Sapphire Foods India Ltd (SAPPHIRE) Q4 FY23 Earnings Concall Transcript

Sapphire Foods India Ltd (NSE:SAPPHIRE) Q4 FY23 Earnings Concall dated May. 12, 2023.

Corporate Participants:

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Vijay Jain — Chief Finance Officer

Analysts:

Nachiket Kale — Orient Capital — Analyst

Jaykumar Doshi — Kotak Securities Limited — Analyst

Tejas Shah — Spark Capital Advisors Private Limited — Analyst

Nihal Jham — Nuvama Wealth Management — Analyst

Percy Panthaki — IIFL Securities — Analyst

Saurabh Kundan — Goldman Sachs — Analyst

Devanshu Bansal — Emkay Global Financial Services — Analyst

Shirish Pardeshi — Centrum Broking — Analyst

Amruta Deherkar — Wealth Managers India — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Sapphire Foods India Limited Q4 FY ’23 Earnings Conference Call, organized by Orient Capital. [Operator Instructions]

I now hand the conference over to Mr. Nachiket Kale from Orient Capital. Thank you and over to you, Mr. Kale.

Nachiket Kale — Orient Capital — Analyst

Yeah, thanks. Hello, good evening, everyone. Welcome to the Q4 and FY ’23 earnings con call of Sapphire Foods India Private Limited. Representing the management on call, we have with us, Mr. Sanjay Purohit, Group CEO and Whole Time Director, accompanied by Mr. Vijay Jain, CFO.

I hope everyone had a chance to go through the results and the investor presentation, which are uploaded on the exchange earlier today. Before we proceed, a reminder that this call may contain some forward-looking statements, which do not guarantee future performance and involve unforeseen risks. A detailed disclaimer has also been published in the presentation. I would now like to hand over the call to Mr. Sanjay Purohit to take over. Over to you.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Good evening, all of you. Thank you for joining this call. This is our second annual results presentation since the IPO. And therefore, firstly, we wanted to place our two-year scorecard in front of you, and then we will talk about the quarter four performance.

I’m referring to Page number 6 on our deck. FY ’23 has seen our best-ever annual performance. So, we delivered our highest revenue. And in a growing company, I understand, we will always deliver ever highest revenue every single year, so INR22.6 billion is the revenue that we delivered for the full year. But also from our adjusted EBITDA — from an adjusted EBITDA trends, we delivered INR2.6 billion and our highest margin of 11.7%. The same thing is with respect to our adjusted PAT. And we had a deferred tax credit of INR125 crores this quarter. But removing that, we delivered our highest ever adjusted PAT of INR1.4 billion at 6.2% PAT margin.

We also had our highest ever new restaurants addition of 164 new restaurants, KFC, Pizza Hut and in Sri Lanka. It was the best ever year for KFC and Pizza Hut India, both from a revenue and from a restaurant EBITDA percentage. And even in Sri Lanka, despite all the challenges that the country has faced, we were able to grow revenue and Lankan rupee terms were 48%. And despite 100% inflation, our restaurant EBITDA remained flat in LKR terms. And today, we continue to remain the Number 1 QSR brand in the country.

Now talking about our quarter four numbers. Our quarter four consolidated sales of INR5.59 billion, we grew it by 13% year-on-year. Indian — India restaurant sales, within that grew robustly at 23%, and therefore, the Lanka business contributed to the gap between 23% and 13%. Same-store sales were however challenged, as we have continued to experience post-Diwali ’22. And you would have read that our GDP growth rate dropped from 7%-plus in April in the first-half to 4.4% in October-December. I’m quoting these numbers just to indicate that, at a macro level, demand conditions were tough. But we believe that these — such conditions are actually opportunities for us.

What do I mean by that? Generally consumers revert to trusted brands in a tough macroeconomic condition and we believe that the two power brands that we have got, KFC and Pizza Hut, we can gain differential momentum if we launched a robust marketing and activation calendar. So, starting April itself, brands have launched both strong product innovation as well as increased marketing investments. And I’ll talk about that in a minute or two.

Consol restaurant EBITDA remained flat year-on-year and absolute terms. Margin was 16.2%, down 210 basis points over last year, again primarily due to the adverse Sri Lanka impact. India restaurant EBITDA grew in absolute terms by 19% and margin was 16.5%, down 50 basis points, primarily due to Pizza Hut. Our consol EBITDA post-Ind AS was INR1.03 billion or 18.4% and that big client YonY by 1%, now 260 basis points. Our consol adjusted EBITDA was INR56 crores or 10.1%, which declined year-on year-by 11%, largely on account of the Sri Lanka impact. Consol PAT came in at INR136 crores or 24.2% due to deferred tax credit of INR125 crores in this quarter. Consol adjusted PAT before this DT, deferred tax credit, is INR187 million or INR19 crores, 3.3% in quarter four of FY ’23.

