Sapphire Foods India Ltd (SAPPHIRE) Q2 FY23 Earnings Concall Transcript

Sapphire Foods India Ltd (NSE:SAPPHIRE) Q2 FY23 Earnings Concall dated Nov. 03, 2022

Corporate Participants:

Nachiket Kale — Investor Relations

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Vijay Jain — Chief Financial Officer

Analysts:

Sameer Gupta — India Infoline — Analyst

Nihal Jain — Novama — Analyst

Devanshu Basnal — Emkay Global — Analyst

Kapil Jagasia — Edelweiss Broking — Analyst

C. Kishore — Jolla MS — Analyst

Ashish Kumar — Infinity Alternatives — Analyst

Jignesh Kamani — BMO — Analyst

Hero Dedwani — Motilal Oswal — Analyst

Kalpit Narvekar — Allianz Global Investors — Analyst

Haresh Mirchandani — KRIIS PMS — Analyst

Ameya Gawande — Metaverse Equity Fund — Analyst

Pujan Shah — Congruence Advisors — Analyst

Teriya Tirvedi — DJP Investments — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Sapphire Foods India Limited Q2 FY’23 earnings conference call. [Operator Instructions]

I would now like to turn the conference over to Mr. Nachiket Kale from Orient capital. Thank you and over to you Mr. Kale.

Nachiket Kale — Investor Relations

Hi, good evening, everyone, and welcome to Sapphire Foods India Limited Q2 FY’23 earnings conference call. Management today is represented by Mr. Sanjay Purohit, Group CEO and Whole Time Director. Along with Mr. Vijay Jain, CFO. I hope everyone had a chance to go through the investor presentation and earnings resolution. Before we begin, just a reminder that this call may contain some forward-looking statements, which do not guarantee future performance and involve unforeseen risks.

With that I would like to hand over to Mr. Sanjay Purohit to take over.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So good afternoon, ladies and gentlemen. Welcome to our Q2 highlights. I’ll talk very briefly about the numbers and then I’ll give you a color on the quarter. In the quarter we delivered a strong performance our revenue was highest ever at INR506 crores. Our EBITDA was 103 crores 18.4% up 350 basis points year-on-year and our adjusted EBITDA was about 62 crores at 11.1% up 490 basis points year-on-year. PAT stood at 27 crores 4.8% of revenue up 600 basis points year on year. Our India restaurant EBITDA grew by 40 basis points year on year. However, due to the adverse Sri Lanka impact, validated restaurant EBITDA of 16.8% was actually lower by 50 basis points.

And all of this and looking at versus our normalized EBITDA of Q2 FY’22. And if you remember last year, we were painstakingly calling out that our EBITDA was actually lower than what we had to repeat that year because of one-time incentives that we have got on our store openings. So again, the normalized EBITDA numbers in there grew by 40 basis points, but our consolidated level we do, we dropped by 50 basis points. So, it’s not either, so what was the quarter like? So at the beginning of the quarter, we thought it’s going to be a challenging quarter. One, KFC revenues, especially for the Sapphire markets, are especially impacted because of the higher festival vegetarian days that we see.

And I’ll say this year, the instant drop that we see on vegetarian days, has gone back to 2018 2019 levels. So, there was there, there has been a severe drop versus say last year, but in line with what we are seeing, perhaps in the earlier years, so that was one potential negative impact. The second potential negative impact was that inflation came. And in both the plans, we were seeing mid-teens inflation level. Therefore, at the start of the financial year along with young, we are consciously taking the call price increases, not in line with inflation, but lower price increases, so as to ensure that our transaction volumes are maintained. And that has worked really well from us, for us from a demand perspective. So, we are really happy with how the quarter has gone. From a demand perspective. If you look at our same store sales growth have been really strong.

Our year-on-year ADS levels have been sustained in spite of 176 stores that we have added in the last one year. So, I think the fact that these are strong transaction growth has been maintained in spite of– in spite of a price increases, I think that bodes well for us. So, if we look at KFC now, we delivered a 15% same store sales growth and 36% increase in overall transaction. In– when we look at the channel level actually training was quite strong. And their transactions also grew up on a year-on-year basis. But because of price increase, which we are taking in April about nine, between nine to 10%. And like I said inflation was in mid-teens, our gross margins were impacted by 310 basis points. But on– because of leverage that we got on 15% SSSG. And tighter cost management or restaurant EBITDA was the drop in restaurant EBITDA to about 80 basis points versus the normalized EBITDA level of 18.7% in Q2 FY’22. You would have heard both Vijay and me talk about Q2 being generally the lowest quarter for us in this perspective, and it drops versus Q1 and then we hope to recover in Q3 as we go faster festival in the vegetarian days.

So, this time we were able to remove gross margins went down by 310 basis point, restaurant EBITDA margins just went down by 80 basis points. So, the SSSG focus as well as the cost management focus helped us to curtail this drop. On Pizza Hut, I think we had our best ever quarter. Our same store sales growth grew by 23%. There was a very strong transaction growth in excess of this SSSG and the ADS growth both over the corresponding quarter and the sequential quarter. And therefore, even when gross margins dropped by 110 basis points, our restaurant EBITDA was our highest ever at 15% up by 440 basis points compared to our normalized restaurant EBITDA of 10.7% in Q2 FY’22. So, yours– I’m happy to say that a combination of our omni channel strategy where dine in, takeaway, and delivery all three come you know, we are able to maximize revenue out of a store through all three channels combined with– the combined with all the work that we have done on cost management as well as the innovation on Pizza Hut. The same store sales growth has been very strong at 23%.

