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Published on 15/08/2019 10:58:06 AM | Source: Equirus Securities Ltd

Update On Jubilant FoodWorks Ltd by Equirus Securities

 

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SSSg, margin performance likely to improve — reiterate LONG

JUBI’s 1Q revenues grew 10% yoy to Rs 9.4bn, in line with EE, on muted SSSg of 4.1% (EE: 5%). EBITDA was up 54% yoy to ~Rs 2.2bn, 42% above EE. The EBITDA spike was optical owing to Ind-AS 116 adoption, which led to reclassification of rental and other expenses to depreciation and finance costs. SSSg remained muted amid subdued consumer sentiments, pressure on dine-in revenues, a higher 1QFY19 base and store splits. While we believe pressure on SSSg would ease qoq largely due to price hikes, 1Q’s muted SSSg in tough demand conditions leads us to lower FY20E/FY21E SSSg estimates from 8.5%/9.0% to 7.4%/7.6%. We expect margin pressures to normalize ahead with JUBI’s price hikes coming into play 2Q onwards. We retain LONG as mid-to-long term growth levers remain intact. Our Sep’20 TP of Rs 1,385 (Mar’20: Rs 1,403) is set at a 47x TTM EPS of Rs 29.5.

 

SSSg remains under pressure: Domino’s posted muted SSSg of 4.1% amid (a) a high 1QFY19 base of 25.9%, led by the extension of Everyday Value initiative to regular pizzas, (b) splitting of stores leading to optically lower SSSg (impact of 1.7% on SSSg) and (c) muted consumer sentiment with a shifting preference for delivery over dine-ins — an industry-wide phenomenon. We expect continued SSSg pressure in the near term, but feel price hikes of ~5% would partly mitigate challenges. We forecast SSSg of 7.4%/7.6% during FY20E/FY21E.

 

Margins hit by multiple headwinds: RM inflation led by higher dairy prices led to a 60bps gross margin contraction qoq to 75.5%. JUBI extended salary hikes in 1Q (instead of 2Q historically), leading to higher employee costs. Other expenses spiked due to high A&P spends (IPL and World Cup) and increased investments in technology coupled with one-off donation costs. On a like-to-like basis, JUBI registered EBIDTAM of 15.7%, down 90bps yoy/140bps qoq and ~60bps below EE. To counter this, it took price hikes in low single digits towards 1QFY20-end, the impact of which would be visible in the next few quarters. Accordingly, we expect margins to improve qoq in the coming quarters.

 

Switch to IndAS accounting subdues profitability: JUBI’s adoption of IndAS 116 pulled down rent and other expenses but pushed up depreciation and finance costs. This would thus lead to higher costs in initial years and higher profits in later years. Accordingly, we expect an impact of Rs 425mn/Rs 282mn for FY20E/FY21E.

 

Rating & view: We remain positive on JUBI’s mid-to-long term growth prospects despite near-term challenges. Accordingly, we pare FY20E/FY21 sales estimates by 1%/3% and PAT estimates by 9% each. We do not cut our target multiple as we have factored in the Ind-AS-related cost impact which would normalize in the years ahead. Reiterate LONG with a Sep’20 TP of Rs 1,385.

 

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