While consumer demand, like I said, in India has remained little muted over the last few months, we believe that this a near-term concern only, and we have continued our pace of expansion in quarter four FY ’23, with a total addition of 28 restaurants, 16 KFC and 12 Pizza Hut and none in Sri Lanka, where we are adopting a more cautious approach on our new restaurants expansion in the next 12 months.

Now we will cover the business performance of our three business verticals. And I’ll first start-off with KFC, I’m referring to Slide number 20, where we wanted to give you an idea of what are the brand priorities that we are driving. Firstly, I’d like to say that these are the brand priorities that we drive jointly with Yum. And our first priority is to enhance fried chicken category relevance. While KFC is synonymous with fried chicken, we’d like to grow relevance with Indian consumers, and this is largely a marketing and communication task. Among all related QSR brands, KFC scores the highest on taste. And therefore, enhancing our what we internally call craveable taste credentials is an important priority. While core product innovation remains the largest contributor, we also look at other innovations, and I’ll give you examples that we have run through to date. So, Chizza is a core innovation, whereas we have done chicken popcorn with Maggie or popcorn nachos in the year that has gone by. Thirdly, value is absolutely key in the QSR industry, both entry value and abundant value. And while our bucket options offer the consumer abundant value, we are very, very excited with the launch of Chicken Rolls in April. This price point starts from INR99 onwards. And we have seen very good traction behind this launch in April. We are sure that it will contribute to driving transactions on the brand and increasing our snacking day-part. The fourth priority is to ensure that the customer has as friction less experience as possible. And we are making a big play with our digital KIOSKs that we piloted in about 16 restaurants last year, but this year we will be up in that significantly.

I have spoken about our operational excellence initiatives of seven minutes or free chicken. Our scores are in the high-90s here, which means that we are — and this is important driver of customer satisfaction. And finally, we believe that accessibility is also critical to driving demand and we continue to implement towards our ambition of doubling the store count in three to four years’ time. This year, we have launched — this year, we have opened a record 78 stores of KFC in the year.

Vijay Jain, our CFO, will now take us through the KFC numbers.

Vijay Jain — Chief Finance Officer

Yeah. And starting on Page 28, SSSG of 2% in quarter four, partly impacted by the soft demand conditions continued post-Diwali, and also partly by the fact that Navaratri festival this time shifted to March vis-a-vis last year was in April. This 2% SSSG has also come on the back or with additions of 70 — or 78 additions in restaurant count, that is 30% additions in last one year. Overall revenue grew by 24% to INR369 crores and annually we delivered approximately INR1,450 crores revenue on the brand, which is growth of 40%. Gross margin for the quarter, while it dropped by 110 basis points, there was a sequential improvement of 30 basis points on gross margin. And if you compare to quarter two of this financial Navaratri ear, the total gain sequentially has been 120 basis points on gross margin. So, definitely we have seen some cooling off on inflation and that improvement in gross margin over last six months shows it.

Restaurant EBITDA was at 19.1%, despite the low SSSG of 2%, this is on back of cost efficiencies that we were able to deliver 10 basis points improvement vis-a-vis last year. And overall, on KFC, we had the best-ever year, with 78 store additions, its highest-ever revenue growth of 40% and highest ever EBITDA percentage of 19.4%, which is up by 70 basis points.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Going now forward to Pizza Hut. We had an excellent first half on Pizza Hut. And with the slowdown that we’ve seen post-Diwali, perhaps it impacted Pizza Hut slightly more. Our SSSG is negative. However, importantly our SSTG, same-store transaction growth, is positive, because — we believe because of the big value play that we have made. But I’ll talk about that in a minute or so.

I think importantly, when we look [Technical Issues].

Operator

Ladies and gentlemen, please stay connected. The line for the management dropped. [Operator Instructions]

Thank you for your patience. We have the line for the management reconnected. Sir, you may go ahead.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yeah. Can I go ahead?