Our Sri Lanka business also had a strong quarter and we grow SSSG of 30 to the tune of 37% in albums now, this has largely been on the back of price increases. So, the transaction growth has been just about positive in this quarter. Inflation has continued to rise and therefore our gross margins are consequently impacted. And therefore, restaurant margins also dropped to about 550 bases by 550 basis points to 15% versus our normalized restaurant EBITDA of 20.5% last year Q2. Absolute value EBITDA grew by 23% in Lankan rupee terms, but in Indian rupee terms declined by 25%. The currency translation impact largely if you see in Q1, we delivered in Indian Rupees sense is roughly about seven crores in this quarter also we have delivered similar

To Lankan personally so far for EBITDA.

We’re also happy to say that our restaurant expand pace has steadily has been steady. We opened 42 restaurants in Q2, 20 KFC, 14 Pizza Hut in India and seven Pizza Hut and a Taco Bell in Sri Lanka. Okay. So, given all the macro-economic conditions that we are seeing many, many consumer products, companies showing a transaction growth, lower volume growth, our inflation being quite high with the fact that we consciously took lower price increases in the hope that we will be able to maintain transaction growth, I think this quarter has been actually a very strong quarter for us. And we are quite happy as the way that it has panned out coupled with our restaurant expansion. That means that we are in a reasonably good space as we look at Q3, there will be some amount of support, Q3 is generally better than Q2. And we expect some amount of marginal amount of gross margin improvement towards the end of Q3, perhaps beginning Q4, but inflation continues to be at the same level so there is no drop in inflation.

So, that’s the overview. When I look at the– when I look at the pace, when I look at page seven, the consolidated financials you’ll see I’m repeating myself here 560 crores up 36% adjusted EBITDA down to 62 crores translates into 11.1% adjusted EBITDA margin. EBITDA was 103 crores at 18.4% and PAT 27 crores for 4.8%. We ended the quarter with 658 stores, 301 KFC, 249 Pizza Huts in India and 106 Pizza Hut and well in Sri Lanka and two stores in Maldives so totally 658 allow quickly hand it over to Vijay who will talk about the specific financial highlights.

Vijay Jain — Chief Financial Officer

Good afternoon, everyone. I will move to slide number nine consolidated financial highlights slide number nine. So, with local sales of 560 crores, our highest revenue growth of 36% gross margins be dropped by 310 basis points. We’ll deep dive into this at each business level. Moving on to slide number 10 Number 10 is busy. At times when you do over disclosures it can have this kind of effect. So, I’ll take a bit of time on this particular slide. If you look at numbers in brackets, which are given for last year corresponding quarters, those indicate normalized restaurant EBITDA numbers taking account taking a side onetime benefit which we received from Yamana counter of COVID additional incentives which we received we had called out this last time as well in Q3 financials when we released so on a comparison to our normalized last year restaurant EBITDA of last year of 17.2%. We delivered 16.8% This year, a drop of 50 basis point.

If you look at the note below the graph, it says India restaurant EBITDA grew by 40 basis points versus last year. So, after excluding the Sri Lanka business where we have seen a big drop on Sri Lanka, the Indian restaurant business grew by 40 basis points in spite of a 300 basis points drop what you’re seeing at overall level. On adjusted EBIT done at 11.1%. It was up by 750 basis points over last year, compared to a normalized EBITDA for Q2 which was 3.6% last year. In terms of value we delivered 62.4 crores, Q1 for us was around 73 odd crores. Slide number level overall bid of 103 crores 18.4% up by 610 basis points versus last year normalized EBITDA of 12.3% and PAT of 4.8% at 27 crores by 850 basis points over last year last year we were negative on PAT. And YTD basis if we look at we delivered a PAT of 65 crores this is close to 6% up by almost 1000 basis points voted last year. And you won’t be caught on the case election.

When we look at the channel contribution, we’ll find that dine-in has continued to increase in overall contribution. So, in Q2, it was a 44% whereas delivery was about 36%. And from take away was about 20%. We are launching chicken Peri-Peri. We have the chocolate lava, a lot of branding and promotions around both chicken Peri-Peri and chocolate lava. Our digital activation continues and the use of celebrities our new store– our new store launches we’ve given you some pictures. Finally in variable to launch a Colaba store. Recently in October, we launched store near four. And then we launched a store in central Mumbai and also near the other. You can see the Faridkot, Punjab, so some of the stores in Punjab has really beautiful big stores with full drive thru. And the retail development in in these integrated retail developments with lots of food players will play entertainment so the brand does really well here that and you can see a picture of the Jalna Road, Aurangabad store.

Moving on to slide 20 on a financial very strong SSSG of 15% in the quarter for KFC very healthy ideas of 134. By new this area is in spite of the 82 restaurant additions which have happened over the last one year so it includes all the new restaurants as well. On restaurants which are slide 21 our gross margins this let me cover the gross margin. Revenue first, on restaurant revenue we drop 350 crores by jettisoned editions of 20 stores, which took the counterpart the 300 marks for us in KFC in the last quarter. On gross margins we dropped by 310, which is pointed to 2 reasons over here, one prime reason that inflation picked in quarter to quarter one while inflation was there, we were also getting old inventories. Inflation peaked in quarter two that has a major impact. marginal impact also on account of delivery mix realization, compared to last year last year, which was 42% now it’s 46%.

