SAPPHIRE — earnings call

The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.

Prepared remarks

Moderator · Conference Operator

MR. NACHIKET KALE – ORIENT CAPITAL Sapphire Foods India Limited May 12, 2023

Questions and answers

Moderator · Conference Operator

The first question is from the line of Jay Doshi from Kotak Securities Limited.

Jay Doshi

Sanjay, my first question is on the weakness we're seeing in pizza category.

In the past cycles, we've not seen the kind of divergence between different QSR categories that we are seeing this time between KFC, Pizza Hut maybe even Domino's and burger.

So what is your reading?

What do you think is the problems of the category are?

Sanjay Purohit

Yes.

So while the SSSGs are different, KFC is 2% SSSG and Pizza Hut is negative.

From a transaction perspective, actually, it is a little opposite where KFC is negative transaction and Pizza Hut is positive.

So I'm not sure whether that is -- that hypothesis actually bears out, Jay, that pizza category is doing either worse off or other categories are doing better off.

We don't know what the other pizza brands will come in at.

But at this moment, I think it is largely secular slowdown that we believe is happening.

And then when you factor in new store additions across different QSR brands, if you see the total system growth also you have to compare, because if one brand has perhaps opened less number of stores, it will impact positively on same-store sales growth.

And in our case, over our base of last year, we've opened nearly 30% more stores, and therefore, we've always called out that our SSSG ambitions would be in the region of 5% to 7%.

So I think it's not that pizza is doing worse off than other categories, is my submission.

Jay Doshi

Okay.

Let me ask you one more on the same thing.

What do you pick up when you talk to the aggregators, Yum being the largest partner for both Zomato and Swiggy.

I believe you would be getting some color or intelligence on overall what they are seeing for this category on that platform?

Is there a similar level of sort of weakness or softness on food aggregator platforms also?

Or do you think there is some competitive -- change in competitive landscape with a lot of new brands eating into?

Sanjay Purohit

Yes.

So in general, there is a softness that we see even on the aggregator platform and on aggregated deliveries.

So in general, we see that.

Specifically, there might be some brands with a higher level of discounting that might do a little better in the short term.

And if we are consistent on our discounting, then there might be a little up and down.

But I think, again, we are seeing this softness even with our aggregator partners.

Jay Doshi

But is that for Pizza Hut brand or is that -- you're referring to softness for the entire category?

Sapphire Foods India Limited May 12, 2023

Sanjay Purohit

At least on both our brands, we see that.

Jay Doshi

Understood.

One bookkeeping question there.

What percentage of your delivery orders are now delivered within 30 minutes?

Can you give us some color around it in terms of how delivery metrics have improved over time?

Vijay Jain

Right now for Pizza Hut, around 85% of our orders gets delivered within the 30 minutes' time.

Sanjay Purohit

Yes.

And about 93%, 94% gets delivered under 40.

Jay Doshi

Understood.

That's pretty impressive.

Second question is, can you call out -- give us some color on your store opening guidance for FY '24 and capex guidance as well?

Vijay Jain

So again, Jay, we have refrained from giving our annual store opening guidance.

As we have called out previously, we could double the count on the base of December '21 over 3 to 4 years, that remains we are on track, which converts to annual number of anywhere between 130 to 160 per year.

So we are on track for that particular number.

As Sanjay said previously that we believe the softening is near term, so our expansion plans continue.

If we see that this softer demand continues for a longer time or a longer period, at that point in time, we'll definitely recalibrate our approach.

But at this point in time, we are on the track for that 130 to 160 range.

Jay Doshi

And what will be the capex for the year?

Vijay Jain

So again, as I said, we have not given out the total capex guidance for the next year.

But for a per store basis, KFC is in the range of INR2 crores.

It used to be INR1.9 crores with the inflation.

It's now more around INR2 crores for KFC.

Pizza Hut used to be around INR1.4 crores, now it's more around INR1.5 crores per store.

Jay Doshi

Right.

So when I look at your FY '23 numbers and the store additions versus overall capex of INR380 crores.

Ballpark, I get that about INR70 crores to INR80 crores is spent on refurbishment or some upgradations.

So, is that being sort of a higher number than the normalized number or is that something that we should expect every year?

