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

Ladies and gentlemen, good day, and welcome to the Sapphire Foods Q4 and Full Year FY '25 Earnings Conference Call hosted by Vogabe Advisors. [Operator Instructions] 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 4 and financial year '25 consolidated financial highlights. I'm joined by my colleague, Vijay Jain, who is our 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. 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 grew -- declined by 4% in the entire year. KFC for the full year was at negative 4% SSSG and with negative 4% SSSG, we opened -- with our store openings, we delivered a double-digit revenue growth of 11%. And despite the negative SSSG and the operating deleverage as a result, our -- still our EBITDA margins were healthy at 17.3% and we crossed a significant milestone of 500 restaurants during the year, thereby doubling our count over 3 years. Pizza Hut had very good 3 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 minus 1% SSSG. In the quarter, we were plus 1% SSSG. Sri Lanka had a very strong turnaround in the full year. We grew revenue in LKR terms by 14% and restaurant EBITDA margin was healthy at 15.4%, first time in 3 years that we have been able to clock above 15% restaurant EBITDA. We were rated the #1 QSR in India for the second consecutive year on our -- on the Dow Jones Sustainability Index. It's a big achievement for the organization. And then in the recent Yum! Global Franchise Convention, we were recognized as the World's Top 4 Pizza Hut Franchisee. Among thousands of franchisees, we were rated as World's Top 4 Pizza Hut Franchisee, the World's Best Pizza Hut Franchisee for People Practices. And finally, the big award was of that of the World's Best KFC Franchisee. So these awards mean a lot. As I said many years ago, we aspire to be India's best restaurant operator. Certainly, we are among the top 1, 2 best global Yum! franchisees certainly. Quickly, the quarter 4 highlights. We delivered a revenue of INR 710 crores, 13% growth led by KFC India and Pizza Hut Sri Lanka. We added 6 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%. Consol EBITDA was 16% or INR 113 crores and increased year-on-year by 3%. Consol 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 slides. In quarter 4, our SSSG trajectory was -- continued to improve versus the last -- previous 2 quarters. However, on a 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. And 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 buckets, zinger burger, boneless chicken and roll. And apart from this, the other positive of the quarter was our own delivery business. After 2 or 3 years of being stable or slight decline, actually improved and had the greater SSSG uplift in this quarter versus even the aggregator channel. It's still 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 3 to quarter 4. The brand priorities are quite clear. This is the Slide #21, and this is something that I've spoken about earlier. We've 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. So it's really a lot of sauces and a lot of dips that are very popular with younger generation. On Slide #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 it's implemented in about 238 restaurants. Over to Vijay for the financial numbers.

I'm on Slide #26 which presents channel-wide sales contribution. Dine-in 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. So 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 1 year. Gross margin dropped marginally. However, restaurant EBITDA dropped to 15.7%. This was a result of operating deleverage lower ADS which we experienced in Q4 compared to Q3 and a higher delivery mix. Slide #29 shows 4-year trend. Clearly see that despite 2 challenging years now, back to back 2 challenging years in terms of SSSG, brand has still delivered a healthy EBITDA of 17.3% in the last financial year.

Let me now take you through Pizza Hut and I'm referring to Slide #31 in our deck. Our 6 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 the 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. So, this strategy actually resulted in improved performance in the 9 months between April and December '24 when our ADS moved from INR 41,000 to INR 48,000. However, starting JFM quarter, quarter 4, we have not been able to invest in mass media advertising and that resulted in an impact on our transactions. And that's really arising out of a difference of view between 2 franchisees, between us and our sister franchise 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. And that -- so we still spend money, but we spend 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 pizza, which is the Juicylicious 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. And clearly we see that Tamil Nadu is driving differential performance versus the rest of the market on -- 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 them -- 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 #33. We'll get Vijay to talk about the financial numbers.

Slide #36, channel by sales contributions. Dine-in and takeaway mix at 58% -- 48% and delivery at 52%, in line with the previous quarters. 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 #39 gives 4-year trend. The gains made in the first 9 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 4 due to pullout of mass media campaign. And as mentioned by Sanjay, we'll need a slightly longer horizon on the brand. And once we're able to resolve this in the next couple of quarters, we're sure we'll be again back on the path of recovery for the brand.

Quick update on Sri Lanka. Quarter 4 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 2 years of coming well below 15%. We -- from a new launches perspective, we continue to support Melts, has come out in a single form. We've introduced some really good fries. We opened one store in Enderamulla. And for the numbers, over to Vijay.