Operator

Yes, sir.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yeah. So, I was saying, we had an excellent first-half on Pizza Hut. And we believe that we’ve got all the levers of the consumer proposition on Pizza Hut in-place and the brand competes well in the category. And while the last six months have been slow, we are quite confident about the prospects of this brand. So, our first task on Pizza Hut is to build top-of-mind awareness. We find that — so, apart from digital advertising, we have — first time, we are on mass entertainment television also, and we intend to sustain this marketing presence for the — we intend to sustain this marketing presence going forward. The marketing campaign, which you can see in Slide number 35, employing two celebrities, Saif Ali Khan and and Shehnaaz Gill, broke on April 20, with the launch of our 10 new pizzas. And that’s — second priority that I wanted to talk about that Pizza Hut is the leadership in the — in this category. And with the rise of competition, I think, it’s extremely important to reinforce what a great pizza tastes like. And therefore, the launch of 10 new pan Pizzas in April, new — two new pastas, we have expanded our garlic bread range with a keema garlic bread, also the new pizzas are very flavor full, very moist. And again, consumer reactions are positive on this.

Value, like I said earlier, is also important and Flavor Fun continues to do well. And today, we today, we — today, Pizza Hut offers as good, if not the best value in the pizza category, and therefore it goes back to — with take leadership and value, it goes back to the first priority that we have to enhance the top-of-mind awareness of the brand as we go forward and invest in both television, digital and higher marketing spends.

Friction less — frictionless customer experience is our next priority. So, apart from the native Pizza Hut app launch, which happened earlier in FY ’22, we also launched a self ordering QR code base dine-in digital solution, which is also — got good response from consumers. Operational excellence is our fifth priority and we are using technology to simplify our back-end operations. So, we have invested in two technologies, Dragon Tail and Hut Bot, to help us drive operational excellence. And like on KFC, accessibility is very important. We are on track to double our store count every three or four years. And what is going to aid us in this process is the launch of our 1,000 square foot model, with the same number of covers as a 1,200 square foot model, which means that we have tightened the back-end and this, we believe, can work to increasing density of our stores in the larger towns.

I’ll hand it over to Vijay for the Pizza Hut numbers.

Vijay Jain — Chief Finance Officer

I’m on Slide 42. On average daily sales, so our SSSG was minus 4% for the quarter. And as Sanjay mentioned, the SSTG, the same-store transaction growth, continued to remain positive. And so, that’s the happening part. 67 store additions in the last one year, that’s 30% on our previous year’s base. Overall revenue grew by 18% to INR122 crores for the quarter. And gross margins dropped by 50 basis points, that’s also a sequential drop of 10 basis points. Our restaurant EBITDA came at 8.6%, which is a drop of 290 basis points over previous year. This was largely on account of the negative leverage or the operating deleverage we get because of the lower or negative SSSG.

However, having said that, the overall year, while H1 was soft but — H1 was great for Pizza Hut, H2 was slightly softer, but overall we still had the best-ever year for Pizza Hut, with highest there was additions of 67, revenue growth of 41% and higher-ever restaurant EBITDA margin of 13.3%, which is up by 190 basis points over last year.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

A quick note on the Sri Lanka business. Today, operational constraints are few and far between in Sri Lanka. So, from an ability to import cheese to availability of utilities, all operating conditions have largely normalized. The economy is also gained because of the IMF loan being sanctioned, India rolling over credit. So, things have stabilized in the country. Actually foreign — actually the dollar rate has also — the Sri Lankan rupee has also appreciated marginally versus the dollar. So, it used to operate at LKR362 a dollar. Now, it’s operating anywhere between LKR320 and LKR330. So, the signs on Sri Lanka are positive from that perspective.

However, the impact has been very high on customer wallets and we are seeing big transaction drops on the brand. We have lost transactions definitely. But with our omnichannel presence, with our delivery capabilities, with kind of stores, footprint that we have got, we continue to be the Number 1 QSR brand in the country.

And Vijay will now quickly take us to the Sri Lanka financials.

Vijay Jain — Chief Finance Officer

On 49, SSSG for the quarter was minus 3% and 19 store additions in last one year, that’s 20% on the previous year’s base. Overall revenue grew by 10% in Sri Lankan rupees. In Indian rupees on translation effect, it de-grew by — declined by 27% for the quarter.

The gross margin dropped by 390 basis points year-on-year. And overall restaurant EBITDA was 14.2%. So, while the SSSG has been challenging, what you can see the settling down of the restaurant EBITDA around that 14% mark over the last three quarters, which makes us feel that this is probably the bottom of what we are seeing in that country on the business performance at the restaurant EBITDA level. From here onwards, we hope that over a period of time, we should be able to go somewhere around that 20% restaurant EBITDA mark, which we used to get a year back. So, hopefully, over 12 months’ time to 24 months’ time, we should be able to go back to that particular level.

