Published on 16/10/2019 9:57:46 AM | Source: Reliance Securities Ltd

Reduce Jubilant FoodWorks Ltd For The Target Rs.1,050 - Reliance Securities

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Key Highlights of Domino’s Pizza 3Q Earnings & Channel Check

Domino’s Pizza Inc (DPZ US: NOT RATED) reported its 3QCY19 earnings, below consensus expectations. Our channel check from the chain of restaurants operating in the similar space indicates that 2QFY20 saw sequential decline in Same-Store-Sales (SSS) growth with some volume up-tick during Navaratri festival. Foray of Amazon and Dunzo into food delivery business is an added disruption to the delivery moat of Jubilant FoodWorks (JUBI). Taking cues from its performance of international operations and our channel check, we do not expect JUBI to report beyond 5-6% SSS growth in 2QFY20. FY20E is expected to be the year of moderation in SSS with higher investments across the businesses. Read our annual report analysis. Slower headline growth is likely to keep operating margin under pressure, which may further lead to download trajectory of RoE. Such scenario is likely to keep the valuation multiples under check. At CMP, JUBI trades at 45x of FY21E earnings. Valuing at PE multiple of 36x FY21E, we reiterate our REDUCE recommendation on the stock with an unrevised Target Price of Rs1,050, which implies 20% downside from the current level.

A. Domino’s Pizza 3QCY19 Earnings – Key Highlights

*  US SSS grew by 2.4% YoY vs. consensus expectation of 2.8%, while International SSS grew by 1.7% YoY vs. consensus expectation of 2.9%.

*  DPZ announced new 2-3year outlook (vs. earlier 3-5year) given faster changing market dynamics and uncertainty arising from new entrants into quick service food delivery segment. Sales growth range for the next 2-3 years is seen at 7-10% (from 8-12% earlier). US SSS growth guidance now stands at 2-5% (from 3-6% earlier) and international SSS growth is seen 1-4% (. from 3-6% earlier).

*  Revised guidance in international markets reflects longer-than-expected weakness in some of the key markets. Thus, the company has lowered its outlook than envisaged earlier mainly driven by the ongoing competitive intensity. Although DPZ believes that there exist multiple opportunities in key international markets and is working alongside the Centres of Excellence, these efforts are going to take some time to unfold.

* As per our back-of-the-envelope estimate, India retail sales account for 7-8% of DPZ’s total international retail sales (US $6,953, as on December 2018). Notably, India has the highest stores among the Top-10 international markets for DPZ.


B. Channel Check – Key Findings

*  Higher rainy days, delivery boys going on strike for 7-8days, and logout campaign by restaurant/food joint operators aimed at Zomato/Swiggy were the key factors, which will lead to sequential decline in SSS growth during the quarter, in our view.

* The prices of key dairy products (raw material) continue to scale up which has led to upward price revision by most pizza chains


C. Media Reports Validate Increasing Competitive Intensity

*  Amazon’s entry into India’s food delivery business (with initial funding of US$500mn) is negative for JUBI, as discounting intensity among the food service players, which was expected to reduce, will intensify further. Restaurants piggybacking delivery aggregators are likely to be key beneficiary with lower commissions.

* Dunzo (with fresh funding of US$45mn) is planning to expand operation on pan-India basis from its current reach of 8 cities. Dunzo is currently processing 2mn orders/month (vs. Swiggy/ Zomato 3mn orders/day) with faster delivery, as the key moat. It tied-up with Xiaomi to deliver smartphones to users in select parts of India to deliver it within 30 minutes.


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