Slide #43. Dine-in and takeaway mix at 62%, similar to previous 2 quarters. The SSSG was 16% backed by 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 #47, which gives a 4-year trend, clearly seen the business has made a strong comeback and has delivered the highest restaurant EBITDA margin in the last 3 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 start -- we should see an uptick in performance in the coming months to quarters. I'll stop now here -- I'll stop here now and open this to questions.

[Operator Instructions]

We can start, Hamshad, with Videesha from AMBIT Capital.

The first question is from the line of Videesha Sheth from AMBIT Capital.

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. So 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 '26?

Yes, so the demand situation continues to be neutral. It's not improved or it has not worsened off over the last 3 or 4 quarters. So it's still a tight demand situation. And then coupled with heightened competitive pressures has meant that growth has been difficult to come by. You are seeing minus 1% SSSG in quarter 4 on the back of, I think, again, low -- very low single-digits the previous year. So 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 flattish SSSG. That's the current trend which we are experiencing.

Got it, right sir. The second question was on a commentary on Pizza Hut. You've talked about the longer horizon required in terms of revising the brand. So 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 are the 2 questions in my head.

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 range bound to a flattish kind of to low single-digit restaurant EBITDA which we experienced last year. Because the first step would be how do we get the movement back from that INR 41,000, INR 42,000 level. We have reached INR 42,000 level. It's the same place where we were probably 1 year ago. So it's the same journey we have to start again. So in the next 12 months, I don't see this EBITDA moving beyond low single-digit number.

The next question is from the line of Gaurav Jogani from JM Financial.

Sir my first question is with regards to the network addition guidance. In the current [ weakened ] environment scenario, if you can help us, how are you looking to now alter the store addition network both in the KFC and the Pizza Hut format?

I think our large guidance still stands. In the previous quarter call, we said KFC we can look at opening 70 to 80 stores or anywhere between 60 to 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 to 80 stores. For Pizza Hut, we said our restaurant expansion strategy will be extremely cautious and that's what we continue to follow. So we don't see additions which are, let's say, beyond 20, 25 stores in a year max.

And sir, this would be the net additions or the gross additions that you would be guiding?

These are net additions.

Net additions.

Sure. And sir, 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 very commendable. Now, I just wanted to take your sense given that -- given the environment, as you mentioned, the space where it is right now, what kind of margins can we expect in the next 12 to 18 months going ahead?

I think holding on to the current level margins would be a good achievement. And for holding the current level margins, we will require some SSSG, even if it means low single-digit SSSG. And I think that's what our immediate task would be, to get back into positive SSSG territory. Currently, we are experiencing flattish, but as we move into a territory which is positive SSSG, holding these margins would be important. So, that's what I think the near-term 12 to 18 month guidance would be.

So, sir, just to follow up here, I mean, given that -- I am assuming that you would have [ tweaked your cost structures ], which would have helped you to achieve this kind of a margin despite the lower ADS. So, won't experiencing a better ADS then would flow through the margins and then could boost the margins slightly going ahead?

So if we get -- start getting SSSGs of 5% and plus, then definitely we can see improvement in margins. So, it's all linked to the SSSG. I said that if we are experiencing flattish 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.

And sir just last question from my end on KFC only. If you can highlight what really is the problem that you are 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, it's a combination of also competitive intensity. So, I don't think -- we were expecting in the coming financial year because of tax SOPs and inflation to -- inflation reducing, we are expecting discretionary spends to increase. However, quarter 4, there was -- the earlier trend continued and that's reflected really in the SSSG that we saw and hence in the EBITDA margins.

Okay. So, if I summarize it right, you are saying that it's a combination of slowdown and the competitive intensity which is kind of leading to this slowdown. And you are still hopeful that these tax SOPs and inflation should -- the reducing inflation rather should help to drive the demand improvement going ahead?

Correctly captured.

[Operator Instructions] The next question is from the line of Saurabh from Goldman Sachs.

My question is on the comment made earlier by Sanjay that you are confident that in the next 1 to 2 months, the difference of opinion in Pizza Hut will be resolved. So, just wanted to ask what gives you the confidence that in the next 1 to 2 months, you will resolve that difference with the sister franchise?

No, I never said 1 to 2 months. I said in the coming months, I mean it might take 1 to 2 quarters rather than 1 to 2 months. I guess what gives us the confidence is the fact that -- so 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. And 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. And therefore, we continue to invest behind mass media advertising in Tamil Nadu which is a Sapphire exclusive territory. And being able to showcase a differential performance there should convince everyone that this indeed is the right strategy to adopt. And therefore, perhaps let's look at internal execution and see what can we do to actually capture the additional footfall that we -- this can offer us.