Overall, 48% revenue growth in Lankan rupees. And in-spite of all the challenges which Sanjay spoke about, the Lankan EBITDA in absolute terms has remained largely flat year-on-year. So that’s the happening side and we continue to remain the Number 1 QSR player in that particular country.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

So, while closing, I wanted to say that we’ve had a tough last six months, but this is what the entire industry has seen. And there are overall weak consumer demand conditions. In the past, I have noticed that consumer behavior in such conditions always favors the trusted large brands. And they tend to do better in these conditions. And therefore, actually we are looking at this situation as an opportunity, both KFC and Pizza Hut are quite well-placed to perform differentially in this environment. All our consumer proposition levers are in pace. And we have doubled down on both innovation as well as on marketing, starting end of March and in April.

The launch of Chicken Rolls for KFC and the launch of 10 new pizzas and appetizers along with Flavor Fun and the television campaign, it’s really an indicator as to how we believe that we can perform well even in market conditions like this.

That’s all from us. We will now open it up to questions. Thank you so much.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions]

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

Jaykumar Doshi — Kotak Securities Limited — Analyst

Hi, good afternoon, thanks for the opportunity. Sanjay, my first question is on this weakness we’re seeing in the category. In the past cycles, we have not seen the kind of divergence between different QSR categories that we are seeing this time, between KFC, Pizza Hut and maybe even Dominos and Burger. So, what is what is your reading, what do you think is the problem with the category?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yeah. So, while the SSGS are are different, KFC 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 yet, that pizza category is doing either worse off or other categories are doing better off. I don’t know what the other pizza brand 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 we impact positively on same-store sales growth. And in our case over, over our base of last year, we have 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.

Jaykumar Doshi — Kotak Securities Limited — Analyst

Okay. Let me ask you one more on the same thing. What do you pick up when you talk to food 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?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yeah.

Jaykumar Doshi — Kotak Securities Limited — Analyst

Idea is — do you — 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 that a lot of new brands eating into?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

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 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.

Jaykumar Doshi — Kotak Securities Limited — Analyst

Is that for Pizza Hut brand, or is that — you’re referring to softness for the entire category?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Actually it’s on both our brands, we see that.

Jaykumar Doshi — Kotak Securities Limited — Analyst

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?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yeah.

Vijay Jain — Chief Finance Officer

So, right now, for Pizza Hut 85 — around 85% of our orders gets delivered within the 30 minutes time.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

And about 93%, 94% gets delivered 40.

Jaykumar Doshi — Kotak Securities Limited — Analyst

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 — Chief Finance Officer

So, again, Jay, we have refrained from giving our annual store opening guidance. As you’ve called out, previously, we could double the count on the base of December ’21 over three to four years, that remains, we are on track, which converts to annual number of anywhere between 130 and 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 you 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.

Jaykumar Doshi — Kotak Securities Limited — Analyst

And what will be the CapEx for the year?

Vijay Jain — Chief Finance Officer

So, again, as I said, we have not given out the total CapEx guidance for the next year, but for positive [Phonetic], KFC is in the range of INR2 crore, 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 positive.

Jaykumar Doshi — Kotak Securities Limited — Analyst

Thanks. So, when I look at your FY ’23 numbers and the store additions versus overall CapEx of INR380 crore, ballpark, I get that about INR70 crores to INR80 crores is spent on refurbishment or some upgradations. So, is that sort of a higher number than the normalized number or is that something that we should expect every year?

Vijay Jain — Chief Finance Officer

So, roughly, and again, I’m giving an approximate number, roughly INR40-odd crores, would have got spent on the refurbishment and the resizing and there would be some major refurbishments as well. The balance will also be the maintenance CapEx as well as the IP CapEx, which would incur and even warehouse CapEx. So, it’s really the combination of all those, but the refurbishment CapEx would be in the range of INR40-odd crores.

Jaykumar Doshi — Kotak Securities Limited — Analyst

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

Vijay Jain — Chief Finance Officer

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 square feet to 3,000 square feet. But post that, we have been opening the tighter format stores. So, we expect as we move around two years, three years down the line. The post store refurbishment CapEx will certainly come down here.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Also our — Jay, our legacy stores are much older stores. And they have come up for their major refurbishment after 10 years and that’s why for us, that costs us slightly higher. Our newer stores, we will see this cycle — minor refurbishment cycle, which is much lower in terms of CapEx per store as we go forward. But I think in the next one or two years, there is also 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.

Operator

Thank you. Sorry to interrupt you, Jay. I’ll request you to join the queue again for a follow-up question. I request to all the participants, please restrict to two questions per participant so the management can answer all the questions.

