Published on 13/02/2020 12:12:48 PM | Source: Motilal Oswal Services Ltd

Buy Jubilant FoodWorks Ltd Target Rs. 2,020 - Motilal Oswal

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SSS growth in line, margin outlook positive

* JUBI’s 3QFY20 sales were in line with SSS growth at 5.9% YoY (v/s est. 6%).

* The company has done well to report mid-single digit SSS growth in the past 4 quarters despite very high base of 15-26% SSS growth, competition from aggregators and slowdown in dine-in.

* Healthy demand environment, favorable base of 4-6% SSSG in the next 4 quarters and incrementally benign outlook on operating costs augur well for >25% earnings growth over the next two years, supporting our Buy rating.


Sales and SSSG in line, marginally lower than anticipated EBITDA

* JUBI reported 14.1% sales growth YoY to INR10.6b (v/s est. INR10.4b). SSS growth was 5.9% YoY (v/s est. 6%); like-to-like growth (i.e. sales growth of stores that were not split since 1st Apr’18) stood at 7.2%.

* EBITDA grew 48.6% YoY to INR2.5b (v/s est. INR2.6b), mainly due to Ind-AS 116 impact YoY.

* PBT declined 5.6% YoY to INR1.4b (v/s est. INR1.5b) while Adj. PAT was up 7.4% YoY to INR1b (v/s est. INR1.1b).

* Without the impact of Ind-AS 116, underlying EBITDA was up 3.3% YoY to INR1.8b with EBITDA margin at 16.6%.

* Gross margin was down 60bp YoY to 74.9% due to high RM inflation, led by dairy and vegetables.

* EBITDA margin expanded 560bp to 23.9%, largely due to Ind-AS 116. Underlying EBITDA margin contracted 170bp to 16.6%.

* For 9MFY20, sales/EBITDA/PAT growth stood at 12.1%/53.8%/7.3% YoY.


Highlights from management commentary

* After a 20-quarter high store opening in 3QFY20, management revised store opening guidance in FY20 to 140-150 Domino’s stores (previous guidance- 120), indicating management’s confidence on the growth prospects.

* Management believes that the worst is now over on the material cost front.

* Aggregator led staff-cost increases are petering out and attrition for JUBI has declined sharply in recent quarters, which means that other operating costs should also have a benign trend, going ahead.


Valuation and view

* Valuations of 49.6x FY21 EPS and 38.9x FY22 EPS are at a substantial discount to historical 5-year and 10-year multiples of over 60x. The stock has given 22% return since our upgrade to Buy (3 months ago) v/s flat average return for consumer ad retail peers.

* Earnings outlook remains strong led by healthy SSSG aided by good demand momentum and favorable base of 4-6% for the next few quarters. Maintain Buy with target price of INR2,020 based on 45x FY22EPS, 16% upside.


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