new POS. We implemented LS Retail. So there are several back-end benefits of it, but the biggest front-end benefit is consumer, so the processing time for billing. And we are seeing that billing time has reduced anywhere between 12% and 15% on an average. The time it takes to punch in a bill and serve a customer.

It has been rolled out in August of last year.

So we have rolled it out within June. Yes. So by August, we had finished the implementation across the India -- restaurant, yes, restaurant base.

We take the next question from the line of Shivam Agarwal from Mirae Asset Capital Markets.

My question is what is the store expansion strategy that you are taking for the Sri Lanka business for current year? And do you stick to your overall target despite slowdown in the economy?

So last year, we opened 25 restaurants and even in the last quarter, we opened 6 restaurants. As Sanjay said, probably this is a great opportunity for us to strengthen our base in Sri Lanka. So we would continue to expand. This year, we are looking at anywhere between 10 to 15 -- 10 to 15 odd stores this year. Again, we will monitor this quarter-on-quarter that how things pan out over there but this was a plan for this particular year, 10 to 15 restaurants.

Again, at a broader level, Shivam, we have said that we expect to again double our restaurant base in Sri Lanka over 3 to 4 years. I think we continue to hold that.

My second question is, are you planning to take any price hike in the Pizza Hut or KFC for the current year?

So KFC, we just recently had a hike in last week of March, right, first week of April of 9-odd percent. Last week of March, you also saw a price hike of roughly 2.5% to 3% in Pizza Hut as well. Nothing immediate on cards for KFC at least. On Pizza Hut, we have been very conservative in terms of our price increase over the last 2, 3 years because we wanted to drive this value. But yes, if the inflationary pressures continue to remain, you may see another small hiking case of Pizza Hut in the upcoming quarter.

We take the next question from the line of Akshen Thakkar from Fidelity International.

Am I audible, sir?

Yes. Loud and clear, Akshen.

Just on the price hike point that you were mentioning, you've taken price hikes in KFC and Pizza Hut in March and April. How should we be thinking about gross margins in each of the businesses in India at least versus the exit in the year? Should, given the price hikes, do margins improve a little bit? Or you think this is just staying defense to the inflation that we saw?

Again, the point which Sanjay made that the way we look at price hike is to make sure that we balance out the impact on customer wallet, how do we remain competitive in the market and still drive transaction growth and drive value. So our price hike typically will always be lower than the inflation. However, having said that, one eye is on restaurant EBITDA margins, we would certainly drive other cost efficiencies to hold and slightly improve on our current restaurant EBITDA margins for both the brands. So while you may see a small drop, maybe on the gross margin side, we are confident of holding and improving our restaurant EBITDA margin as we move forward.

And I think if I add here, so one eye is on consumer transactions. The transaction needs to continue to improve. At the moment, at least, we are finding in April, May on transactions on both the brands have continued to improve. So this is important. So in an inflationary environment, it is not about taking price hikes to cover all the inflation but to take it in such a way that transactions are not compromised. Right now, at least, we are seeing that happen. And then do [indiscernible] as Vijay said restaurant margins are protected perhaps improved.

Just last question from my side. If I see pricing behavior in the pizza market by the market leader, they have been a little more upfront in taking larger price hikes and you've taken smaller price hikes. I guess the gap between the 2 would have reduced now. Is that playing a role in driving transactions for you? Or do you think it's more to do with the kind of product offerings that you have out there? And the kind of communication that you've been able to put out about Pizza Hut.

So to be honest, I don't think we have looked at what the competition has done. Even from a pricing standard, over the last 2 years, we have taken a slightly different pricing outlook. So we've got -- if you look at, compare Ala carte pricing, pizza to pizza, we might be more expensive than our principal competitor. However, what we have pushed is our meals. So Pizza Hut is known for meal occasion and if you look at our meal deals that are on offer, those are very competitive, in some cases, might be even better value than the principal competitor. And I think that -- so we're not chasing someone. This is our way to go. And once we see dine-in come back, consumers are rewarding us for the value that they see in our meal deal. And plus, if you look at all the work that is happening on innovation, the San Francisco crust pizza is doing well. And I think the Momo Mio did really well. So if I just look at the last 12, 15 months on the brand, actually, there's been a lot of noise, lot of positive noise that we are seeing even on a new product and inflation that perhaps over the last 5 years, we have not seen. Was that clear Akshen?

Yes, yes. Very clear. All the best.

We take the next question from the line of Utkarsh Maheshwari from Reliance General Insurance.