Understood. My second question is on the CapEx number. I am 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 am 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. And even if I look at the net stores, we would have added roughly 100 plus stores this year including our Lanka. And if I remember the correct number correctly, I think it is INR 265-odd crore, which is reflected in the cash flow. So, even if you do the math on a gross basis, which is the way you are doing this, it does not touch INR 3 crore. So, let me just clarify that. Having said 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. So, 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 for first 2.

The next question is from the line of Devanshu Bansal from Emkay Global.

Sir, a question on KFC. Q1 typically is the strongest quarter with the rest 3 quarters having some days where the consumption is weaker. This time around, it was also pre-poned to Q4 where I am suspecting that consumption may be lower. So, we have a relatively cleaner Q1 this time around versus last year. So how should we read this flat SSG? Is there actually some demand improvement happening or it has further worsened in April so far?

So, again, April is a -- April we had Navratri this year. So, on top of that, the flat SSSG really says that there is no material improvement or deterioration in the demand condition. That's all that it says. And it is really too early. May-June are in the quarter the better months. It's too early to comment on May.

Understood. And sir, we are sustaining with this Epic campaign for KFC, which was launched last quarter also. So, what are the key benefits that we have gained during Q4 and what are the expectations from this campaign going ahead?

So, the campaign is really focusing on our -- the variety that we offer in our core range and through that we expect to get more consumers who are aware of the brand but 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. So, that is what really this campaign is aiming to do. Now, this is not going to happen in one or 2 campaigns and 1 or 2 quarters, and we should sustain the intensity and the thought behind this idea that represent our variety in core and offer great value on core to pull new consumers in. This is the intention. We will see this continue for a -- over a period of time.

In terms of the benefit, we have definitely seen transaction improvement. So, while our SSSG was negative in H1 of last year, our transactions were also negative. And what we did experience in the last 2 quarters of last year, which is H2, that the decline in transactions was definitely lower than the decline in the overall revenue of -- for the same stores. So, definitely the focus on the value has helped us arrest the transaction decline. Now we are largely neutral on the transactions. Hopefully, from here we can grow the transactions as well.

The next question is from the line of Ashish Kumar from Infinity Alternatives.

Congratulations for a decent set of numbers in a bit tough environment. Sir, a couple of things which I wanted to understand that given the fact that Pizza Hut as a brand is changing -- is seeing some challenges, are we looking to add more brands to our repertoire? And secondly, sir, when I'm seeing the percentage of delivery from dine-in, even for KFC, it's down to 30s and it's constantly declining. So, is a pure takeaway or a pure cloud kitchen concept is something which you might want to think about at some point of time?

The second question pertains to Pizza Hut or KFC or both?

Both. Pizza Hut is at 26%. So, basically, our business is starting to become more and more a takeaway business.

Okay. So, 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. And 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 don't end up wasting resources and the bandwidth behind the third brand which becomes inconsequential. So, the 2 key elements are that it has to be scalable or a scale brand, which can give us success. So, we are only interested in success at scale. Anything which is where either of the 2 stuff is missing, we will not be too keen to adopt that third brand or acquire that third brand. And to identify whether a brand can be successful at scale, we have called out 7 specific filters or 7 Sapphire mantras. I won't go into the details right now. You can refer annual report or we can have a separate conversation. And each of those 7 parameters are key for us to ensure that we achieve success at scale. So, that's the view on the third brand. On the second part, to do a takeaway or a cloud kitchen, we have always called out 2 things. First, from a brand or a customer propositions, and especially this works in case of Pizza Hut, we want to be different compared to the #1 brand. I think that the positioning of just a delivery brand is taken by somebody else. If we have to be relevant #2 in the long run, we need to offer a point of view of difference. And hence, dine-in forward omnichannel strategy I think works best for us in the long run. And 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 much stronger in the long run. That's first on the customer perspective. Second, from a financial perspective, even if you look at a cloud kitchen or a takeaway, we don't think the economics works clearly because 70% of our CapEx goes into the back of house, which is kitchen. And your delivery takeaway component, let's say is today 50%, profitability in those channels are lower compared to dine-in profitability. So the economics doesn't work as far as we believe. So no, the answer is no. We'll continue with our dine-in forward omnichannel strategy on both the brands.

The next question is from the line of Tejash Shah from Avendus Spark.

Sir, I just wanted to understand if you like 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, Tejash, I was not able to understand your question because the voice broke. Can you just repeat it?

Sure. So I was asking if you have further doubled down on the slowdown or consumer sentiment [indiscernible] seeing the max pressure, is it that footfalls have been compromised, conversion rates or they are coming and they are not actually consuming more [indiscernible] in terms of ticket size or [ bill cuts ]?