Vijay Jain

So roughly and again, I'm giving approximate number, roughly INR40-odd crores would have got spent on the refurbishment and the resizing and there would be included some major refurbishments as well.

The balance will also be the maintenance capex as well as the IT capex, which we would incur and even the warehouse capex.

So it's the combination of all those, but the refurbishment capex would be in the range of INR40-odd crores.

Jay Doshi

Understood.

But is this something that we should model in or bake in every year or was FY '23 a year where this number...

Vijay Jain

Initially for the -- I think the next couple of years probably, yes, because these are the refurbishment capex of our legacy stores, some of the old stores, which were sized in the range of 2,500 to 3,000 square feet.

But post that, we have been opening the tighter format stores.

So Sapphire Foods India Limited May 12, 2023 we expect, as we move around 2 years, 3 years down the line, the per store refurbishment capex will certainly come down.

Yes.

Sanjay Purohit

Also, Jay, our legacy stores are much older stores, and they have come up for their major refurbishment after 10 years.

And that's why perhaps our per store costs are slightly higher.

Our newer stores, we will see this cycle a minor refurbishment cycle, which is much lower in terms of capex per store as we go forward.

But I think in the next 1 or 2 years, there is also a significant -- so once you do a significant upgrade, there is also an upgrade that you get on sales.

So it does pay for itself over a period of time.

Moderator · Conference Operator

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

Tejash Shah

A couple of questions from my side.

Sanjay, you spoke about the divergence on trend between KFC and Pizza Hut.

And you said that there's nothing specific to consumer sentiment, but when we just look at the way broaden number, like a country in Sri Lanka -- country in distress like Sri Lanka, having an SSSG of minus 3% and India having minus 4, obviously, on a low base, Sri Lanka is there, but still don't you think that somewhere either the resilience of our brand in pizza in Sri Lanka is much better or perhaps the distress that we are seeing on pizza as a category is much louder in India.

How do you read that?

Sanjay Purohit

So Sri Lanka, the first half of Sri Lanka because of the pricing that we've got was because of pricing that we took.

So we would have taken nearly 50%, 60% pricing and in response to inflation, which was about 90%.

And therefore, SSSG is minus 3%.

Transaction decline is in high double digits.

So I don't think the parallels that you are drawing between Sri Lanka and India doesn’t exist.

The Sri Lanka business has got impacted much more significantly from a transaction basis than India.

Tejash Shah

Very clear.

And you spoke about SSG being negative in Pizza Hut but our STG has been in positive territory.

Does it mean that down-trading has actually played a very major role and you briefly touched upon it, but if you can elaborate, how should we think about that dynamic playing out in FY '24 going ahead?

Sanjay Purohit

So I think -- so this has been one of the key pillars of the Pizza Hut strategies, which was to pivot towards QSR kind of pricing.

It first started off by us stopping our high low -- stopping our high, low discounting strategy in April’19 going to everyday value, then to meal options and finally, culminating in the launch of flavor fun.

Today, the kind of pricing and the average order value that we see on Pizza Hut is what we expect to continue as we go forward.

Tejash Shah

Yes.

And if this trend has to continue, would you revisit -- so you spoke about that perhaps if this weakness continues for a longer period, you will revisit your store expansion guidance.

But how long will it be that monitoring period?

Will it be 6 months, 1 year or will you like -- will you respond a bit earlier on the store expansion guidance?

Sapphire Foods India Limited May 12, 2023

Sanjay Purohit

So it is important to note, Tejash, that the machinery on new stores is not a switch on, switch off machinery.

And many of the calls that we take have been baked in earlier.

And hence, we are saying that we have to project calmness in this scenario.

So we're -- I think over the next 6 to 9 months is when we would take a call on what we need to do from a store addition perspective.

Vijay Jain

Tejash, the current marketing plan and the new launches, which we have done will start playing out the results or we can start seeing the results over the next 3 to 4 months.

And I think that's the time that how those marketing initiatives and the new product initiatives has gone through and maybe that's the time if the softness still remains, that's the time to probably rethink.

Moderator · Conference Operator

The next question is from the line of Nihal Jham from Nuvama.

Nihal Jham

Two questions.

First was on the Pizza Hut and KFC, you highlighted that while you've seen transaction growth in Pizza Hut, there has obviously been a fall in the average bill value, and is the opposite way, which is paid out for KFC and you've taken price hikes of around 9% to 10%.