So small impact also on account of delivery reduction, or delivery prices are generally higher than our dine-in and takeaway prices. However, in spite of gross margin reduction we are able to curtail the restaurant EBITDA drop to 80 basis points. If you compared to a normalized EBITDA of last year of 18.7, we delivered 17.9%. This was possible because of LD SSSG, which just spoke about that we were able to drive because of lower price increase than inflation. Combined with the cost control, we were able to limit the drop to 80 basis points in the quarter. And overall, a very soft quarter expectedly soft quarter from a festival point of view. But from overall demand and SSSG point of view which wasn’t a strong quarter for us. And the cost management and health really meant that we were able to restrict the impact to 80 basis points going forward. Sanjay mentioned that as we move into Q3 we expect a recovery and demand to pick up because of expectable is a Vegetarian Festival is our gross margin point of view, we expect marginal recovery to happen as of Q3, the beginning of Q4. And the higher s is higher ideas or higher revenue should enable us to drive greater restaurant to EBITDA margins.

From Pizza Hut perspective, the channel says contributions is quite some similar to Q1 where 35% came dine-in and about 15 16% comes out or take away. So, deliveries today about 49 50% of our total business. A lot of our branding and promotions was focused on flavor fun that we launched on in the end of July. Personally, you can see some of our new restaurant launches and we just launched about 14 in the quarter. So, you can see Alwal, Gandhidham, Avadi, even we got KFC and Pizza Hut in the same premise in Dighi, Pune. And now we’ll just talk about the numbers

Slide 28 on Pizza Hut our overall SSSG was 23%. And Sanjay mentioned that this was on back of strong transit, which was really heartening to see in terms of EDs us 64,000. This was not only a growth on sequential quarter, but as well as earning quarter as well. And this is in spite of 62 additions, which happened over last one year in case of recurrent revenue grew by 60% at 140 crores with 40 additions during the quarter overall 24 to 49 restaurants. On gross margins we dropped by 110 basis points on account of churn and a price increase generally been lower than the inflation. However, a restaurant EBITDA when compared to a normal EBITDA of last year at 10.7%, we delivered 15.1% just up by 40 basis points.

So, this was best ever quarter for Pizza Hut in terms of revenue as well as interest of the restaurant margins. And within 15.1% If you guys remember last time, we called out that stores which are open from April 18 onwards over the last four years, those are delivering mid to high teens level of profitability and stores prior to April 18 vida Vida converted to omni channel because of the inefficient side they deliver low double digit restaurant EBITDA.

Sri Lanka business economy that is still impacted continues to do well the highest or the greatest impact of all the disturbances came in perhaps towards the end of June July and August. But now things are stabilizing from an operations perspective it is easier to get fuel, there are less number or less number of electricity outages, imports and again meaning allows so we are able to– we are able to get our imported products also in time cheese etc, which is very important for operating while the business the business is as so, at least I would say 85 90% at a normal level inflation. When we look at the first half would anywhere close to about 75 to 80%. We would have taken price increases in the region of about 40%. And therefore, gross margins here have dropped. But ADS in Sri Lanka level SSSG grew by 37%. And our store openings continue. We opened six we opened six Pizza Hut and Taco Bell. Seven Pizza Hut and one Taco Bell.

We’re also seeing reasonably good traction on Taco Bell even though it is just seven stores today. But potentially at some point in time. You know, it could be it could be another driver of growth in Sri Lanka, as new products continue to do well, so the brand is in a strong position. And when I look at October, there’s been a little easing out of improvement in operating conditions. However, inflation is still an issue. And given that wage inflation is not in line with general inflation. There will be pressure on consumer discretionary categories and from a transaction level I feel that we will see pressure as we go forward. The quick finances video we’ll talk about page 26 overall sssd 37% with areas in Lankan rupees at 335,000. If we look at the Indian rupees 73 impacted by translation of currency of almost 40% impact or depreciation. In terms of revenue in Sri Lankan rupees 312 crores revenue for the quarter up by 76% in Indian Rupees it’s 67 Crore up by 2%. So, still positive even though a big impact on translation of currency and gross margins are dropped off a 1000 basis points as we saw even in quarter one there was a drop of close to 900-950 basis points impacted by inflation and just talk about the top price increases in the range of 40% while the price by the inflation was in the range of 75 80%.

Absolute margin still grew by 20 23% in LKR terms, while the percentage margin dropped by 550 basis points when you compare it with normalized EBITDA of last year, so, it flopped 15%. So, overall things are more stable in terms of SMDC operating conditions beat for liquid availability with Supply Chain Management beat power and fuel. And as many indicated earlier this year, we expect COVID overall year revenue to grow by 20 30% in Lankan rupees, we would be happy if we are able to hold on marginally lower EBITDA Lankan level in LKR terms of course, we will have a depreciation impact of 40% which means that a corporate EBITDA level on an annual basis there would be an impact of 15 to 20 crores in Indian rupees. Having said that the entire business has more than able to cover for the deficit on Lanka business. And this no holds only 10 to 11% of mix of corporate level.

That’s it guys. Thank you. I’ll hand it over to Vikram for the Q&A session.

Questions and Answers:

Operator

Thank you very much. Ladies and gentlemen, [Operator Instructions] We have our first question from the line of, Sameer Gupta from India Infoline. Please go ahead.

Sameer Gupta — India Infoline — Analyst

Hi, thank you for having me here. So, my question is on the margins. You mentioned there’s a 300 basis points hit on gross margins. So, what is the plan to counter that? Is it that you see the commodities coming down? And that itself will take care of it? And if so, to what extent? And do you think any more pricing fees are necessary? That’s the first part of the question. And second, part of the question is that assuming that you recover this 300 basis points over the next two, three quarters. Does that mean that your EBITDA margin? Also what is the 11-11 and a half percent your ban this quarter? Does it mean it goes up to 14%? Plus when that happens, or it doesn’t translate that way?

