Weak results, worsening outlook
* While 4QFY20 sales were in line with expectations, EBITDA and PAT were significantly below expectations.
* Extended lockdown, the economic implications of COVID-19 on discretionary consumption, a minimum wage increase, and 30% of sales generated from dine-ins were major concerns that more than offset market share gains in other restaurants and aggregators.
* While the longer term earnings outlook is attractive – and JUBI, with its delivery-focused business, has the right model among retailing peers in India – valuations of ~60x FY22 appear daunting from a one-year investment perspective. Downgrade to Neutral.
Sales and SSSG in-line; profitability significantly below expectation
* Jubilant FoodWorks (JUBI) reported 3.8% sales growth YoY to INR9b (est.: INR9.1b), with SSSG of -3.4% YoY (est.: -3%). Like-for-like growth (year-overyear growth in sales of non-split restaurants opened before the previous financial year) stood at -2.3%.
* JUBI opened a total of 17 stores during the quarter: 13 for Domino’s Pizza, 2 for Dunkin’ Donuts, and 2 for Hong’s Kitchen.
* Gross margins were down 160bp YoY to 74.4%. Higher other expenses as a percentage of sales (+200bp YoY) and staff cost as a percentage of sales (+230bp YoY) were offset by lower rent costs as a percentage of sales (-780bp YoY). This led to EBITDA margin expansion of 180bp to 18.9%.
* EBITDA thus grew 14.8% YoY to INR1.7b (est.: INR2b).
* EBITDA for 4QFY20 (without the impact of Ind-AS 116) declined 59.8% YoY to INR593m, with the EBITDA margin at 6.6%.
* Adj. PAT declined 42.9% YoY to INR452m (est.: INR646m).
* The company reported an exceptional item of INR323m pertaining to a) provision for diminution in the value of the investment of INR200m in the Sri Lankan subsidiary and (b) COVID-19-led expenses of INR123m.
Highlights from management commentary
* Extended lockdown is resulting in an economic crisis.
* Heightened safety protocols and social distancing measures would be the new norm.
* In addition to zero-contact deliveries, JUBI has introduced the same service for takeaways as well. It is also planning for zero-contact dine-ins when dine-ins are finally allowed.
Valuation and view
* Our upgrade to BUY on JUBI in Nov’19 has worked very well, with the company outperforming ~20% v/s our coverage universe over this period. Its deliveryfocused model makes the company a good investment candidate in the Indian Retail space as this enables it to circumvent the high rental and overhead burdens faced by the industry.
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