As things improve or revive, which of these 2 would end up catching up faster or reviving further?

Sanjay Purohit

Which of these 2 from a...

Vijay Jain

Revive faster.

Sanjay Purohit

SSSG or transaction?

I think...

Nihal Jham

SSSG perspectives, overall.

Because there is a divergence in terms of how the SSSG stayed out for the 2 formats is different.

One has seen a fall in the footfall, whereas the other one has seen a fall in the transaction value.

Sanjay Purohit

Yes.

So if you look at the answer to that lies in the kind of price increases that we expect from going forward from here.

On both the brands we are seeing inflation having cooled off, and therefore, pricing today will be very modest.

And I think from here onwards, both SSSG and transactions will start to go in the same direction.

In KFC also the launch of our value -- entry value innovation, which is chicken rolls will help us in our transaction growth.

In one simple adage that we try and follow is that transaction growth finally is the important barometer for a brand.

And it's not only same-store transaction growth, but overall transaction growth also because our number of stores that we have opened also is quite high.

As long as transactions are growing, the brands are in good health.

And going forward, with inflation, cooling of pricing, then reverting to the kind that we have had in the past, I think both will start to see upward trajectory.

Nihal Jham

Just one follow-up to Sanjay, that in case of KFC, there are launches maybe at the value range of -- with the INR99 roll launch and all.

That going forward, is there a case of the transactions come back and maybe similar to Pizza Hut the ADS maybe contrast a little or maybe the SSSG stays flat, irrespective of how the market turns out?

Sapphire Foods India Limited May 12, 2023

Sanjay Purohit

Yes.

So I think it's -- you've got to do both, Nihal.

You've got to have innovations that are aimed at the brand loyalists and therefore, things like Chizza worked with the brand loyalists and you have to look at customer acquisition innovation.

So chicken rolls perhaps do a bit of both.

They talk to the brand loyalists and give them one more reason to come to KFC.

But also because of their attractive price points, so they'll attract a new consumer.

So I think we should see both SSSG and SSTG move up now through this launch.

So it's not one versus the other.

Nihal Jham

Just one final question was on the store sizes for Pizza Hut.

Ideally, you used to target 1,500 square feet kind of omni store sizes.

Are the 1,000 square feet either -- despite, say, the lowest space on kitchen food serving, the purpose in terms of giving the omni experience, which, in a way, differentiated us, say, from our sister brand -- sorry, our sister company, which is opening more delivery focused?

Sanjay Purohit

Yes.

So we are not doing 1,500 square foot stores, Nihal, first of all.

We have done 1,200 square foot stores right across.

This 1,000 square foot format does not compromise one bit on the front- of-house, it's dine-in experience.

What we have seen is that because -- in the larger cities, through increased delivery cycles, we are able to crunch the back-of-house kitchen and a large portion of the back-of-house kitchen goes into storage, both chilled, as well as frozen as well as dry.

That we are able to crunch because we are in the large cities.

So this format won't work if you're going to a slightly more remote city.

So this is only to enable us to increase density.

Moderator · Conference Operator

Next question is from the line of Percy Panthaki from India Infoline.

Percy Panthaki

First question on innovations.

These innovations which you have written in terms of popcorn pizza, -- sorry, Chicken Popcorn with Maggi, Popcorn Nachos and Chizza, these few months or weeks back were visible on Zomato, but now they are not.

So have you withdrawn these launches?

And if so, why?

Sanjay Purohit

Secondly, to answer your question, these are limited time offers typically, Percy.

So there are some innovations that come and stay as part of our menu forever.

And there are innovations that we run for a limited period of time.

So chicken popcorn with Maggi and nachos was a limited time offer.

Vijay Jain

And for example, chicken roll is a permanent addition to the menu.

So there are LTOs as we call internally, LTOs are a limited time offers, and there are some permanent additions to the menu.

Sanjay Purohit

Yes.

So chicken rolls is a permanent addition to the menu.

Percy Panthaki

And what parameters or metrics do you use to determine whether it will be a permanent or a limited time offering?

Sanjay Purohit

Yes.

So during the process of new product innovation, we would have tested with consumers, and there are parameters that we use for acceptability, is there a new occasion of consumption and what need does it serve.

