Jubilant Foodworks - Best positioned to gain from a faster-than-expected recovery. Upgrade to ADD. - ICICI Securities

We (still) remain longstanding believers of the QSR opportunity and Jubi's superior execution skills to optimise the advantage. Recovery of food service industry during Covid-times has been much ahead of expectations - network checks (and Zomato's commentary) suggest food aggregators have already recovered to ~80% of pre-COVID levels. We believe JUBI remains best positioned to benefit from this recovery driven by (1) already existing digital infrastructure and delivery relationships, (2) lower competition thanks to industry consolidation and (3) cash-positive balance sheet. Delivery charge and variabilisation of costs (delivery personnel and rentals) could help mitigate the near-term pressure on profitability. There are risks attached to these - delivery charge could have a potential brand positioning issue and cost variabilisation could limit the upside potential from operating leverage. However, continuation of these in the long-term is a low probability event, in our view. Upgrade to ADD post underperformance versus Nifty over last three months, despite JUBI being a high beta stock.

- Digital infrastructure and delivery relationships are a competitive advantage: JUBI has invested significant capital and effort in building a fleet of ~27,000 delivery riders. This has been a competitive advantage, helping entrench themselves as the first choice of delivery in the minds of the consumers through the 'delivery in 30 minutes' campaign. Even in recent times, when the food aggregators gained significant scale, JUBI continues to do the delivery themselves and just sources orders through FAs - thereby ensuring low take rates and more importantly, access to consumer information.

- Consolidation in the industry likely to benefit JUBI: We note that, given the stress on balance sheet, a large proportion of standalone restaurants and even cloud kitchens are likely to shut shops. This significantly reduces the competition for JUBI and thereby benefits it in the medium-term. Consolidation even in food aggregators (FA) augurs well for JUBI's profitability as the probability of discount wars between the FAs reduces.

- Delivery charge is a short-term positive; potential long-term brand positioning issue though: JUBI started charging delivery fee (ranging from Rs21-42) from mid-July. This, in our opinion, is a significant positive in the near-term (helps mitigate the cash loss impact) and there is no real worry of negative price elasticity (consumers are not prioritising value in FY21). That said, Domino's brand has worked hard, since 2017, to improve he reasons-to-buy of "value" which might be at risk in long-term.

- Strong balance sheet strength: As per our understanding, JUBI is likely to come out least impacted from the current crisis, in comparison to even the other organised QSR players. JUBI had Rs 7 bn of cash and equivalents on its books as of Mar'20 and therefore, in our opinion, the probability of capital augmentation appears low. The company has also been very efficient in 'variablising' its delivery personnel cost and renegotiating rentals, thereby reducing the cash drag. However, this structure, if maintained in long-term, could limit the upside potential from operating leverage.

- Valuations and risks: We increase our earnings estimates by 6-10%; modelling revenue / EBITDA / PAT CAGR of 9 / 15 / 33 (%) over FY20-22E. Upgrade to ADD (from Hold) with DCF-based revised target price of Rs2,100 (was Rs 1,800). At our target price, the stock will trade at 53x P/E Mar-22E. Key downside risk includes raw material turning inflationary.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs.1972.35 as compared to the previous close of Rs. 1965.6. The total number of shares traded during the day was 21482 in over 1303 trades.

The stock hit an intraday high of Rs. 2001.05 and intraday low of 1964.8. The net turnover during the day was Rs. 42500457.

Source : Equity Bulls

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