The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.

Tejas Shah — Spark Capital Advisors Private Limited — Analyst

Hi, thanks for the opportunity. Couple of questions from my side. Sanjay, you spoke about the divergence on trend between KFC and Pizza Hut. And you said that, this is nothing specific to consumer sentiment. But when you just look at way broader number, like a country in Sri Lanka — a 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’re seeing on pizza as a category is much louder. In India? How do you read that?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

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’re drawing between Sri Lanka India exist. The Sri Lanka business has got impacted much more significantly from a transaction basis than India.

Tejas Shah — Spark Capital Advisors Private Limited — Analyst

Very clear. And then you spoke about SSGS being negative in Pizza Hut, but SSTG has been in positive territory. Does it mean that downtrading has actually paid a major role? And you briefly touched upon that, but if you can elaborate how should we think about that dynamic playing out in FY ’24 going at?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Correct. 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 discounting strategy in April 29, going into everyday value, then to meal option, and finally, culminating at 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.

Tejas Shah — Spark Capital Advisors Private Limited — Analyst

And if this trend has to continue, would you revisit? So, you spoke about that perhaps as this weakness continues for longer period, you will see store expansion guidance. But how long will it be the — how long will it be that the monitoring period, will it be six months of one year or will you — like, will you respond a bit earlier on the store expansion guidance?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

So, it is important to note, Tejas, that the machinery on new stores, it 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’ll — I think over the next six to nine months is when we would take a call on what we need to do from our store addition perspective.

Vijay Jain — Chief Finance Officer

Tejas, 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 next three to four months. And I think that’s the timing that how those marketing initiatives and the new product initiatives have gone through. And maybe at that time if the softness is still remains, that’s the time to probably rethink.

Tejas Shah — Spark Capital Advisors Private Limited — Analyst

Very clear. Thanks and all the best.

Operator

Thank you. I request to all the participants, please restrict to two questions per participant. The next question is from the line of Nihal Jham from Nuvama. Please go ahead.

Nihal Jham — Nuvama Wealth Management — Analyst

Yes. Thank you so much. So, good evening, Sanjay and Vijay. Two questions. First was on the Pizza Hut and KFC, you highlighted, while we’ve seen transaction growth in Pizza Hut, there has obviously been a fall in the average bill value and is the opposite way, which has played out for KFC and you’ve taken price hikes of around 9% to 10%. As things improve or revive, which of these two would end-up catching-up faster or reviving further?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Which of these two from a…

Vijay Jain — Chief Finance Officer

Revive faster.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

SSSG or transactions.

Nihal Jham — Nuvama Wealth Management — Analyst

SSSG perspective overall, because there is a divergence in terms of how the SSSG paid out for the two formats, it’s different there, one has seen a fall in the footfall, where as the other one has seen a fall in the transaction volume.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yeah. So, if we 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 moderate. 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 — I mean, that’s one simple adage that we try 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 or pricing then reverting to the kind that we have had in the past, I think, both will start to see upward trajectory.

Nihal Jham — Nuvama Wealth Management — Analyst

Just one follow-up, Sanjay, that, in case of KFC, there are lunches maybe at the value with the INR99 Rolls launch and all, but going-forward, is there a case if the transactions come back and maybe similar to Pizza Hut, the ADS maybe contracts a little and maybe the SSSG stays last irrespective of how the market turns out?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

So, I think, it’s — you got to do both, Nihal. You’ve got to have innovations that are aimed at the brand loyalists. And therefore, things like Chizza work 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 that attractive price points, so they will attract new consumer. So, I think we should see both SSSG and TG now through this launch. So, it’s not one versus the other.

Nihal Jham — Nuvama Wealth Management — Analyst

Thanks. Just one final question was on the store sizes for Pizza Hut. Are we used to target 1,500 square feet kind of for new-store sizes, are these 1,000 square feet despite say the lower space on kitchens serving the purpose in terms of giving you omnichannel, which only differentiated us say from our sister brand or — sorry, our sister company, which is opening more delivery focused stores?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yeah. So, we’re not doing 1,500 square foot stores, Nihal, first of all. We have 1,200 square foot stores right across. This 1,000 square foot format, it does not compromise one bit on the front-of-house dine-in experience. What we have seen is that, because in — so, in the largest cities, through increased delivery cycle, we are able to crunch the back of house kitchen and a large portion of the back of house kitchen goes into store, 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 we are going to a slightly more remote cities. So, this is only to enable us to increase density.

