Maintain REDUCE on Jubilant FoodWorks - Time to charge on delivery strength - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities

Jubilant FoodWorks (Jubilant) clocked weak show amidst COVID led lockdown. Revenue declined by 60% YoY with negative SSG of 61% YoY (HSIE -54%). Recovery in July/Aug at 70/85% is encouraging as dine-in pressure remained high. Jubilant is capitalising the situation (weaker competition, delivery friendly demand, and increase in delivery fee by aggregator) by charging delivery fee (Rs 30/order). It will support operational performance in FY21. Cost control initiatives have resulted into positive EBITDA of Rs 241mn vs. loss of Rs 423mn by Westlife. We believe benign raw material prices, soft rental cost and sustained delivery fee will drive the EBITDA margin in ensuing quarters. We change our EPS estimate by -9/+15/+12% for FY21/22/23. We increase target P/E multiple to 45x (42x earlier) to factor-in faster recovery and potential share gain. We maintain REDUCE rating with TP of Rs 1,758.

Weak revenue: Revenue declined by 60% YoY (+10% in 1QFY20 and +4% in 4QFY20), much better than Westlife Development which clocked 75% YoY decline. System sales saw healthy recovery and stood at 70/85% in July/Aug. In August, delivery and takeaway was up by 10% and 55% YoY while Dine-in remained weak at -84%. Domino's net store addition was 19 (spill over of 4QFY20 store addition) while Dunkin saw 4 store closure. Company guided no new net store addition in FY21.

Subdued EBITDA margins: GM expanded by 257bps YoY to 78% (+93bps in 1QFY20 and -164bps in 4QFY20). Soft raw material prices and less promotional activity (EDV was available in 1Q) expanded margin. Employee/other expenses were down by 19/60% YoY. EBITDA margin was at 6.3% vs. 23% in 1QFY20.

Call takeaways: (1) Demand is expected to reach normalcy by the end of FY21; (2) Plan to close 105 unprofitable stores in FY21 (mostly located in malls and corporate parks with a dine-in focus); (3) Intends to open 100 new stores in FY21 and will maintain its store count; (4) Delivery charges were started at Rs 20/order then moved to Rs 30/order. Delivery fee has no impact on the rate of recovery in demand; (5) Delivery fee will be sustainable.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs.2292.75 as compared to the previous close of Rs. 2252.25. The total number of shares traded during the day was 78161 in over 5525 trades.

The stock hit an intraday high of Rs. 2310 and intraday low of 2210.6. The net turnover during the day was Rs. 176926435.

Source : Equity Bulls

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