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Yeah, so we’ll see. I just let me take a KFC example. I think we are we’ve got one balancing act to do between pricing and the impact of the pricing on consumer demand. Therefore, we’ve taken 9% versus inflation, the team’s been able to still hold on to very strong SSSG that is and despite 310 basis points in gross margins EBITDA margins just dropped by 80. Now, if we do another calculation and say let’s say mid-teens price increase and if it leads to very poor SSSG then the leverage impact will vanish. And therefore, it can have a detrimental impact on restaurant EBITDA.

So, this is a this is something that along with the young we are monitoring as a close level, we are not seeing commodity prices coming down at an overall level significantly. Some places it is coming down, for example, oil has come down. But for both the brands, inflation versus last year continues to be at this level. And now are there opportunities to take price increases? I think we’d be very cautious about some of the price increases. So, I’ll say gross margins perhaps we’ll see some marginal improvement towards the end of quarter three beginning of quarter four, but won’t see any dramatic improvement in in the in gross margins. Having said that restaurant EBITDA in quarter three because of better sales compared to quarter two, we will see some leverage coming out of that. And I’m hoping that we’re starting to EBITDA margins improved.

Vijay Jain — Chief Financial Officer

And just to add to that, we have always called out that our focus is more on the restaurant EBITDA margins level. And we always try and take the impact in our stride on gross margins and still deliver, sustain and improve upon restaurant EBITDA margin, so that journey will still continue, where, while you may not see a full recovery on gross margins, marginal recovery, but our cost management and the SSSG’s, which gives us leverage will help us move towards that restaurant EBITDA margins, the ideal margin, which we’re looking for.

Sameer Gupta — India Infoline — Analyst

And if the input costs come off in future, do you think you would retain those benefits or in one way or the other not through MRP. But to extra promotions, or something like that large part of that will get passed through to the consumer, What’s your stance on this?

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

See, if it comes down, let’s wait and watch if it comes down, per se. And it will be a combination of what SSSG and what growth we are seeing at that point in time. And with that, we’ll take a call per se.

Sameer Gupta — India Infoline — Analyst

And one small question I had was on corporate expenses, the corporate expenses that I’m deriving for this quarter are about 5.6% of sales, versus in Q1, it was 5.1% of sales. So, there’s a 50 basis points operating the leverage on a sequential basis. So, am I reading too much into this? Or do you think I mean, there is this scope for these corporate expenses itself to be like a over the next six to eight quarters can be 100 basis points, driver of margins or something like that.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Suppose again, we will not comment on a specific line and give a specific line guidance. Having said that quarter to corporate cost is also impacted by the source grant, which happened in towards the latter half of quarter one. So quarter, one did not see probably the full impact of that. So that have probably contributed 30 basis points in this year, marginal impact has also happened on account of leverage on account of lower sales. As revenue builds up happen, our corporate cost, which is a combination of corporate costs, and regional teams will definitely grow lower than the revenue growth. So, you will see some leverage happening quarter on quarter or more logically, year on year on corporate cost, because on quarter-on-quarter security also plays out. So, you will see some leverage, I will not put on that leverage.

Sameer Gupta — India Infoline — Analyst

And this ESOP cost of 30 basis points, does it continue into the coming quarters as well?

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Quarter two is now representative of the ESOP costs. So it’s, it’s fully ESOP costs which are called Building. In fact, what may happen is after after March 25, march 23, when some resorts gets rested, it may come down slightly, in fact.

Sameer Gupta — India Infoline — Analyst

Okay, that’s all from my side. Thank you.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Thank you.

Operator

Thank you. [Operator Instructions] We have a next question from line of Nihal Jain with Novama. Please go ahead.

Nihal Jain — Novama — Analyst

Yes, thank you so much, and good evening to the management. So a couple of questions. First on the KFC part as you’re highlighting the seasonality generally, what is the impact from q1 to q2 in ADS that happened because of higher proportions of vegetarian in the areas you operate?

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So very difficult to put the exact issue because what happens is, the religious festival, the days can move between quarter two and quarter three. And then last two years COVID has actually played a habit with trend analysis. So very difficult to put up with a actual number. For example, even this quarter, you saw no rostra part of no data coming in September last week, whereas last year, the entire normal data was in October. So very difficult to put, what I can say is that this year, the deep issue of soft, which we have seen is similar to the DIP switch we have seen in pre COVID times.

Vijay Jain — Chief Financial Officer

Having said that, quarter one, our overall ADS was in the region of 144. Overall ADS in quarter 2 is 134. So that is kind of give or take. Because new store in fact, from quarter to quarter won’t be high. But so that is the kind of impact we’ll see over the whole quarter.

Nihal Jain — Novama — Analyst

Understood the only reason I’m asking is because you highlight inflation so if there was a exaggerated impact of footfalls or something, but I’ll take the number that are giving of this as representative.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Although that was one worry that we had that with inflation and with vegetarian days put a good impact on Zach. But we are really happy with the kind of SSSG growth that we’ve seen, because dine-in has been strong their transaction growth has been has been strong. And we have also seen we have also seen it translate into SSSG growth also.

Nihal Jain — Novama — Analyst

Understood. Thing Two questions on Pizza Hut. First is, if you could, again, highlight on the flavor fun which you highlighted since July I’ve been promoting and second is whether to put separately call out the margins for the new format stores? That I’ve done, I’ll be done.

Vijay Jain — Chief Financial Officer

The second question first, we’ll share that the tools which are open from April 18 onwards, and it’s not a new format, it’s all we have that is permission of stores, whether it’s old or new, the APR 18 onwards are more compact ones compared to the size which we were operating earlier, which we inherited in legacy. So the compact ones are delivering anywhere from mid to high teens.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

And on flavor fun. The response has been very positive, low to call out a specific number on flavor fun, because it’s just really too early days. And while we always say that there is a seasonality impact on KFC, there is also a seasonality, some seasonality impact that happens in Pizza Hut also. So, I think we should wait for three, four quarters, look at how the look at how the specific innovation goes. Undoubtedly it is leading to transaction growth and from an anecdotal basis the kinds of customers we are seeing coming to our stores and ordering is definitely you know; these consumers might not have come in the past. So that value layer under 100 rupees, like we call it out, even in the last earnings call is important. Your future driver of growth. I hope we answered your question.

