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Result better than expected, immense growth opportunity

* JUBI reported a beat on all fronts in its 2QFY22 result. Both store expansion and SSSG were ahead of our estimates. Earnings in 2QFY22 were strong, despite the recovery in dine-in still ~47% of pre-COVID levels.

* With the lifting of lockdown restrictions, dine-in levels are picking up significantly compared to the early part of 2QFY22. Delivery is sustaining at much higher than pre-COVID levels.

* JUBI has the best business model in the QSR space to take advantage of the enhanced growth opportunity after the lifting of COVID-related restrictions. Its technological and logistical moats are also being strengthened further. We maintain our Buy rating.

Strong performance with a beat on all fronts

* Sales grew 36.6% YoY to INR11b (est. INR10.3b), with SSSG of 26.3% YoY (est. 21%).

* Like-for-Like (LFL) growth (refers to the year-over-year growth in sales for non-split Restaurants opened in the previous fiscal) stood at 29.4%.

* JUBI opened 55 new Domino’s Pizza stores and closed nil stores, leading to 1,435 stores at the end of 2QFY22. It added a net one store of Dunkin’ Donuts, taking its total store count to 28. It added three Restaurants of Hong’s Kitchen and Ekdum! (biryani), taking its total count to 21.

* Gross margin fell 50bp YoY to 78.2%.

* EBITDA grew 33.2% YoY to INR2.9b (est. INR2.6b).

* EBITDA margin declined by 70bp YoY to 26% (est. 25%).

* Adjusted PAT grew 59.6% YoY to INR1.2b (est. INR986m).

Highlights from the management commentary

* The management believes that even as dine-in is gradually returning delivery will remain at much higher levels compared to the past. This has been borne out in geographies where dine-in has come back strongly.

* Increased number of orders are now getting delivered in under 20 minutes. Delivery time has improved overall.

* Domino’s app saw 7m downloads during 2QFY22. Key metrics like active users and transacting users are also on a monthly uptrend.

* Own app sales grew significantly faster than sales through aggregators.

* Cost inflation is under control. The material costs basket is likely to see a modest increase because of benign inflation expected in dairy cost. While there will be an increase in manpower due to store expansion, employee costs are not expected to rise materially going forward. However, packaging costs and the cost of delivery (due to higher petrol and diesel costs) are rising.

Valuation and view

* We have raised our FY22 EPS estimate by 7.1% on account of the earnings beat. However, there is no material change to our FY23 forecasts.

* JUBI has historically had the best business model among QSRs in India, with an emphasis on/success in delivery, with 70% of sales prior to the COVID-19 outbreak from this channel. This has given it a huge advantage over peers, which have higher Real Estate and overhead costs. 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 as well as newer businesses.

* As highlighted in our annual report analysis note, JUBI has strong moats, which offers it a strong competitive advantage v/s peers. These moats include: a) addition and strengthening of the technology moat over the past 2-3 years, b) emergence of a value moat in the past 4-5 years, and c) the historically strong delivery moat. These three moats together make the business profitable and scalable in smaller centers as well.

* We maintain our Buy rating with a TP of INR4,870/share (35x Dec'23E EV/EBITDA, implying ~73x Dec’23E EPS).

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