Nihal Jham — Nuvama Wealth Management — Analyst

Got it. And then, I’ll come back to queue. Thank you so much.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Thank you, Nihal.

Operator

Thank you. Next question is from the line of Percy Panthaki from India Infoline. Please go ahead.

Percy Panthaki — IIFL Securities — Analyst

Hi, sir. First question on innovations, these innovations, which you have written in terms of popcorn, pizza — sorry, chicken popcorn with Maggie, 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 — Whole Time Director & Group Chief Executive Officer

So, Percy, first, hello. 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 — Chief Finance Officer

And for example, Chicken Roll is a permanent addition to the menu. So, there are LTO service, as we call internally, LTOs are limited time offers, and there are some permanents to the menu.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

So, Chicken Rolls is a permanent addition to the menu.

Percy Panthaki — IIFL Securities — Analyst

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

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yeah. 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.

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 — IIFL Securities — Analyst

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 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, etc.

So, I just wanted to understand why the differential thought process and — or 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, I 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 — Whole Time Director & Group Chief Executive Officer

So, first of all, Percy, innovation is a long game. So, this is not a quarter-on-quarter game. And as a period of time, I — you are seeing both our brands launching value innovation, so this is coincidental. This is, like I said, period of time that you’ve seen these innovation. There is 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 April innovations on Pizza Hut, and it’s just not a topping — I mean, I invite you to go and try the product out, but mouth feel etc., 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 redone. So — and again, brands have different objectives at different times. Largely, you’re trying to appeal to the brand loyalists. And when we are appealing to the brand loyalists, premiumization is an important factors. So, Chizza, for example, does really well with the premiumization aspect that we want to try 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 loyalists, so give him or her an occasion to come, say, between three and six and snack on our products and so.

Percy Panthaki — IIFL Securities — Analyst

Right. Got it. And finally, just wanted to get some idea on this Pizza Hot margins. So, this time we had a negative 4% SSSG and the margin is around sort of 18.5%. Assuming that, I mean, in the near-term, for the next two, three 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 be like 10% to 11% will be a fair number to look at for the next two to three quarters under our assumption of 0% SSSG?

Vijay Jain — Chief Finance Officer

So, again, Percy, I would not comment on the next two or three 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.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

It’s also factored on ADS, Percy, that it went down to 50 — yes, so, it’s also a factor of that.

Vijay Jain — Chief Finance Officer

Yeah. SSSG become neutral or positive, it will be on the last year’s SSSG nature [Phonetic], which was pretty healthy ADS. So, you’re right. If you’re able to get it neutral or positive, it will come back to the double-digit restaurant EBITDA margins.

Percy Panthaki — IIFL Securities — Analyst

Right. That’s all from me. Thanks, and all the best.

Vijay Jain — Chief Finance Officer

Thank you, Percy.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Thank you, Percy.

Operator

Thank you. Next question is from the line of Saurabh Kundan from Goldman Sachs. Please go ahead.

Saurabh Kundan — Goldman Sachs — Analyst

Hello. Thanks for the opportunity. So, when you set-out into this quarter or maybe we’re in the middle of the quarter, for your expectations lower than what you’ve actually delivered, especially on the Pizza Hut side? So, in other words, has March — despite the difficult days, has March surprised you slightly positively?

And if you could also comment on how 1Q has been till now, that’ll be very helpful.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

So, I don’t think March was any better or any worse on Pizza Hut. I think, it continued the same tradition, in the same manner. Quarter one generally sees an uplift in absolute terms from the Jan-March quarter, and we’ve seen an uplift. But I’m not going to — it’s too early to talk about quarter one. 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 Navaratri — nine days of Navaratri and Ramadan, all impacted us in March significantly.

Saurabh Kundan — Goldman Sachs — Analyst

Great. Second, very quick question, what is the non-cash component of corporate overheads this time or for the whole year?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Sorry, just repeat that.

Saurabh Kundan — Goldman Sachs — Analyst

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

Vijay Jain — Chief Finance Officer

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

Saurabh Kundan — Goldman Sachs — Analyst

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? So, 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 — Whole Time Director & Group Chief Executive Officer

So, sequentially, KFC has improved. On Pizza Hut, also the only pressure is on dairy right now.

Vijay Jain — Chief Finance Officer

So, again the — 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 in chicken.

On Pizza Hut, dairy probably, amongst all commodities and not just for pizza as a category, but dairy amongst all commodities has seen highest-ever inflation. And that’s probably the reason for why our — both the brands have seen a negative or a drop-in gross margins. Having said that, in-spite of a drop-in gross margins as we said, we have reported an improvement in restaurant EBITDA margin year-on year for both the brands.