After looking at much of these parameters, then we decide whether it is a limited time offer or a permanent offer.

Sapphire Foods India Limited May 12, 2023 Finally, also importantly is while we will do all of this testing, performance in the marketplace is really important.

And we might -- so that's the final determinant.

Percy Panthaki

Okay.

Also on the same topic of innovation, just something I noticed was that a company like McDonald's, most of the innovation in recent times are towards the premium and their gourmet burger variants are actually what is driving the SSSG in a meaningful way now.

Whereas, I see that our innovations are largely towards democratization, affordable price points like chicken roll at INR99, flavor fun pizza, et cetera.

So just wanted to understand why the differential thought process?

And does this really help in this kind of an environment where, for example, flavor fun pizza, whatever gain you've got in terms of attracting new users or transactions the detriment in terms of down trading has actually more than offset that.

That explains the negative SSSG at a net level.

So just wanted to understand if probably this could have been launched at some other time when the situation was more normal and not stressed like this?

Sanjay Purohit

So first of all, Percy, innovation is a long game.

So this is not a quarter-on-quarter gain.

And at a period of time, you are seeing both the brands launching value innovation.

So this is coincidental.

This is, like I said, a period of time that you've seen this innovation.

There's no grand plan that either both of these brands will only launch value innovation.

So that's the first thing that I would want to say.

In fact, the April innovations on Pizza Hut, and it's just not a topping -- I'd invite you to go and try the product out, but mouth feel, et cetera, has substantially improved.

There's much more moistness in the pizzas.

And so while we are saying 10 new pizzas, actually, this is our core range that has got completely re-done.

So -- and again, brands have different objectives at different times.

Largely, you're trying to appeal to the brand loyalists and when you're appealing to the brand loyalists, premiumization is an important factor.

So Chizza, for example, does really well with the premiumization aspect that we want to drive with the KFC brand loyalists.

And at times, you also want to expand the consumer base, and therefore, rolls plays a good role.

It also plays a very important role in expanding the usage occasions for the same KFC brand lines.

So give him or her an occasion to come, say, between 3 and 6 and snack on our products and so on.

Percy Panthaki

Right.

Got it.

And finally, just wanted to get some idea on this Pizza Hut margins.

So this time, we had a negative 4% SSSG and the margin is around sort of 8.5%.

Assuming that -- I mean, in the near term, for the next 2, 3 quarters, if let's say our SSSG comes to a 0% kind of a level, what kind of margin range we'll be looking at?

Will it be like 10% to 11% will be a fair number to look at for the next 2 to 3 quarters under an assumption of 0 SSSG?

Vijay Jain

So again, Percy, I would not comment on the next 2 or 3 quarters percentage.

But yes, if your negative SSSG comes to flat or starts going to positive, we should come back to double-digit restaurant EBITDA.

Sapphire Foods India Limited May 12, 2023

Sanjay Purohit

It's also a factor of ADS, Percy, that it went down to 50 ADS.

So it's also a factor of that.

Vijay Jain

But yes, SSSG becomes neutral or positive, it will be on the last year's SSSG in H1, which was pretty healthy ADS.

So you are right, if you are able to get it neutral or positive, it will come back to the double-digit restaurant EBITDA levels.

Moderator · Conference Operator

Next question is from the line of Saurabh Kundan from Goldman Sachs.

Saurabh Kundan

So when you set out into this quarter or maybe you were in the middle of the quarter, were your expectations lower than what you've actually delivered, especially on the Pizza Hut side?

So in other words, has March, despite the difficult base, has March surprised you slightly positively?

And if you could also comment on how 1Q has been until now, that will be very helpful?

Sanjay Purohit

So I don't think March was any better or any worse on Pizza Hut.

I think it continued in the same tradition in the same manner.

Quarter 1 generally sees an uplift in absolute terms from the Jan- March quarter, and we have seen an uplift.

But I'm not going to -- it's really too early to talk about quarter 1.

But the general movement that we see from Jan, March into April, May, June, is what we have noticed this year.

But on the base that we were delivering in -- we are delivering in April, May, June.

In the case of KFC, March was muted because 9 days of Navratra and Ramadan, all impacted us in March significantly.

Saurabh Kundan

Right.

Second, very quick question.

What is the non-cash component of corporate overheads this time or for the whole year?