Footfalls more than anything else. But APC is all right. And dine-in footfalls especially have been challenging. And delivery, while it's growing, it's not really growing to the extent that it used to also.

Got it. Second, if I understood you correctly... [Technical Difficulty]

Sorry to interrupt you sir. [Operator Instructions]

Is this better?

Go ahead and we will still find out.

We'll figure out, Tejash, go ahead.

Yes, sure. Sir, I just wanted to know, I heard from your comment today, do you believe that this big franchise ownership structure in India is somewhere limiting our ability to drive any -- target interventions to drive SSSGs and sentiment?

So it's not ideal, but that is how it is. And we have lived with it for 7, 8 years. And 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, of course, not only for us, but other basket at large also.

To be fair, when we took over the brand, both the brands were just -- I don't think the numbers were easy then. If I remember correctly, KFC was low single-digit -- or not low single, 7%, 8% restaurant EBITDA, Pizza Hut was still 5%, 6%. So even those were tough times. So I think we've been able to negotiate -- navigate quite well through the situation. And we're confident that even right now, we are hopeful of a solution and we will be able to navigate through the situation as well.

And it's all right. We found great joy in this strategy. Someone else might have found a little less joy. I think the only way to -- so 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. And as we continue to spend in our exclusive market, this will play out over the next couple of months.

Next couple of quarters.

[Operator Instructions] The next question is from the line of Aditya from JPMorgan.

My first question is on the delivery channel for KFC. It was good to hear that your own channels grow 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? And as an extension to the last question as well, how do you think about scaling up the own delivery channel and is there any misalignment in that strategy versus either Yum! India or versus your sister franchise?

So the contribution of our own channel is still small. It's closer to now double-digit, 10%, I would say, for KFC. And I think that's a similar number for Pizza Hut as well. That's the first part of your question. The second part, I was not very clear on the query. You were talking about whether there's any misalignment on the own channel delivery strategy between us and anybody else? That's what you're referring to?

Yes, yes. How -- Like do you want to scale it up aggressively? How important is this for you?

So own channel has always been a very important focus for us over the years. While the results wouldn't have been there because whatever -- no matter whatever we do, I think the aggregator channel grew considerably faster compared to us. And during those times, our own channel also performed very well. But 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. But 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. So those measures have always been there previously. And we continue to work on the similar means going forward as well.

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 run rate in the next quarter?

So the depreciation charge was lower, right? That charge was lower because we had reversals on some of the -- this is now post-Ind AS accounting, could be difficult probably to understand over a call. I'll try it. So when you do a post-Ind AS accounting, you basically book higher amount during the initial period of lease under depreciation and the finance cost. And if there are store closures or you have taken a provision for store closures, those provisions get reversed. So what we have seen is benefit of some reversals coming in this particular quarter. And you are right, we will go back to the earlier quarter trend. So, you are right, we will go back to the earlier quarter trend.

The next question is from the line of Subrata Sarkar from Mount Intra Finance.

Yes. Sir, my question is that more so from an industry perspective, since we have observed that the emergence or development of this industry in other Western countries, so like this -- particularly these western QSR, like what is our observation? Like if it is -- if consumption generally goes up at what rate to that of a let's say premiumization or increasing the per capita income? So is there any study like 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. So $2,500, 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. And that's one parameter which is on per capita income. On -- especially in case of KFC, there's another angle which is the protein consumption increase. And 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 -- not headwind, tailwind which actually helps us. As the per capita income grows, the protein consumption also grows. And 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. So these are the 2 angles which we have seen in the -- from a Western economy especially.

Okay. And sir, again, your thought on that, let's say the way we derive this kind of analysis is like, is there -- do you think that the market which used to -- which we have observed, let's say, in developing countries, discretionary consumption market, and right now the discretionary consumption market which India will experience, is there a change in that? Like with the QSR, like the way it was at that point of time, the discretionary consumption out of that QSR used to get -- one of the primary consumptions was increasing QSR. Is it still relevant in today's context, sir? If I'm -- 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 we are, industry like ours is dependent on. And as the per capita income grows, that's the bucket of the consumer which grows faster. And that's where we tend to benefit and grow faster along with it.

Can I reframe my question? Maybe it will help you. What I mean to say, like, let's say 20 years back or 25 years back when U.S. -- let's say 30 years back when U.S. observed the increase in discretionary -- increase in per capita income and because of that lead to a higher discretionary expenditure and QSR rate is one of the prime share of that. But my only question is, like, assumption holds, if that assumption holds good, with the increase in per capita income, discretionary expenditure will go up. But my only point to understand from you, like, the way QSR was relevant in terms -- as one of the component of discretionary expenditure, does it still hold good in terms of share of discretionary consumption, QSR expenditure? Or there are other expenditure 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 think in general when we observe the correlation of per capita income and eating out occasion, you will 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.

