QSRs: Why Ambit Capital prefers Sapphire Foods over Devyani and Jubilant FoodWorks

Quick service restaurants (QSRs) present a scalable and profitable opportunity beyond the current slowdown. In a recent note, Ambit Capital highlighted that certain brands – particularly KFC – have the potential to more than double their number of stores by FY30, based on global benchmarks and bottom-up analysis of store potential. While aggregators have partially democratised the sector, especially in delivery, Ambit Capital believes that brand preference and process complexity serve as protective moats that can prevent market share loss and sustain the sector's growth potential.

The brokerage favors chicken as a category and sees Sapphire Foods as a strong investment due to its reasonable valuations and scalability potential. Although Devyani International shares similar growth drivers with Sapphire Foods, Ambit Capital believes it does not justify a premium despite some optionalities. Furthermore, it noted that Jubilant FoodWorks faces challenges with limited scalability of Domino's and a lower same-store sales growth (SSSG) profile, making its valuations too demanding even after considering its interests in DP Eurasia and Popeyes.

As a result, Ambit Capital's recommendations are Sapphire Foods (BUY) > Devyani International (SELL) > Jubilant FoodWorks (SELL).

Let's look at key reasons why

Large Opportunity with a Temporary Pause: According to Ambit Capital, India's food services market was valued at ₹4.25 trillion in FY20, representing about 2.1 percent of the GDP. Within this market, the chain QSR segment is worth ₹188 billion, or 4.4 percent of the total. The QSR segment experienced a 20 percent compound annual growth rate (CAGR) from FY10 to FY20, the highest among food service categories, and is expected to grow at 23 percent CAGR from FY20 to FY25, according to Technopak estimates.

However, there has been a slowdown in the past six quarters, with an average same-store sales growth (SSSG) of -2 percent, due to pent-up demand in FY23 and a general slowdown in consumption. Ambit Capital expects demand to improve gradually, although SSSG is expected to remain negative in the first half of FY25. Despite this, the potential for growth through new customers, expansion into new cities (with a market opportunity in approximately 550 cities, while brands other than Domino's are in around 250 cities), and store scalability (1.5-2 times by FY30E) presents a significant growth opportunity for QSRs.

Competitive Intensity and Process Complexity: The rise of aggregators has increased competition for QSRs by democratising delivery and customer mind share. Ambit Capital's framework for assessing category moats, which focuses on process complexity, suggests that chicken QSRs will be least affected by the increasing competitive intensity, followed by burger and pizza chains. This is crucial because any market revival may not translate into company growth if there is a loss of market share, noted the brokerage.

Cloud Kitchens as a Non-Threat: While cloud kitchen companies have grown (with the top five gross merchandise value accounting for about 20 percent of listed QSR chains), they are not seen as long-term competitors to QSRs because they lack customer connectivity, stated Ambit. The scalability of pure-play cloud kitchen brands is less than 5 percent of the market leader, and these companies are still experiencing significant losses. The high customer acquisition costs and unclear path to profitability further diminish their competitive threat, it added.

Valuation and Investment Preferences

Ambit Capital believes that QSRs should trade at a premium to all consumer categories, except jewelry, due to their growth potential and lower competitive intensity. The brokerage evaluates companies using a six-factor framework to determine their relative valuation order. Jubilant FoodWorks ranks highest for store return on capital employed (RoCE), execution, and optionality, but its current valuations are demanding with a FY26 price-to-earnings (P/E) ratio of 74x (adjusted for Popeyes and DP Eurasia), compared to the pre-Covid five-year and ten-year averages of 48x and 51x, respectively. This is despite lower growth, SSSG, and RoCE.

Ambit Capital prefers Sapphire Foods due to its 16 percent revenue and 29 percent EBITDA CAGR from FY24 to FY27, its scalability with KFC (810 potential stores by FY30E compared to 429 in FY24), and reasonable valuations (21x FY26E EV/EBITDA versus 34x for Jubilant and 33x for Devyani International). While Devyani International offers similar opportunities as Sapphire, the 50 percent premium for perceived execution superiority and optionality (such as KFC Thailand and Costa Coffee) is not justified.

Stocks

Sapphire Foods: The brokerage has a 'buy call on the stock with a target price of ₹1,876, implying a 16% upside. Ambit Capital highlighted Sapphire Foods' key proposition as the scalability of KFC, estimating approximately 850 stores by FY31 compared to 429 in FY24, supported by robust store economics, with mature KFC stores achieving over 40 percent return on capital employed (RoCE). This expansion is expected to drive a 16 percent CAGR in revenue from FY24 to FY27 and an 11 percent CAGR from FY24 to FY44, while RoCE is projected to increase from 9 percent to 18 percent over FY24 to FY27. 

Competition in the chicken QSR segment is the lowest among categories and is expected to remain moderate due to process complexity and brand preferences. Another growth lever is the turnaround in Sapphire's Sri Lankan operations, where the company has leadership through Pizza Hut, which was highly profitable before the crisis. As the Sri Lankan economy improves, profitability is anticipated to rebound, it said. Ambit’s discounted cash flow-based target price of ₹1,876 (at 25x FY26E EV/EBITDA pre-IND AS) incorporates a 16 percent EBITDA CAGR from FY24 to FY44, with a value split of 82:5:13 between KFC, Pizza Hut, and Sri Lanka operations, respectively. Key risks include prolonged demand weakness and increased competition, particularly from Popeyes, affecting KFC, it cautioned.

Devyani International: The brokerage has ‘sell’ call on the stock with a target price of ₹149, implying an 11 percent downside.

Devyani International (DIL), the franchisor of KFC and Pizza Hut in India, has a core investment proposition centered on the scalability of KFC, similar to Sapphire Foods. DIL is expected to achieve a revenue and EBITDA CAGR of 11 percent and 13 percent, respectively, for KFC over FY24-44E, with KFC contributing 61 percent of EBITDA by FY44E, predicted Ambit. The chicken category's inherent moats support these estimates. However, despite DIL's current free cash flow to the firm (FCFF) CAGR of 21 percent over FY27-44E, which is comparable to Sapphire even when considering the Costa Coffee franchise, KFC Thailand, and greater Pizza Hut territory rights (about 65 percent), there is limited execution superiority over Sapphire. DIL's 50 percent valuation premium (33x FY26 EV/EBITDA excluding KFC Thailand versus Sapphire's 21x) is seen as unjustified. Ambit's DCF-based target price for DIL incorporates 12 percent, 14 percent, and 21 percent revenue, EBITDA, and PAT CAGR over FY24-44E.

Jubilant FoodWorks: The brokerage has a ‘sell’ call on the stock with a target price of ₹439, implying a 20.5 percent downside. JFL has maintained industry-leading same-store sales growth (SSSG) with Domino’s, securing a 78 percent market share in pizza at its peak. However, the democratisation of delivery and low entry barriers in the pizza category, along with limited impact from recent growth initiatives, lead to a moderate SSSG CAGR estimate of 5 percent over FY24-29 (down from 11 percent in FY11-20), and a market-share decline of 280 basis points to 60 percent, noted Ambit.

JFL’s focus on building Popeyes into a profitable brand adds value but is unlikely to be a major growth driver. The DCF-based target price is ₹439, reflecting a 61x/51x P/E ratio for standalone and Domino’s FY26E, with a split of 75:15:11 for Domino’s, Popeyes, and DP Eurasia, it added. Key risks include the potential revival of SSSG, market share gains from new initiatives, or intensified competition.

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