Actually, just wanted to understand what was the quantum of incentive which we received for this quarter? And I mean, for the full year, and I think this is only for this period, right? I mean next year, it will not be there, right?

So, good that you brought out this point. For the quarter 4, we have not booked anything which is additional incentives, the normal incentives which are going to be there for the next 5 years. It continues to remain -- this is what it is booked for Quarter 4. The additional incentives was booked for the period April to December, which we have called out. And if you look at our annual numbers, the number in the bracket brings that out clearly, 1.1% to be precise, it was the additional incentive. Booked from the period April to December, which has been called out.

Okay. So basically, one more thing which I want to understand, we have been able to so far survive the storm in your Sri Lanka. So what could be the new thing which you should be keeping in the mind just to keep this boat sailing. I mean what could be the new areas? Or what could be the areas where we can have some pressure, which can come to us?

Again, the focus continues to remain to make the business stronger, and this is what has enabled us to survive the thing. So as long as the stores remains operational, we are confident of handling the situation and confident of driving the revenue and transition growth. If there's something else which happens on a broader macro logic, which would relate to shutting down of our stores then one can't help but as long as stores are operational, I think we are very confident of driving revenue and profitability growth in that particular market.

If I want to understand, if you can quantify what could be the percentage increase cost of operations for us in the current scenario which is hyper-inflationary over there, compared to the similar time last year, comparatively?

Increasing cost of operations your saying? Or you're talking about general inflation?

An increased cost of operation for us because, I mean, when things are in short supply, we would -- we might paying something extra to keep them coming to our way.

But we have been able to actually still drive margin expansion even in quarter 4, even in entire FY '23 (sic) [FY '22] not in quarter 4, but still a very healthy margin of 24% in quarter 4.

That's why because that must be because we are in the hyper-inflationary environment because, I mean, you have said that growth has been like 28%, 29% in terms of SSG. So I want to -- I would probably -- if I want to just rephrase the question, what could be the quantum of increased cost of operation for us? Though it has been passed on so far, but what could -- what is the quantum as a percentage, if I want to understand?

So again, we have not passed on the customers. Even the current SSSGs we are talking about is led by transactions. So 30% plus transaction growth we have seen in that particular business for Sri Lanka. So the costs are growing anywhere between 10% to 15%. The inflation on raw material was 25%. We took a price increase of only 15%. So we have not passed on. We've been able to drive cost efficiencies, delivered higher throughput, probably at similar cost level. And as a result, we've been able to expand margin.

So what could be our secret recipe to get things going? Because I mean, as we are reading that there is a shortage of everything. And I think as you have rightly pointed out that cheese is in short supply, and I think fuel is already a problem. So I mean, what -- what are the steps we have taken to just ensure that it is sailing through in the right direction?

Again, a lot of things when you read in the newspapers probably are not giving the correct picture. So when you say, read a 15-hour power cuts, at least our stores are not experiencing a 15-hour power cut, as Sanjay said, there is a challenge for 2 or 3-hours. Second, again, we are making sure that we have enough reserves in terms of backup for fuel, which will enable us to operate through via DG. Bigger thing on the brand as Sanjay said, probably we are experiencing movement from unorganized sector to organized sector. And again, within organized sector, we are the largest player by far that helps us drive transaction and the growth over that. So the strength of the business by being there over the last so many years, the team which Sanjay just spoke about, the delivery capabilities which Sanjay spoke about, I think it's all adding up together. It's very difficult to put finger on one particular aspect over a year, to be fair. But I think all these things put together is what's driving the business. And as long as the stores remain open, we are confident of the growth over there, both in revenue and profits as well.

Because, I mean, there was one particular thing, which is called as your delivery, which is like 56% of our total sales. I mean fuel cost is on us or fuel cost is on the rider part?

No, it's on us, these are our fleet, our riders.

Yes. So I mean when we see that what kind of inflationary impact, which have been must have felt because of this? Because it's a proportion, it is almost like 56% of the revenues are coming from your delivery only. So there's the -- the rise in fuel cost is going to be certainly an impact for us?

Yes. But then when fuel costs are rising, all other costs which are there as the part of the store operating costs are largely fixed in nature, right? So when you see our topline growth of 40% and 50%, you get a huge operating leverage out of that particular business, which enables you to drive expansion. So yes, there are a few lines in the P&L, which would grow disproportionately. But the rest of the lines, you are able to generate operating leverage. As a result, we can still deliver a healthy margin, and that's what is happening in the Sri Lanka business.