Sanjay Purohit

Sorry, just repeat that.

Saurabh Kundan

What is the non -- what is ESOP part of the corporate overheads this quarter or for the whole year?

Vijay Jain

ESOP cost for the year would be anywhere between 0.7% to 0.8% of revenue.

Saurabh Kundan

Right.

Just a last one, if I can squeeze one in.

Another QSR player reported and although the raw material profile is different, but they reported like a very large expansion in gross margin.

Can you comment on what drives this difference?

For both your formats you've seen a drop in gross margin year-over-year versus like 300 basis points plus increase for the other player.

Sanjay Purohit

So sequentially, KFC has improved.

On Pizza Hut also the only pressure is on dairy right now.

Vijay Jain

So again, both the key components of each of our brands.

So one is chicken for KFC saw the highest ever inflation in H1, in particular.

And since then, we have seen some cooling off and some recovery.

Again, oil is a very big component for us and chicken.

On Pizza Hut, dairy probably amongst all commodities and not just for pizza, as a category, but dairy amongst all commodities have seen highest ever inflation.

And that's probably the reason for why our -- both the brands would have seen a negative or a drop in gross margins.

Sapphire Foods India Limited May 12, 2023 Having said that, in spite of a drop in gross margins, as we said, we have reported an improvement in restaurant EBITDA margins year-on-year for both the brands.

On the other side, while I should not comment on the other competitor.

But we believe the catering business would be high -- typically, catering business is a high gross margin business.

And that could be a mix, which would be a play.

Also, I heard in the commentary that there was some reclassification by them on some processing charges from the cost of goods sold to other expense line.

But again, very difficult to comment on their side.

Moderator · Conference Operator

Next question is from the line of Devanshu Bansal from Emkay Global.

Devanshu Bansal

Congrats on big menu revamp and associated marketing.

Sir, for KFC, last year ADS was about 145,000 and we have exited Q4 with about 127,000.

Similar trends go for Pizza Hut as well.

So is it correct to assume that the SSSG outlook that you have mentioned is a combination of declining first half followed up by a strong turnaround in second half?

Vijay Jain

And you're referring to which outlook?

I think you're referring to the 5% to 7% comment which Sanjay have made.

But that's a comment we would have said, you would have heard Sanjay or me saying over a long-term 3 to 4 years scenario that, that's what we expect with the kind of growth ambitions we have in terms of store additions, which is doubling the count over 3 to 4 years.

We believe a 5% to 7% SSSG over a 3- to 4-year period is a reasonable assumption to go.

But this does not indicate in any way what the next or immediate quarter is going to look like.

Devanshu Bansal

No. So even if -- I just want some sense as in last year for Q1, it was 145,000 and Q4 exit is at 127,000.

So is this largely because of seasonality or we can see on a sequential basis such kind of a pickup in this quarter, which is going on?

Vijay Jain

ADS has 2 parts to it.

So one is seasonality definitely.

Also with the new store additions, typically, a new store for us would start anywhere at 75% to 80% of the overall brand average in year 1 and then takes 3 to 4 years to scale up towards brand average.

So as you keep adding more and more new stores, which starts at 75% to 80% of the brand average, it impacts the overall ADS.

So that's the reason what you have seen.

Having said that, Q4, apart from seasonality, has also been impacted by Navratra in March quarter -- in March, month.

Devanshu Bansal

And what is the typical Q4 to Q1 since these are close around quarters?

So I guess, what is the typical pickup in Q1 that you see after Q4?

Vijay Jain

Unfortunately, this movement in festival period can make it very difficult to predict at what has been the exact and apart from other than festivals over last 3 years, the COVID impacts from 1 quarter to other quarter, means that there is no specific trend which you can rely upon.

However, generally, we could see anywhere between 5% to 15% upliftment in Q1 compared to Q4. But I'm giving you a very broad range and a big range as well.

But difficult to say because of the last 3 years trend being marked by various incidents or various reasons.

Devanshu Bansal

And this applies for Pizza Hut as well, Vijay?

Sapphire Foods India Limited May 12, 2023

Vijay Jain

Yes.

Yes.

Although Pizza Hut gets slightly less impacted by festival movements unlike KFC, but yes, you see upliftment in given Pizza Hut in quarter 1 compared to quarter 4.

