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Downgrade to REDUCE on Jubilant FoodWorks - Good franchise, a pause before run - HDFC Securities

Posted On: 2020-05-21 14:23:16

Mr. Varun Lohchab, Head Institutional Research & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

Jubilant FoodWorks (Q4FY20 Results Review): Good franchise, a pause before run. Downgrade to REDUCE
(TP Rs 1,420, CMP Rs 1, 521, MCap Rs 201 bn)

Jubilant was on course to returning to double digit SSG (7/13% SSG in Jan/Feb) after mid-single digit clocked in the previous four quarters. It justified our thesis on Domino's SSG recovery even when street was factoring aggregator pressure. Covid impacted OOH consumption sharply, thereby, Domino's March SSG saw sharp dip of 28% yoy. QSR will be among the most impacted categories in FY21 (stated in our FMCG thematic report) as dine-in pressure will be immense. We continue to believe that Jubilant is one of the strongest QSR players (superior store economics, healthy FCFs, strong balance sheet) and will be able to gain market share. However, high impact on OOH consumption will have several challenges for growth (co is also returning to muted store expansion in FY21). We believe even in such challenging time, JUBI will be able to cut cost sharply to sustain margin (overhead cost is 55% of sales). However, we cut EPS estimate by 5% for FY21/FY22 (43/22% cut in our FMCG thematic in April) to factor-in consistent extension of lockdown, weaker consumption sentiments and slower store expansion in FY21/FY22. We value JUBI at 40x on Mar-22E EPS, deriving a TP of Rs 1,420. With unattractive risk-reward at current price, we downgrade JUBI to REDUCE.

In-line SSG: Net revenues grew by 4% yoy (vs. exp of flat revenue) as ex-SSG growth remained strong. Reported SSG saw a yoy decline of 3.4% (est. decline 4.1%) while LFL SSG dipped by 2.3% yoy. However, ex-SSG growth was strong at 7% led by strong store expansion in 9MFY20. LFL SSG in Jan/Feb was at 7/13%. Covid halted store expansion to 10 stores in 4Q which >30 stores was planned to open in March. Those unopened stores will be carried over and opened in 1QFY21. Store opening will be weaker and we reduced the new store count to 60/100 for FY21/FY22 (earlier 120/110).

Miss in margins: GM contracted 164bps to 74.4% (exp. dip of 46bps) led by steep dairy inflation, inflation to moderate in FY21. Co could not get enough time to cut down cost in March, thereby LFL EBITDA margin declined by 686bps yoy to 10% (est 16%). Co is focusing on converting several fixed cost into variable cost like employee cost is being shifted from full time/part time model to flexi-time model. We believe this model will help the company control costs without cutting headcounts and will also provide clear visibility to riders and other store staff.

Call & other takeaways: (1) Co has reopened 930 stores (covering 87% of the delivery area), (2) Only carried over stores (30 stores) from 4QFY20 will be opened in 1QFY21, (3) Several cost control initiatives will be visible from 1Q, (4) Momentum in Hong's was strong pre-Covid, (5) JUBI's BS remains strong, Cash & Equivalent has risen to Rs 7bn vs. Rs 6.6bn in FY19.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs.1532.4 as compared to the previous close of Rs. 1510.5. The total number of shares traded during the day was 46582 in over 4349 trades.

The stock hit an intraday high of Rs. 1538.05 and intraday low of 1486.8. The net turnover during the day was Rs. 70480288.

Source: Equity Bulls

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