Nihal Jain — Novama — Analyst

Very much. Thank you so much. I’ll come back in the queue. Thank you.

Operator

Thank you. So we have next question from the line of Devanshu Bansal with Emkay Global, please go ahead.

Devanshu Basnal — Emkay Global — Analyst

Yes. Thanks for the opportunity. I wanted to check what is the typical growth trend in ADS from q2 to q3, because q2 generally is a weak quarter for KFC. So, if you can just help me with the historical trends, it would be helpful.

Vijay Jain — Chief Financial Officer

It could see again, areas is also functional, how many new stores you’re opening, when we look at the historical trends, we were not expanding so much. So that may not be the representative for new store additions to dilute to some extent the overall ADSs. Having said that, we are seeing a drop of five to 7% with this quarter one, the something of that in that range, it could be anywhere between that four to 8%. I would not put a specific number to it. But that could be the range on quarter three versus quarter, quarter two.

Devanshu Basnal — Emkay Global — Analyst

And sir for Pizza Hut. It has been a very encouraging performance with 23%. Just wanted to check if there’s an element of no basis in the last year.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Devanshu. Devanshu, Sanjay here. I just want to interrupt. I think I heard Vijay said say a decrease in quarter three versus quarter of two actually it is between four to 8% increase in quarter three versus quarter two.

Devanshu Basnal — Emkay Global — Analyst

Yes, sir. I got that I understood it as an increase only.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So we just wanted to clarify for the benefit of everyone. There are 260 people on the call. So there shouldn’t be 260 minus they want to all of them freezing. I think my god quarter two, so I just clarified. Go ahead with your question again please, Devanshu.

Devanshu Basnal — Emkay Global — Analyst

Yes, sir. So, I was indicating that Pizza Hut has been a very encouraging performance between the 23% this quarter. I wanted to check if there was any sort of low base element for you last year for Pizza Hut format, due to operating conditions, etc.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So I would say there In a very marginal margin, marginally lower base, I would say malls were at a 90% recovery last year was you know what they would normally be, but I think it is minimal. The service is not the issue.

Vijay Jain — Chief Financial Officer

So marginally a small impact and maybe a pocket territory like Maharashtra where the conditions were slightly more favorable in operating from October onwards September towards the end September, but then that’s the marginal impact in the base.

Devanshu Basnal — Emkay Global — Analyst

And lastly, if you can talk a talk about the trends in terms of SSSG for the festive season, it would be very helpful for both performance.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Sorry, just repeat so the festive season is over. So, we have given you the SSSG numbers, the quarter numbers are you talking about quarter three or what are you talking about?

Devanshu Basnal — Emkay Global — Analyst

Yes, festive season in quarter three, some outlook if you can provide then it will be very helpful.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

We can predict our business but we are not soothsayer. They want to and therefore what are we just roughly we have seen four to 8% Increase the over quarter two, I think that that’s about as much that I’m able to you know, perhaps predict.

Vijay Jain — Chief Financial Officer

That that’s for KFC just to call out clarify again. Pizza Hut does not so impacted by seasonality anyways, so quarter two was the vegetable quarter. So the ADS of Pizza Hut which was 64,000 in quarter two does not have any significant impact so we hope we continue on the same trajectory for Pizza Hut.

Devanshu Basnal — Emkay Global — Analyst

Got it with a Yeah, that’s it for mine. Thank you.

Operator

Thank you, sir. [Operator Instructions] We have next question from the lineup. Kapil Jagasia with Edelweiss broking, please go ahead.

Kapil Jagasia — Edelweiss Broking — Analyst

First of all, congratulations for a great set of numbers. Sir my first question is…

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Kapil, was the first person who congratulated normally the first person who would good set or number, but the third party for some reason was very muted. So thank you, Kapil.

Kapil Jagasia — Edelweiss Broking — Analyst

Store opening and it has been very healthy in each font. So would we be eligible for incentives from young this year to like if yes, then what will be the content?

Vijay Jain — Chief Financial Officer

So just to clarify, and I think you’re referring to the incentives, which we actually had last year, per contract, every year we plenteous we’ve been getting incentives over last five years, we will continue to get incentives over last next five years as well. That’s not gonna change. What we call out last year was there was an additional component on account of COVID because of COVID, our targets were revised and we were given some additional incentives that’s all we have called our current set of numbers are representative in terms of incentive calculations, you will not see a reduction in terms of incentives you will not see increase in terms of incentives.

Kapil Jagasia — Edelweiss Broking — Analyst

Okay, that that’s very much clear. And I just wanted to understand your take away channel because you know if why, just the you know, in in terms of including COVID Probably you know, people might be stepping in and taking away Pizza Hut or KFC items but now with you know, nothing there’s no restrictions there. Would it be clearly a dine-in or a delivery channel because I’m just trying to understand why the takeaway is tailored or 20% of sales like what is like any any drivers for it or how you see this channel growing going forward.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So,so, takeaway has always been a double digit channel for us even in the past and proximity to store you know proximity to store enables this take away in many of our modern format stores and drive thru stores people so when they the drive thru format also we say that when a person purchases in the drive thru that that is the under take-away. Having said that, I think now I’ll just refer to a global trend that we are seeing and perhaps that will play out in India sometime. If you look at globally, delivery, now, delivery prices are substantially higher than either dine in or take away prices. Apparently, there is a global trend where consumers look at these delivery prices, if they are in the vicinity of the store preferred to come and take away because it is a little more economical.

