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Building on strengths, growth prospects buoyant

JUBI’s FY21 annual report highlights the management’s efforts to stay ahead of its peers and reap the tremendous opportunities in the Indian QSR space.

* Boosting its technological capabilities: In addition to its delivery and value moat, JUBI is boosting its technological moat to enhance its lead over its QSR peers and aggregators. Improving its pre-order experience, usage of Hindi and regional languages, and setting up of its analytics and insights division are some of the efforts on this front.

* Macro factors favoring delivery are extremely strong: Robust growth in urban and rural internet penetration is likely to be boosted further by the launch of 5G technology. Online ordering is growing strongly, even in smaller centers. As a result, delivery and takeaway (a clear focus area going forward) will be the key drivers of SSSG in the next few years, even when dine-in recovers.

* Sustainable sourcing and food safety is increasingly becoming a vital focus area to boost its long-term growth potential.

* We maintain our Buy rating on the stock with a TP of INR4,830 per share.

Growing its technological moat

Huge app downloads: The company recorded its highest ever app downloads at 57.2m in FY21.

A large part of total orders are from its own app: Despite aggregators doing well, majority of Domino’s online sales are generated on its own platform. This is important as it reduces commissions and builds loyalty.

Other benefits of its own app: Besides driving sales, usage of its own app gives it access to granular consumer behavior, which helps in better decision making via menu curation, marketing enhancements, and store opening choices.

App in other languages: In FY21, the company launched a Hindi version of its app. It is focused on adding support for other languages in its app to personalize the customer experience. The more JUBI expands its store network, greater would be the additional edge.

Improving the pre-order experience further: JUBI introduced a machine learning based model of personalized ranking to substantially enhance the preorder experience through personalized ranking.

Improving efficiency: Several other improvements were made to JUBI’s digital assets to further minimize the time taken to order, enhance the user experience, reduce friction, and target higher conversion

Launch of analytics and insights division in FY21: JUBI continued its efforts on further strengthening the capabilities of its digital team. In addition to growing its product and engineering teams, it launched another vertical under digital: analytics and insights. Together these three functions form the backbone of JUBI’s digital prowess and lead the organization’s digital first agenda

Valuation and view

* JUBI has historically had the best business model among QSRs in India, with an emphasis on and success in delivery (with 70% of sales prior to the COVID-19 outbreak from this channel). This has given it a huge advantage over its peers, which have higher Real Estate and overhead cost. It has had the best Balance Sheet, with a RoCE of over 20% for many years now (barring the blip in FY21 due to the COVID-19 outbreak). This has enhanced funding for its store network expansion.

JUBI's sale per sq. ft. has remained healthy, despite competition from aggregators and other QSRs gradually getting their act together. It is likely to remain by far the best player in the Indian F&B Retail space. SSSG would further improve, driven by tailwinds towards a delivery-based model and organized players once the pandemic ends.

The management sharply raised its 'potential' Domino's store target to 3,000, after maintaining it at 2,000 for many years. In a recent conference call, it increased its store opening target for FY22 as well, boosting its sales growth potential.

The addition of technology and value moats, in conjunction with the historically strong delivery moat, offers a strong barrier to entry vis-à-vis peers. These three moats together make the business profitable and scalable in smaller centers as well.

We believe QSRs are in a sweet spot for rapid growth in India over the next 5-10 years, offering scope for a 25-30% operating profit CAGR to several players. Domino's stands to gain a lion’s share as it is the most efficient among them.

Given the structural opportunities in the QSR space and JUBI's dominant positioning, with a proven and profitable model, we expect JUBI to be the key beneficiary of favorable trends (shift towards branded players). We had upgraded our rating to Buy after its 1QFY22 result. We maintain our Buy rating with TP of INR4,830 per share (35x Dec'23E EV/EBITDA, implying 73x Dec’23E EPS).

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