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Beat-upgrade cycle taking a pause for now; our 5-year optimism is intact

Key Jubi narratives now are - store expansion, industry-leading revenue growth, resilient margins, unlock-led recovery, digital capabilities, high quality management, platform potential, market opportunity. What’s not ticking (for consensus) is the international expansion which JUBI has aspirations for – while it is bound to have (1) capital allocation concerns and (2) debatable valuation (lower India premium), we draw comfort from (1) JUBI’s execution capabilities (most investors agree on its superior execution) and (2) primary focus will be the larger India opportunity.

JUBI did see a good recovery with 2QFY22 revenue up 11.6% over 2QFY20 levels (delivery charges and higher ticket size did help). Performance of delivery and takeaway channels has been impressive, mitigating the still sluggish dine-in. We like the focus towards (1) growth (store expansion, higher emphasis on digital infra), (2) developing synergies with new brands (Hong’s Kitchen, Ekdum! and Popeyes) and (3) expanded organisational bandwidth. Investments on a strong fleet gives it an edge over peers. The intent and potential to leverage data analytics possibly give a glimpse that JUBI can reposition as a food-tech platform (and not just a collection of few brands in silos). Popeye’s success (execution is key) is the next potential positive upside trigger. Our positive stance stays - ADD retained; TP 4,200.

* Delivery channel continue to be resilient: 2QFY22 was a decent (and in-line) quarter with revenue / EBITDA / PAT up (over 2QFY20 – a normal quarter) 12% / 22% / 39%; compared to 2QFY21, revenue and EBITDA were up 37% and 33%, respectively. This was led by continued strong momentum in convenience channels with both delivery and takeaway recording 37% and 72% growth over 2QFY20. To be sure, (compared to 2QFY20) the current quarter did have the benefit of (1) delivery charges and (2) larger ticket size given higher delivery salience. Management did highlight that the number of orders did recover back to pre-Covid levels by the end of the quarter led by mobility-led recovery in dine-in.

* Store expansion on track: JUBI did accelerate store expansion (after guiding for 150-175 new stores for FY22) to 55 new stores in 2Q; it also added two stores each for Dunkin and HK, one store of Ekdum! and three in Sri Lanka. Domino’s total store network in India is now 1,435 stores and the management highlighted market opportunity of 3,000 stores. Management is confident of a strong runway for store expansion in both large and small cities. JUBI could also look at a ramp-up for the new brands along with the launch of Popeye brand.

* Measures taken to offset inflation impact: Gross margin print continued to be strong at 78.2% YoY up 100bps QoQ but down 50bps YoY. The small increase in delivery charges and nominal price increases in the previous quarter seem to have been absorbed well. While JUBI can further use the pricing lever, if required, we believe sufficient caution will be exercised given the value positioning. While RM inflation can emerge as a potential headwind, management is focusing on (1) premiumisation to improve average ticket size and (2) further enhance business efficiencies.

* Valuations and risks: We cut our FY22-23 earnings estimates by ~8-10%, modelling revenue / EBITDA / PAT CAGR of 29 / 37 / 70 (%) over FY21-23E. Maintain ADD with DCF-based revised target price of Rs4,200 (was Rs3,500 earlier) as we roll forward. Key downside risk is raw material costs turning inflationary.

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