Perhaps something like that we are seeing in India because take a person that’s slightly better than what has been there in the past. But again, compared to what happened during COVID It’s not better than what happened during COVID. So, it’s come reduced a little bit. So, I think it’s traditionally been a strong double digit contributing channel for us and the behavior that started during the COVID period when takeaway increased that sort of continues, even when COVID is all and neighborhood restaurants and access to a restaurant drives really take off.

Vijay Jain — Chief Financial Officer

And just to add to that, our omni channel strategy where all the three channels are available, actually puts us in a strong position that you can take advantage of one channel versus the all the features are available in sapphire four might be preserved which is omni channel beat KFC which is omni channel.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Did that answer your question?

Vijay Jain — Chief Financial Officer

There is a disturbance, maybe you can take it over and we can move on to the next caller.

Operator

Sure. Thank you. We have the next question from line of C Kishore with Jolla MS. Please go ahead.

C. Kishore — Jolla MS — Analyst

Hi, good evening. Thanks a lot for taking my question. I just want to understand what is the average size of the new stores that you’re opening? That’s my and let’s say, I want to understand going forward, would it be safe to assume that I mean, the future would be towards in assessing smallest door sizes so that the unit economics actually work out better? Thank you.

Vijay Jain — Chief Financial Officer

So, our sizes for KFC are in the range of 15 to 1600 square foot, Pizza Hut 1100 square foot. The reductions in sizes have happened over the last five, six years that I want to call out. It’s not just a COVID phenomenon that were cut down the sizes. What happened with calculations in terms of covers table turns. And with the advent of delivery channel partnering with the aggregators meant that we can be a more omni channel player. So that’s how the conditionals happened. While the reduction sizes happened, again, just to clarify the impact our capacity to serve customers, so the area’s throughput can be considerably higher than what we deliver right now. At the level where we are, we don’t expect to in the medium term for a dramatic or a further reduction in different sizes as we move forward, because you require X amount of capacity, seating capacity for your dining channel to be relevant. Any cut downs from here on would compromise that particular channel.

C. Kishore — Jolla MS — Analyst

Thank you. Thanks a lot.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Yep. Thank you, Kishore.

Operator

Thank you. We have a next question from the lineup, Ashish Kumar from Infinity Alternatives. Please go ahead.

Ashish Kumar — Infinity Alternatives — Analyst

Thank you, sir. And congratulations for a good set of results. On the web, if you compare a piece of store edition where we’ve kind of come up significantly from where we were last year. The question which I have is that when we compared to a peer group, they seem to be opening almost double the number of stores on the gear C++ at India. Where did the Hadith in the beauty and we have a part to kind of get to catch up with them in terms of the same sport? Because from a GDP perspective, we kind of split the GDP 50/50. Right.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So I think the PSR expansion is in line with what we have said consistently over the last one year that we will, we hope to double our restaurant base of about 550 stores at the end of December 20. And that gives us roughly in the region of 130-260 stores between these numbers, and all three businesses, Pizza Hut, KFC, and Sri Lanka will be roughly be able to deliver the this kind of pace or expansion. Now, this is what we are happy and comfortable with. I think it is a factor when you look at pace of expansion, it is pace of expansion into the ADSs that you are able to get out of a new store. And if you look at that, I don’t think we are compromised in any way expect to rpm.

Vijay Jain — Chief Financial Officer

So just to accelerate double human doubling in three to four years’ time reserve is a numbers which we had in December 21. And again, our guiding factor would not be what pure set is doing a guiding factor would be our levels, our strike rates, our payback, that’s our internal measures which we use. And that’s where we feel we’re comfortable with doubling the count over three to four years. On the point which you just meant the GDP wise the territory distribution is 50 to 5050. I would just like to clarify the territories which KFC operates in for us, they contribute 56% to India’s GDP for Pizza Hut the territories which we operate difficult to cover roughly 57% of industry.

Ashish Kumar — Infinity Alternatives — Analyst

Yeah, which is where I was coming from? And maybe yes, you are right, that this is in line with the guidance that we have given. But given the fact that we are seeing an environment wherein the shift towards branded players like yourself, is significantly higher. If I were to say, does it make sense to and we have a balance sheet with a very healthy cash accrual and a healthy, healthy, internal accruals? Does it make sense to kind of accelerate the pace of rollout given the fact that you ever higher footprint of the country? It’s a question of if you don’t do it, there was somebody somebody like a Popeyes may come and kind of capture the space, that’s a portion of a land grab right at some level?

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So, I don’t think there is a question of land grab here Ashish. Like I said, there are many things that need to be balanced at this rate, the areas that we get and therefore the new store paybacks that we get are healthy, anyone? I think it’ll be or there’ll be few players who can match this rate of expansion, deliver the kind of returns that we are looking at. So short answer is, this is a dimension that we are looking at at this stage.

Ashish Kumar — Infinity Alternatives — Analyst

Okay. And coming back to and sorry, I missed a little bit of the call when there was an issue cushion the gross margin. Do we believe that we can get back to our historical gross margins the next couple of quarters?

Vijay Jain — Chief Financial Officer

So a friend to KFC in particular case in particular. So while again, the gross margin drop off 300 basis point happened or restaurant EBITDA dropped by only 80 basis points. So that’s the way we are focusing the idea is not to take a price increase with inflation and probably potentially impact our revenue and transactions. So, we are happy with regular price increase stays right now. Yes, marginally. We expect the gross margins to come back towards the second half of quarter three and starting quarter four which will be on improving the restaurant EBITDA, which would happen with the improvement in sales, which we’re investing in quarter three over quarter two, because the vegetarian days are now over in terms of the festivities. But the focus is more on the restaurant EBITDA margin. And how do we sustain and drive restaurant EBITDA on margins.