Devanshu Bansal

Okay.

And from a gross margin perspective, I just wanted to understand it better, if you could call out on an overall basket basis, so you indicated that dairy is up, while others are down.

So on an overall basket basis, what is the current level of inflation that you're seeing in Q1?

Vijay Jain

So we believe that Q4 levels on gross margins, we should be able to sustain on those levels in the near future because the inflation has settled down both for the raw materials for both the brands KFC as well as Pizza Hut.

So I don't see any further impact on the gross margins in the near future.

So what we are seeing is inflation in the range of 3% to 5%, but that we should be able to take care manage either through a price increase or other cost efficiencies, hence we should be able to sustain the gross margin levels in the immediate future.

Devanshu Bansal

Okay.

Have we taken so far any price increase in…

Vijay Jain

So in KFC, starting this financial year, we have taken a roughly 3.5% price increase starting April.

Devanshu Bansal

Got it.

And sir, last small bookkeeping question.

So these growth investments toward marketing in this Pizza Hut, many of you've done.

And this also lead to some margin impact or this is handled by the master franchisee.

Vijay Jain

So we are definitely increasing the level of marketing investment from the current levels.

However, whether this would impact the restaurant EBITDA, we believe if typically, the increase in sales should pay by itself.

Sanjay Purohit

Yes.

Is there any -- Devanshu, you said master franchisee -- I'm sure you meant the Yum right?

Devanshu Bansal

Yes, yes, yes.

Sanjay Purohit

Yes.

Okay.

They're not -- they are the brand owners.

Yes.

Devanshu Bansal

Yes.

Sorry.

Sanjay Purohit

Yes.

Can we move to Shirish, if you're through, Devanshu?

Did we answer Devanshu's question?

Did we answer your question, Devanshu, I'm sorry?

Devanshu Bansal

No, it was incomplete, sir, sorry.

Sanjay Purohit

It was incomplete, I'm sorry.

Let us answer it again.

Vijay Jain

So you will see an increased level of investments, Devanshu.

Again, it's a combination where both the brand owners, like Yum and franchisee comes together and will co-invest the increased amount on that marketing front.

Having said that, we believe this should pay for itself with the Sapphire Foods India Limited May 12, 2023 increase in the revenue again, but it's not a short term.

You have to sustain it over a period of time.

So while immediately, you may or may not see result, but if you are able to sustain it over 2, 3, 4 quarters, we should -- we believe this will pay for itself.

Moderator · Conference Operator

Next question is from the line of Shirish Pardeshi from Centrum Broking.

Shirish Pardeshi

Just two questions very quickly.

Does that INR99 chicken roll is driven by the scaling up competition and down-trading or is it that it was pre-planned and this one of the one more ammunition to expand the transaction growth?

Sanjay Purohit

No, this was in the pipeline for quite some time.

So typically, our innovation pipelines are anywhere between 12 and 15 months long, because there's quite a robust process of consumer checks, operational checks, then test marketing, operationally test marketing it in a particular area and then only going national.

And here, again, there might be new ingredients at play.

So lining up the supplier base for new ingredients is also important.

So in this case, the sort of the -- I'm just using an Indian term, the paratha that goes with the roll required -- was a new ingredient and required us to put up a new supply base.

So it's been in the offering for some time.

Shirish Pardeshi

Just to follow up on this.

This INR99 chicken roll has gone in all 341 restaurants across India and maybe if you can share quick, I'm not saying the growth, but your aspiration is transaction growth has it materially changed in the month of May since the time it is introduced?

Sanjay Purohit

Yes.

So I'm not able to give you specifics on this.

Let's to say that it has done better than what we have expected and the launch is a national launch.

So it's not only restricted to our 341 stores, but all KFCs across the country.

Shirish Pardeshi

No, I'm referring because...

Vijay Jain

Including online.

Shirish Pardeshi

Yes.

So the point, Vijay, what I'm asking, is that gone with the other partner also?

Because you mentioned that you will start advertising.

So is that the thing which is I wanted to check.

Vijay Jain

Yes, yes.

So all in fact, not just with this product launch.

Any product launch, which happens on KFC, happens with other – even sister franchisees as well.

So both the partners do a launch.

It’s always a pan-India launch because that’s where the scale in terms of supply chain, in terms of operational feasibility in terms of marketing plays a role.

