Maintain REDUCE on Jubilant FoodWorks - No fireworks to sustain expensive valuation - HDFC Securities

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

Jubilant's Q1FY22 was in line and it posted revenue growth of 131% YoY (HSIE 131%, -3% two-year CAGR). SSG was at +114% (-61% in Q1FY21) vs. HSIE +129%. System recovery was at 94% vs. 41% in Q1FY21 and 115% in Q4FY21, reflecting less impact of the second wave of COVID on the business. While Jubilant continued to capitalise on its delivery expertise, delivery recovery was at 149% vs. 67% in Q1FY21 and 129% in Q4FY21. EBITDA margin was robust at 24% (HSIE 23%), driven by tight cost control. We expect the margin to remain strong in FY22/FY23. The company is committed to aggressive store expansion across brands for the remaining FY22. Investments in technology and digital marketing will further empower the brands and operations. Jubilant is a strong franchise among QSR peers, and its success on new initiatives and capital allocation will remain the key monitorables for the stock. We maintain our EPS estimates. We value Jubilant at 55x P/E on Jun-23E EPS and derive a target price of INR 2,650. We believe a large part of the recovery is priced in (trading at 68x/57x P/E on FY23/24). Maintain REDUCE.

Sequential recovery continues: Net revenue was in line at 131% YoY (-60% in Q1FY21, +14% in Q4FY21). SSG stood at +114% YoY (-61% in 1QFY21, +12% in Q4FY21). OLO contribution to delivery stood at 99% while app downloads rose by >70% YoY to 64mn. Revenue/SSG in FY21 were weak at -16/-18% despite the support from delivery charges. Delivery charge has increased by INR 3 to INR 35, the benefit of which will reflect from Q2FY22.

Store expansion aggressive, execution a concern: Jubilant remained committed to store expansion, opening 29 new stores (20 Domino's and 3 each of Hong's, Dunkin' and Ekdum!). The store expansion spree will continue across brands. Popeyes is the new brand to particularly target the non-veg consumers. With rapid store expansion in India, Bangladesh, and Sri Lanka (along with managing DP Euro Asia), the company needs to manage around twice the number of stores over the next three years. It would test its execution skills, particularly with rising competition in India.

Delivery charge led margin expansion: GM contracted by 80bps YoY to 77.2% (+257bps in Q1FY21 and +304bps in Q4FY21). Delivery charge expanded the gross margin by >300bps YoY in FY21, which is expected to be muted in FY22. Employee expenses continued to tighten, down by 17% QoQ and 10% vs. Q1FY20. EBITDA margin was at 24% vs. 6% in Q1FY21 and 23% in Q1FY20. EBITDA two-year CAGR was at -2%.

Call takeaways: (1) H2FY21 recovery has been interrupted by the second wave in April and May, while June saw recovery up to 99.5% of the pre- COVID level; (2) store opening in Q1FY22 was slow but the company has guided 150-170 new stores for the next three quarters; (3) it expects strong growth momentum from tier-2 and tier-3 cities; (4) investment in technology and digital marketing will be high in the coming years; (5) increased delivery charges by INR 3 to INR 35; (5) EBITDA margin will remain strong.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs. 3429.7 as compared to the previous close of Rs. 3062.8. The total number of shares traded during the day was 193377 in over 14937 trades.

The stock hit an intraday high of Rs. 3449.9 and intraday low of 3208.2. The net turnover during the day was Rs. 652264408.

Source : Equity Bulls

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