Ashish Kumar — Infinity Alternatives — Analyst

Right. And–

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Thank you, Ashish.

Operator

Sir, I’m sorry to interrupt kindly come back to the question queue. Thank you. We have next question from the line of Jignesh Kamani with BMO. Please go ahead.

Jignesh Kamani — BMO — Analyst

Hi, gentlemen, just the gross margin front, we use in the milk prices increased by three to four rupees last month and hence, ordered the product. So do think that still some of the element of the gross margin and raw material is still continued rising and will have further impact on the gross margin in second half. At least for the Pizza Hut if not for KFC.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So I mentioned this right at the beginning that there are some items where prices have come down some items where as you rightly said milk prices have gone up and therefore, potentially over the next three four months as an impact on on dairy products that we consume also. So overall, I think inflation will continue at the level that at the levels that we have seen in the first half. So I am saying the deviation from this will be marginal, is not going to go down dramatically. It’s not going to go up dramatically.

Jignesh Kamani — BMO — Analyst

Understood. Second thing on the flavor fun, based on the initial experience, obviously more downgrading or new customer is taking care of the needs while downgrading is happening.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So like I said, it’s too early to call it on flavor, and it’s just that we are getting I’m sure we are getting higher level of transaction growth than we have got earlier. So net net it is positive.

Jignesh Kamani — BMO — Analyst

Just okay. Thanks a lot.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Just to go at specific, Jignesh, so forgive me for that.

Operator

Thank you. We have next question. [Operator Instructions] We have next question from the line of Hero Dedwani [Phonetic] from Motilal Oswal, please go ahead.

Hero Dedwani — Motilal Oswal — Analyst

Good evening, Sanjay and Vijay, the seller numbers we see on the process. So my question is on a very comprehensive macro level to Sanjay other than India or Sri Lanka, like in the QSR space, other peer group are growing in other countries. So how? So it’s obviously from the question on increasing stores, would you look at strategically introducing any other country in the near future?

Vijay Jain — Chief Financial Officer

That’s too hypothetical question hero at this moment. Having said that, you we have always called out in terms of our strategy, apart from organic growth in terms of KFC and Pizza restaurant addition, in terms of inorganic growth, we would love to have a third brand at some point in time, if not in the short term, maybe in the medium term. And that’s where we’ll leave it at now. Whether it could be new territory or new brand in India, it’s too early too hypothetical to comment.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

I think, largely, we should largely one of the considerations is that it should be able to offer similar kinds of growth trajectories, as India offers. So if anything that is not offering the kind of Indian growth trajectory or another territory, then I think we will be very, very circumspect.

Vijay Jain — Chief Financial Officer

And the mantra is for those identification of grandeur we have listed in our annual report. So if you go to page 35, there are several mantra sheets of fire define where you want to have scale and success both, then that will go into our choice of the third brand. So you can refer to the page 35 of our renewal report as well.

Hero Dedwani — Motilal Oswal — Analyst

Sure. Thank you.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Thank you, hero.

Operator

Thank you. We have next question from the line of Kalpit Narvekar with Allianz Global Investors, please go ahead.

Kalpit Narvekar — Allianz Global Investors — Analyst

Hello, good evening, and congrats on the Results for the quarter has two questions. One was, so one, I want to understand how discretionary is the category? So essentially, if you’ve done any studies on the demand elasticity, say, at the young level, or for the product categories, check SNPs out, right. So it’s like how does the price like how does price hike affect volume growth? Let’s say in the past in past cycles, how if you’ve done any studies if you have any sort of color on that.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So Kalpit, actually, we are in new territory here. And I’m just looking at my sort of, we’re a new territory here over the last five, five or six years we’ve not had an inflation of this level. And then there is very little past data to fall back on. I’m just looking at my old consumer product experience that says that in general, there is an impact on any discretionary income category, there is an impact when you take the CVS price increases. So the best way to find out actually is to to experiment and say let’s So, in general, we feel that if we are able to restrict price increases to the in the region of between 60 or 70% off inflation, and then find economies of scale elsewhere. It works well because the product then becomes more affordable over a period of time.

I think we used similar kind of understanding when we have taken price increases this year also. But there is no hard and fast heuristic that shows the demand elasticity. demand elasticity. I think we Given we’ve just got to do something and then see how it plays out. I think the fact that we have kept price increases to the level that we have in quarter two compared to the inflation, and it’s borne out with SSSG means that right now, it has worked in, in a quarter that has gone by.

Kalpit Narvekar — Allianz Global Investors — Analyst

And my second question was on the delivery fee. So how much of the delivery fee to our own delivery system and what is the strategy in terms of like [inaudible]

Vijay Jain — Chief Financial Officer

The breakup for both the branch would be different KFC would be 90% approximating or giving you very approximate numbers 90% to aggregators, and rest, every Pizza Hut would be at 20 this ratio. So our plans for our own delivery in terms of our systems, our app, the kinds of offers, which we have on our platform, they continue to be there for last two, three years. And can they continue to grow well, what’s happening at the same time aggregator continues to compete money, they are growing really well. So the receipts are changing, however, our own delivery as well as aggregator both the platforms are growing healthily.

So typically would have stopped the our call was for for an hour, but we are quite happy to continue it if people on the call are also willing to continue. So we’ll take our next call, therefore, Vikram.

Operator

Thank you, sir, we have next question from lineup Haresh Mirchandani with KRIIS PMS. Please go ahead.