So it’s always a pan-India launch.

Shirish Pardeshi

Okay.

My second and last question on the deferred tax credit what we have utilized.

Is there anything which is balanced and we will utilize the same in FY ‘24 also?

Vijay Jain

So we have not utilized as such.

We have taken the deferred tax credit.

Now it goes on to our balance sheet.

It will get utilized in the future when we – out of future profits, we will not require to pay taxes.

So to the extent of INR125 crores tax, there will be no cash outflow in the future.

Sapphire Foods India Limited May 12, 2023

Moderator · Conference Operator

Next question is from the line of Amruta from Wealth Managers India.

Amruta

My question is regarding where you mentioned about the store size to be around 1,000 square feet now.

So earlier, we had around 1,200 to 1,400 square feet stores.

So are we planning to change all those stores step-by-step procedure to 1,000 square feet?

And this is for KFC or Pizza Hut or both?

Sanjay Purohit

I’ll explain Amruta.

We use on Pizza Hut.

Our legacy stores are 2,500 square foot.

But over a period of time, we have shrunk both the back of house and optimize the front of house, and we were opening 1,200 square foot stores.

These 1,200 square foot Pizza Hut stores, we believe in the large cities, 5 – or 6 large cities where we have got warehousing facilities close to the stores can be further crunch to 1,000 square feet.

And because we’ve got shorter delivery schedules to these stores.

And hence, a 1,000 square foot store with the same number of covers is still able to work.

Perhaps anywhere between 10% and 15% of our total store base going forward will be in this size.

However, it does not mean that we are going to convert our old stores into this.

Amruta

So this is only for the Pizza Hut stores?

Vijay Jain

This is only for Pizza Hut stores, and this is only for stores going forward.

Amruta

Okay.

And like what kind of benefit operating-wise do we expect from reduction in these sizes, I mean, in the margin?

Vijay Jain

So again, I would not comment on specific on margins because while we have launched this last year 7 stores we were piloted last year.

H2 was a soft period for Pizza Hut.

So we will wait till I comment on the margins of this.

But from a capex point of view, this could give us anywhere between 5% to 8% capex reduction.

Amruta

And the KFC stores are around 1,200 square feet, right?

So that one remain the same?

Vijay Jain

So KFC were always in the range of 1,500-odd square feet.

So it would remain in the 1,500 to 1,600 square foot range.

Amruta

My second question is regarding as in, there's lot of strategy going ahead for the Sri Lanka business?

Vijay Jain

So on Sri Lanka business, as we mentioned, the operating conditions have stabilized, so which means the forex availability, the power and fuel availability, the raw material availability, the supply chain, everything has stabilized from that point of view.

Yes, while the demand conditions have impacted those transaction growth, we believe we are at the bottom of it.

Hopefully, we believe over the next 12 months, we should start seeing some small amount of recoveries where we can gain our restaurant EBITDA margins back up by a few basis points, if not more.

Sapphire Foods India Limited May 12, 2023 And hopefully, post 12 months, we expect going back towards that 20% restaurant EBITDA margins.

So that could happen from a 12 to 24 months journey point of view on Sri Lanka business.

From a store expansion point of view, we believe the next 12 months, we would be taking a cautious approach and we'll revisit the situation every quarter on how the conditions are improving, whether they are able to pull back our restaurant EBITDA margins.

And as we start seeing positive movements, we'll start opening new stores.

So that's the strategy on Sri Lanka for next 12 to 24 months.

Moderator · Conference Operator

I now hand the conference over to the management for closing comments.

Sanjay Purohit

Like I said, while closing our earnings presentation, the last 6 months have been tough, but we are seeing this general toughness in the macroeconomic demand conditions.

But in such conditions, I want to reiterate and underline large trusted brands have the potential of doing better, differentially and differentially.

And the marketing program, the product innovation program that we have put on both KFC as well as Pizza Hut backed with our operational execution excellence, we believe can -- will give us dividends even in such market, even in such conditions, and we remain quite optimistic and bullish about both the brands and the future of the QSR category.

Thank you very much, everyone, for participating.

Stay safe.

Moderator · Conference Operator

Thank you very much.

On behalf of Sapphire Foods India Limited, that concludes this conference.

Thank you for joining us.

You may now disconnect your lines.