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Maintain SELL on Jubilant FoodWorks - No big fireworks unlike in other discretionary names - HDFC Securities

Posted On: 2021-10-23 09:08:14 (Time Zone: IST)

Jubilant posted a revenue growth of 37% YoY (HSIE 34%, +5.5% two-year CAGR). SSG was at +26% (-20% in Q2FY21, HSIE +26%), two-year CAGR at +0.5%, despite price hike and delivery charges (implying volume contraction). System recovery was at 112% vs. 82% in Q2FY21 and 94% in Q1FY22, reflecting less impact of the second wave of COVID. Dine-in is at 82%, having seen recovery from 37% in Q1FY22, 54% in Q2FY21. GM was down 54bps, resulting in 66bps YoY dip in EBITDA margin to 26% (HSIE 24.4%). The company is committed to aggressive store expansion across brands. Investments in technology and digital marketing will further empower their brands and operations. Jubilant is a strong franchise among QSR peers, and its success in new initiatives and capital allocation will remain the key monitorables for the stock. We maintain our EPS estimates. Despite giving our best assumption and valuation to all the new brands/initiatives (India and international), the best value comes to INR 300/share. Our target price on Jubilant is INR 3,300, based on 60x P/E on Sep-23E EPS for Domino's India and INR 300/share for ex-Domino's India business. With no big surprises in earnings (unlike for other discretionary companies), we believe a large part of the recovery is priced in (trading at 88x/73x P/E on FY23/24). Maintain SELL.

Robust revenue recovery: Net revenue was up 37% YoY (-18% in Q2FY21, +131% in Q1FY22, 34% HSIE). SSG came in line at +26.3% YoY (-20% in Q2FY21, +114% in Q1FY22) while like-to-like growth was +29.4% YoY. OLO contribution to delivery stood at 97.8% while app downloads stood at 7.2mn. Domino's own delivery grew faster than the deliveries by aggregators.

Store expansion spree continued: Jubilant opened 55 Domino's stores during Q2FY22 (75 in H1FY22) along with 1 Dunkin' store and 3 Hong's Kitchen stores. The company maintains its domestic store expansion target of 150-175 stores in FY22; however, it intends to push towards the upper limit. The company is on track to launch Popeye's by the end of FY22.

Raw material headwinds continue: GM contracted by 54bps YoY to 78.2% (+351bps in Q2FY21 and -80bps in Q1FY22). Rent expenses are normalising as concessions are reducing. Employee expenses were up 15% YoY. EBITDA margin was at 26% vs. 26.7% in Q2FY21 and 24% in Q1FY22 (24.4% HSIE). EBITDA grew 33% YoY.

Call takeaways: (1) Dine-in channel showed positive trends through Q2FY22; however, it is still below the pre-COVID level. (2) As revenue growth is back and things normalise, leverage will kick in; however, inflationary headwinds would remain. (3) Domestic store expansion target remains 150-175 stores in FY22; however, the company intends to push for the upper limit. (4) It is now entering tier-3/4 cities, where it is seeing encouraging response across all channels. (5) The company also plans to expand Hong's beyond the NCR region.

Shares of Jubilant Foodworks Limited was last trading in BSE at Rs. 3702.80 as compared to the previous close of Rs. 3867.30. The total number of shares traded during the day was 37043 in over 5379 trades.

The stock hit an intraday high of Rs. 3929.00 and intraday low of 3679.35. The net turnover during the day was Rs. 139669463.00.

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