Jubilant Foodworks Ltd - Q2 FY21 Result Update - YES Securities

Strong revenue traction ex-dine in coupled with sharp margin improvement; premium valuations should sustain

- Valuation and view - The stock is currently trading at 51x FY23 earnings and looks set to see some upgrades given the strong performance and near-term outlook. Continued market share gains especially with strong adoption of the delivery channel by new/existing consumers coupled with resumption of store addition should deliver strong top line growth. Margins are also set to sustain at higher levels with lower discounting, structural cost saving initiatives, delivery charges and shutdown of loss-making stores. We continue to like Jubilant as a solid medium-term discretionary play and advise adding on corrections.

- Result Highlights - Stronger than expected performance with revenue/EBITDA/PBT decline of 18%/8%/20% respectively; sales recovered to 82% and SSG to 87% of last year and October saw sales recover to 96% and SSG to 97% despite high base; delivery up 6% in 2Q and 16% in Oct, takeaway up 50% in 2Q and 64% in Oct; margins up 290bps; opened 12 stores including 10 Domino's; highest ever app downloads - 6.3mn.

- Management commentary - Demand visibility improving but remain cautious; focus remains on convenience, affordability, hygiene and better experience; had strong and swift recovery despite dine-in challenges; closed 100 stores in 2Q but confident on opening more than 100 new Domino's stores in an optimized format in FY21 itself; closure of stores, soft dairy prices and operational improvement has been a key margin driver; expect full normalcy by 4QFY21; sustained recovery in SL and Bangladesh, launched pasta and pasta pizza.

- Aggressive store closures - Closed 105 stores in 2Q, have exited 6 cities, most stores were dine-in oriented where recovery was not expected, reorganized delivery area for a few of the closed stores; will replace with 100 new delivery and takeaway - optimized stores (700-800 sq ft size) mainly in residential areas.

- Gross margin improvement - Key reasons for improvement were soft dairy costs, lower discounting, controlled wastages and imposition of delivery charges; might come off somewhat going forward as won't want to change the value for money equation for the customer.

- Category dynamics with markets opening up - Penetration remains low and market remains highly fragmented - post-COVID, market becoming organized, ordering food at home is increasing, trusted brands are gaining share - so confident of sustaining growth trajectory even with the markets opening up.

- Record app downloads - Led by increased digital investments, special IPL offers on own platform, pasta launch on own platform, best consumer experience on own app; strong consumer engagement strategy to leverage app download.

- Entry into pasta - Pasta is just an additional topping on a pizza rather than a completely different product like Burger Pizza; seeing strong initial response.

- Discounting trends - 2Q saw lower discounts given lower competition overall; believe worst of aggregator-led discounting is behind and a more rational pricing environment.

- Delivery channel outlook - Adoption of food delivery especially in smaller cities/towns is a key and sustainable behavioral change; as market opens up, dine-in piece should see strong recovery.

- Overhead costs - Helped by rental savings, lower store operational costs and lower G&A expenses; partially offset by higher COVID expenses and increased marketing spends; sustainable savings would be more efficient manpower deployment in stores, reduced energy costs, lower wastage.

- Dunkin and Hong's update - Dunkin has seen a slower recovery as expected given dine-in dependence and portfolio, will see more compact stores with beverages and doughnuts in future; Hong's has seen strong recovery, now have 5 stores, will open 10 more in FY21, good response to value range.

- Revenue performance - Don't think revenue is underwhelming as global markets which have seen double-digit growth have different dynamics and delivery formats, fear factor and anxiety were high, record increase in orders from own app.

- Capex - Overall capex of about 200cr on 100 plus Domino's stores, other brands and reimaging/maintenance capex, closed stores SSG impact is minimal and insignificant.

- Sales cannibalization of fortressing strategy - New store in vicinity of an existing store improves service levels, delivery time, consumer experience; mother store comes back in one year after seeing a temporary decline in revenue.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs.2486 as compared to the previous close of Rs. 2338.85. The total number of shares traded during the day was 70767 in over 8025 trades.

The stock hit an intraday high of Rs. 2502.8 and intraday low of 2360.95. The net turnover during the day was Rs. 173840874.

Source : Equity Bulls

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