Haresh Mirchandani — KRIIS PMS — Analyst

Thank you for the opportunity. Congratulations, sir. For a good set of numbers. I just wanted to understand that do you try the set of repeat customers that you’re in? And you know, how does that number look like on a quarter-to-quarter basis?

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So I don’t have those numbers offhand with me, I must confess. So I’m, if necessary, we can get back later, but I don’t have those numbers offhand with me.

Haresh Mirchandani — KRIIS PMS — Analyst

Okay, okay. So, no worries and I have another question on the prices. So, just want to understand operate across states. So, your prices are consistent across states, where you operate or they are different.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Yes, yes, yes. We are consistent with all India there might be so there are records across India.

Vijay Jain — Chief Financial Officer

They will be different across channels. So for example, so for example, delivery channel may have slightly slightly higher prices for KFC in particular in Pizza Hut even that’s not the case. Otherwise, from state-to-state territory to territory, the prices are consistent, we also have some premium price stores. So, that is that’s about the difference otherwise pricing is consistent across the country.

Haresh Mirchandani — KRIIS PMS — Analyst

Got it. Got it. and just to compare it with the price with you know the other operator for Pizza hut which operates in India. So, the prices with them is also similar or you have a different pricing–

Vijay Jain — Chief Financial Officer

Pan India similar So irrespective of the stores are operated by the sister franchisee, or by the fire the pricing strategy is consistent. Not just for Pizza Hut even for KFC across across all states or territories.

Haresh Mirchandani — KRIIS PMS — Analyst

Got it. thank you so much. Thank you.

Operator

We have next question from the lineup. Ameya Gawande with Metaverse equity fund. Please go ahead.

Ameya Gawande — Metaverse Equity Fund — Analyst

Yeah, thank you for the opportunity. Sir. My question is, what growth you are anticipating in within the next three years, particularly in Sri Lanka.

Vijay Jain — Chief Financial Officer

I don’t think I can venture that the answer. Ameya. What growth so SriLanka we can call out already this year we are seeing 20 to 30% growth and the macroeconomic situation while it is stabilized, continues to remain critical. So we’ll be very foolhardy to probably try and predict three years from right now for Sri Lanka. We’ll take a quarter at a time let’s see in next six months’ time where we reach and maybe then we can have this conversation

Ameya Gawande — Metaverse Equity Fund — Analyst

Sure sir.

Operator

Thank you. We have next question from the lineup Pujan Shah with Congruence advisors, please go ahead.

Pujan Shah — Congruence Advisors — Analyst

Hello. I just wanted to know what is the advertisement spend we are doing on the percentage basis

Vijay Jain — Chief Financial Officer

So for the contract with young we are required to spend 5% for a national campaign, which we contribute to young along with the sister franchisee, which is used to use for Pan India marketing and one person for local sales marketing which we spend internally.

Pujan Shah — Congruence Advisors — Analyst

Okay, so as the geographical wise have a sister concern and also our company, do we have any segregated advertisement planned or we have collective advertisement spend on a basis of the trenching with this.

Vijay Jain — Chief Financial Officer

So, the segregation is on that one person very local sales marketing where we put end into our territories for the 5%. It’s a national pool, which is used for Pan India marketing.

Pujan Shah — Congruence Advisors — Analyst

Okay, good. Thank you.

Operator

Thank you. We have next question from the line of Teria Trivedi. With DJP investments, please go ahead.

Teriya Tirvedi — DJP Investments — Analyst

Yeah. Hi, I have a couple of bookkeeping questions, what is the likely tax rate for this financial year?

Vijay Jain — Chief Financial Officer

So this financial year, it’s unlikely that we will have a cash outflow, because we have enough carry forward losses. I guess we’ll get into the texture time next year, maybe towards second half, probably. And then going forward a year later, we’ll get into 25% tax regime. But that’s probably a couple of years away.

Teriya Tirvedi — DJP Investments — Analyst

Okay, got it. And another one on the royalty front? What is the royalty that we are paying to the master franchise at the current stage?

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

So the first of all, we don’t pay to market we’re after franchise we pay royalty to. Yeah, so as per our agreement, it’s 6.3%. But again, there would be recalled out there would be waivers, depending upon the store opening plan, but the base number is 6.3%.

Teriya Tirvedi — DJP Investments — Analyst

And is it likely to go up in the next year or so.

Vijay Jain — Chief Financial Officer

So our royalty of 6.3% has been consistent for last few years. In fact, for years, it has been consistent globally. We don’t expect this to either come down or go up. That’s the rate which Yun follows globally for quite few years across all territories.

Teriya Tirvedi — DJP Investments — Analyst

Okay. Got it, thanks.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to hand the conference back over to Mr. Sanjay Purohit. For closing comments over to you, sir.

Sanjay Purohit — Group Chief Executive Officer and Whole Time Director

Yeah, so first of all, thank you all for joining. We had a really good question answer session at the end of a quarter where, which was potentially challenging, but we have been able to navigate these turbulent waters quite well. And from a demand perspective, both brands were strong in Sri Lanka also, business was strong. And our old adage where we say that let’s not look at gross margin, but see what is the impact of what is the impact of price increases on volume. And if you’re able to maintain volume and therefore grow same store sales growth, we are able to get leverage and that how this played out in quarter two and therefore restaurant EBITDA margin have been quite, you know, have been quite strong. The draw versus last year quarter on KFC has been quite minimal and the India restaurant EBITDA, both brands put together actually went up by 40 basis points. I’m quite looking forward to quarter three and quarter four, and ending the year also on a strong note. Having said that, we will see you at the turn of the new year and therefore best wishes for the new year in advance to all of you. Thank you.

Operator

[Operator Closing Remarks]