Subrata, maybe we can connect offline again if you -- so that we can understand your query better as well.

The next question is from the line of Saurabh Kundan from Goldman Sachs.

I just wanted to double check that we have generated positive free cash this year, right, if I'm not mistaken.

Yes.

And I mean -- and this should continue, I believe, because margins, let's say even at a low single SSSG margin, you said it will be more or less stable and your CapEx requirements are only coming down because you're adding fewer stores than last year. So free cash generation should continue into the next year at least also, right?

So the current year we generated -- so our CapEx and our EBITDA was largely similar this year. Again, this was a year where we opened -- from a financial year 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 dollar shortage. So there was a repayment of that loan which came in, that's roughly INR 25-odd crore. We were able to generate a huge positive on a working capital cycle as well and that gave us INR 30-odd crore. So there were a couple of other factors as well. But yes, we don't anticipate our cash flow vis-à-vis 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 that, 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. So there would be a renewal fee which would be coming up for Yum! payment coming year. And apart from new stores, there are always agenda on refurbs. And typically when you try and complete -- when you complete 10 years, there are a lot of refurbs, which are on major side, major refurbs other than minor. So we don't expect the cash flow to be positive coming year. We expect we will marginally dip into our resources of cash.

[Operator Instructions] The next question is from the line of Ashutosh Parashar from Mirabilis.

Just a couple of questions. Firstly on the Sri Lanka, that -- 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 single-digits to maybe early double-digits over the next couple of years? So any outlook on that? And Q2 we saw a bit of moderation in both Pizza Hut India as well as Sri Lanka in the gross margin. So any comments on that? And secondly, on the corporate cost side, you have shown remarkable constraint, like last 2 years we have grown only by single-digit. So should we expect that trajectory to continue? Those are the 2 questions.

I'll try and remember all the 3 questions. So 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 2 years as well. That's on the Sri Lanka store addition. On a gross margin perspective, there were -- you referred to both Sri Lanka as well as Pizza Hut India. I think our focus on driving value and our promotions are also tailored accordingly, and 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 gross margins dropped in India for Pizza Hut, we were not able to see SSSG, and that has led to a deterioration in our restaurant EBITDA. We believe the current level of gross margins are stable level, and we don't anticipate this either going upward or going downward materially. There was a third question, which was -- I guess that I missed out third one.

On the corporate cost sir.

On the corporate cost. Yes, so corporate cost for single-digit, typically the kind of thumb rule which we use is, can the corporate cost grow at a 2/3 to 3/4 of the overall revenue growth? Our revenue growth last year was at a consol level 13%, 14%. And yes, single-digit growth was a good outcome. I would say if the brand -- and we don't target to grow revenue at low single-digit or low double-digit, we typically target whether revenue can grow towards 15%, 20%. And our typical target would be then to grow -- the corporate cost would grow at double-digit. Let's hope this year we don't see a situation where the revenue grows in low single-digit or low double-digit.

[Operator Instructions] The next question is from the line of Aditya from JPMorgan.

My question is on any regional or state-wise, city-wise divergence you are seeing in terms of SSSG 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 '25?

So, we are not seeing too many -- 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 mass media campaign as well. And it's very initial days, we are seeing slightly differential performance in terms of SSSG for our Tamil Nadu territory. But again, as I said, initial days. On coming to store expansion, 70% of our stores which we added even in the last 2 years are in metro and Tier 1 cities. I think that ratio and mix will continue even going forward at least for the next 2 years.

We will take that as the last question. I would now like to hand the conference over to the management for closing comments.

There is one person, Ashutosh Parashar. We can still take that one question, Hamshad.

The next question is from the line of Ashutosh Parashar from Mirabilis.

Just a question on the value offering. So, while the impact on gross margin of the value offering is visible in Pizza Hut, the same is not there in the KFC. We have held up the gross margins there really well. So, any comments on that?

Actually, when you look at quarter-on-quarter, there we would have dropped very small amount of gross margin over there in case of KFC. Also, there are always an opportunity where on few product compositions or can we do some tweaking so that we can hold on to gross margin. So, some of the value offering impact has been negated by small tweaks here and there on -- in terms of our product composition. But there is certainly a drop even in KFC when you compare Q4 versus Q3.

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.

Thank you, everybody, for joining our conference and being patient with your question. We will see you in 3 months' time after -- to announce our first quarter results. So, 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.