Okay. So basically, it is fair to assume that till the time we have a good win and gateway of growth coming in from Lanka then I think we should be in a better position to manage the show, right? Is that a fair assumption?

Yes.

Thank you. We take the next question from the line of Gopal from SBI Life Insurance.

I have a few questions on what would have been the impact of this wave 3 on ADS? Or you can give some sense in terms of how it was in January, February and now how it is April?

So it's very difficult to exactly quantify because all of factors are at play, mall impacts, the territorial impact, different states getting impacted differently, different restrictions across different cities. But again, if I try and make an attempt, probably around 5-odd percent maybe for KFC, 5% to 7%, maybe for KFC. Pizza Hut would be probably around 10%. And again, I'm trying to give you a very high-level perspective, a very approximate number over year.

Okay. Sure, sir. And this proportion of the delivery, takeaways and dine-in for the last 2 years, it has been more towards delivery. Do you see this changing going ahead?

So again, we have not pushed one channel over the other. Sapphire has been always saying that we are a omni-channel player, Omni-channel player. The push is across all the 3 channels. While we have seen simply the dine-in been lower than pre-COVID level is for simple reason that the operating hours are constrained or operating capacity has been constrained. There is no impact on consumer demand side as the restrictions are coming off. As the malls are coming back with movies coming back in multiplexes, we are seeing customers coming back to the restaurants and we are seeing dine-in coming back. So it's not one channel over the other. Yes, because we had a channel on delivery and takeaway as well and the digital capabilities, we were able to take advantage. We were in a advantageous position to probably take some market share and drive that channel as well. But it was not one channel favoring the other.

Okay, sure. And sir, lastly, can you give some sense in terms of what is the kind of SSG one should expect for financial year '23 for Pizza Hut and KFC?

So again, we will refrain from giving a specific year guidance. Over the next 3 years, we have kept saying that as long as we're able to drive revenue in the range 20% CAGR, including our new stores, I think we should be quite comfortable and happy. And we will continue to maintain that. I think we are on track for that.

We take the last question from the line of Jaykumar Doshi from Kotak.

There were a number of occasions when you indicated that you usually take lower price increase than the inflation, both in Sri Lanka and India businesses. Just trying to -- just need a clarification, for 70% gross margin business, 30% COGS as a percentage of sales, if there is 20% inflation, you just need high single-digit price increase to offset the absolute increase in RM. So but in percentage terms of -- obviously, the price increase will be much lower, like you mentioned in Sri Lanka you have taken 15% price increase versus 25% inflation. Is that the right understanding that you -- on a percentage basis, you take lower price increase than inflation yet do you see at RM basket level. But on an absolute basis, you would try and cover the absolute increase in RM costs at all point of time?

Again, very difficult to say it in a formulate sense because you would do the math each time different for different brands, for example, with KFC currently 9.5%, you would have tried to cover a lot of it. Pizza Hut over the last 2 years we have been trying to drive value, so again at what point in time price will increase. But yes, most certainly, we're always trying to at least cover the absolute increase which is very minimal. But at the same time, we make sure that whether what are the other levers in the P&L. So that restaurant EBITDA margins, we don't drop and we continue to hold and improve the restaurant EBITDA margins.

And is price increase entirely your decision? Or do you need Yum's approval or how does it work in India because there are 2 franchises. So does it sort of -- is it something that is uniform across the country? Or do you have a choice not to take a price increase even if the other franchises?

It is uniform across the country, there's a joint committee between us, the sister franchisee and Yum's. So there's a joint decision making on all pricing decisions. And at the end of the day, I think the overall objectives of both the franchisees and Yum as a partner is all common objective. As long as with the objective is common, I don't think this is a concern in terms of taking and not taking a price increase. We are quite comfortably -- we come out with a unanimous decision on price increase across both the brands.

That was very helpful, and good luck with the coming year.

Thank you.

Thank you very much, ladies and gentlemen.

Thank you. Due to time constraints, I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Yes. So thank you very much all of you all for joining. We've had a record number of participants today. I'm really grateful to all of you, all for your questions also. I just want to repeat the story despite the COVID disruptions in quarter 4, we've had a very strong quarter 4. Yes, there are inflationary pressures, but we have taken price increases on both the brands. And when I look at April and May, from a transaction perspective, we continue to see good consumer demand. From a store expansion perspective, we called out that we should be able to double our stores over 3 or 4 years. And this year, we should be able to again hit our -- the numbers that we want. So from an overall business perspective, we remain quietly confident about our prospects going forward. That's it from our side today.

Thank you. On behalf of Sapphire Food India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.