On the other side, while I should not comment on the other competitor, but we believe the cafe business would be higher — typically cafe business is a high gross margin business and that mix, which would be at play. Also I heard in the commentary that there were some reclassification by some processing charges from the cost-of-goods-sold to other expense line, but again, very difficult to comment on their side.

Saurabh Kundan — Goldman Sachs — Analyst

Sure. Thank you very much.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Thank you, Saurabh.

Operator

Thank you. Next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.

Devanshu Bansal — Emkay Global Financial Services — Analyst

Yes, hi. Thanks for the opportunity and congrats on big menu revamp and associated marketing. Sir, for KFC, last year, ADS was about 145,000 and we have exited Q4 with the bulk 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 the combination of declining first-half followed up by a strong turnaround in second half?

Vijay Jain — Chief Finance Officer

And you are referring to which outlook? I think you’re referring to the slightly 7% combined with some geographic mix.

Devanshu Bansal — Emkay Global Financial Services — Analyst

Yes.

Vijay Jain — Chief Finance Officer

That’s the comment we would have said, you would have heard from Sanjay and I saying, over a long-term three to four years scenario, that’s what we expect with the kind of growth ambitions we have in terms of store additions, which is doubling that about three to four years. We believe 5% to 7%, as I said, over a three- to four-year period is a reasonable assumption to go. But this does not, in anyway, what the next or immediate quarter is going to look like.

Devanshu Bansal — Emkay Global Financial Services — Analyst

So, even if I just want something as in — last year for Q1, it was 145,000 and Q4 exited at 127,000. So, is this largely because of seasonality or we can see, on a sequential basis, that kind of a pickup in this quarter, which is going on?

Vijay Jain — Chief Finance Officer

ADS can be the two cards to it. So, one is seasonality definitely, also with the new store additions, typically our new store for us would start anywhere 75% to 80% of the overall brand average in year-one, and then take three to four years to scale up towards brand average. So, as you keep adding more-and-more new stores, which started 75% to 80% of the brand average, it impacts overall ADS. So, that’s the reason for what you’ve seen.

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

Devanshu Bansal — Emkay Global Financial Services — Analyst

And what is the typical Q4 to Q1, since these are closer quarters, so I guess, what is the typical pickup in Q1 that you see after Q4?

Vijay Jain — Chief Finance Officer

Unfortunately, this moments in festival period can make it very difficult to predict at what has been the exact, and apart — other than festivals, over last three years of COVID impacts from one 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 to Q4, but I’m giving you a very broad range and big range as well. But difficult to say, because of the last three years, trends have been marked by various incidents or various reasons.

Devanshu Bansal — Emkay Global Financial Services — Analyst

And this applies for Pizza Hut as well, Vijay?

Vijay Jain — Chief Finance Officer

Yes. Although, Pizza Hut was slightly less impacted by festival movements, unlike KFC, but yes, you’ll see upliftment in even Pizza Hut in quarter one compared to quarter four.

Devanshu Bansal — Emkay Global Financial Services — Analyst

Okay. And from a gross margin perspective, I just wanted to understand it better. If you could call-out on an overall market basis, so you indicated that there is — while others are down, so on an overall market basis, what is the current level of inflation that you’re seeing in Q1?

Vijay Jain — Chief Finance Officer

So, we believe the Q4 levels on gross margins, we should be able to sustain on those levels in the near future, because the inflation is settled down on 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 you’re 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 cost efficiencies. Hence, we should be able to sustain this gross margin levels in the immediate future.

Devanshu Bansal — Emkay Global Financial Services — Analyst

Okay. Have we taken so far any price increase in KFC [Phonetic]?

Vijay Jain — Chief Finance Officer

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

Devanshu Bansal — Emkay Global Financial Services — Analyst

Sir, last small book-keeping question. So, these growth investments with marketing in this Pizza Hut menu revamp, can this also led to some margin impact or this is handled by a — the master franchisee?

Vijay Jain — Chief Finance Officer

So, we are — yeah, definitely increasing the level of marketing investment from the current level. However, whether this would impact FY ’23, we believe, if typically the increasing sales should pay by itself.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

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

Devanshu Bansal — Emkay Global Financial Services — Analyst

Yeah.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yeah. Okay. They’re not — they’re the branch owners.

Devanshu Bansal — Emkay Global Financial Services — Analyst

Yeah. Sorry, my bad.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Master franchise, yeah. Yeah. 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 — Emkay Global Financial Services — Analyst

No, it was incomplete, sir, sorry.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

It was incomplete. Sorry, let us answer it again.

Vijay Jain — Chief Finance Officer

So, you will see increased level of investments, Devanshu. Again, it’s a combination that both the brand owners the Yum and franchisee comes together and will co-invest the increased amount on the marketing front. Having said that, we believed this should pay for itself, with the increase in the revenue. Again, that 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 two, three, four quarters, we should — we believe, this will pay for itself.

Devanshu Bansal — Emkay Global Financial Services — Analyst

Got, sir. Thanks a lot.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Thank you, Devanshu. I’ll hope that was clear.

Operator

Thank you. A request to all the participants, please restrict to two questions per participant. Next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.

Shirish Pardeshi — Centrum Broking — Analyst

Yeah. Hi, good evening, Sanjay and Vijay. Thanks for the opportunity. And just two questions, very quickly. Does that INR99 Chicken Roll is driven by the scaling up competition and downtrading? Or is it that it was pre-planned and this is one of the — one more ammunition to expand the transaction growth?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

No, this was in the pipeline for quite some time. See, typically, our innovation pipelines are anywhere between 12 and 15 months long, because there is a quite a robust process of consumer check, operational check, then test marketing. Operationally, test marketing is in a particular area and then only growing 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, 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 offing for sometime.

Shirish Pardeshi — Centrum Broking — Analyst

Just two follow-ups on this. This INT99 Chicken Roll has gone in all 341 restaurants across India? And maybe the — if you can share quick — I’m not seeing 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 — Whole Time Director & Group Chief Executive Officer

I’m not able to give you specifics on this, left to say that it is done better than what we’ve 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 — Centrum Broking — Analyst

No, I am referring, because…

Vijay Jain — Chief Finance Officer

Including online.

Shirish Pardeshi — Centrum Broking — Analyst

Yeah. The point, Vijay, that I’m asking, is that gone with the other partner also, because you mentioned that you will start advertising. So, is — that’s the thing which is I wanted to check?

Vijay Jain — Chief Finance Officer

Yeah. So all — in fact, not just this product launch, any new product launch, which happens on KFC happens with other even sister franchisee 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 — Centrum Broking — Analyst

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 F ’24 also?

Vijay Jain — Chief Finance Officer

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 future when we — or future profit. We will not required to pay taxes. So, to the extent of INR125 crore tax, there will be no cash outflow in the future.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. All right. Thank you, sir and all the best.

Operator

Thank you.

Vijay Jain — Chief Finance Officer

Thank you. Last question from…

Operator

Yes, sir. [Operator Instructions]

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

Amruta Deherkar — Wealth Managers India — Analyst

Hello. Thank you for the opportunity. My question is regarding when 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 is this for KFC or Pizza Hut or both.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

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 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, five to six 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 a shorter delivery is scheduled to these stores, and hence 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 Deherkar — Wealth Managers India — Analyst

So, this is only fir the Pizza Hut stores?

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Yes.

Vijay Jain — Chief Finance Officer

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

Amruta Deherkar — Wealth Managers India — Analyst

Okay. And like what kind of benefit, operating wise, do we expect from reduction in these sizes and then in the margins?

Vijay Jain — Chief Finance Officer

So, again, I would not comment on specific on margins, because while we have launched this last year, seven stores 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 Deherkar — Wealth Managers India — Analyst

The KFC stores are around 1,200 square feet, right? So, that remains the same.

Vijay Jain — Chief Finance Officer

So, KFC were always in the range of 1,500-odd square feet. So, it would remain at 1,500 to 1,600 square foot range.

Amruta Deherkar — Wealth Managers India — Analyst

My second question is regarding is, what is the strategy going ahead for the Sri Lanka business?

Vijay Jain — Chief Finance Officer

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 the 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 by few basis points if not more, and hopefully, post 12 months, we expect going back towards that 20% restaurant EBITDA margins. So, that could happen from 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 we’re able to pull-back our restaurant EBITDA margins. And as we start seeing positive movement, we will start opening few stores. So, that’s the strategy on Sri Lanka for next 12 to 24 months.

Amruta Deherkar — Wealth Managers India — Analyst

Thank you.

Vijay Jain — Chief Finance Officer

Thank you.

Operator

Thank you very much. I now hand the conference over to the management for closing comments.

Sanjay Purohit — Whole Time Director & Group Chief Executive Officer

Like I said, while closing our earnings presentation, the last six 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 marketing programs, 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.

Operator

Thank you very much. [Operator Closing Remarks]