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Providing value to customer to lift LFL growth in Q2

JUBI’s Q1 print was in-line; standalone revenue grew 5.6% led by decline in LFL (-1.3%), yet EBIDA/PAT declined by 9.2%/41.1%. Given strong base (41.1% growth), despite IPL event, stretched consumer spends saw 2.7% growth in ADS QoQ. Dine-in/delivery channel grew flat/8.4%. With 48% order contribution, enrolment for loyalty program grew 23.5% (16.8mn customers), yet with 10.0mn app download its MAU at 10.3mn grew 3.0% YoY. JUBI stepped up Its efforts to revive LFL growth by, (1) re-imaging 1400+ stores to upgrade customer experience, (2) launched four new spicy range of Pizzas, in addition to Pizza Mania, and (3) guaranteed 20-minute delivery service in Bengaluru. Gross margin cut to 76.0% (-70bp) led by higher dairy inflation, yet higher employee cost (+21.1%), rent (+13.7%) and SG&A (+6.6%) ensued post-INDAS EBITDA margins at 21.1% (-345bp). Management held store expansion target with single digit LFL led by strong menu innovation. We retain earnings and maintain BUY, with a DCF-based TP Rs570 (implying 19.6x FY25E EPS)

Peak food inflation ensuing weak demand for Pizzas coupled with lower no of days in Q1

Off high base (+41.1% growth), JUBI reported standalone revenue at Rs13.0bn, grew 5.6% YoY led by 2.7% growth in ADS. Domino’s India added 23 stores (total 1838) covering 394 cities, yet Popeyes now cover 5 cities with 17 restaurants in south. With 50/20 stores in Sri Lanka/ Bangladesh, its system sales grew 13.1%/69.6%. Despite flat/8.4% growth in dine-in/ delivery channel Domino’s saw decline of 1.3% in LFL. JUBI stepped up Its efforts to revive LFL growth by, (1) re-imaging 1400+ stores to upgrade customer experience, and (2) launched four new spicy range of Pizzas, in addition to Pizza Mania, and guaranteed 20-minute delivery service in Bengaluru. Enrolment for loyalty program grew 23.5% to 16.8mn customer base, yet with 10.0mn app download its MAU at 10.3mn grew 3.0% YoY. Out of 21 Dunkin’s outlets 9 are rebranded as Coffee-First and addition of 2 outlets under Hong’s Kitchen took total count at 15 in Q1FY24. JUBI maintained its store addition for Domino’s/Popeyes at 250/45 store in FY24

Weak ADS, higher milk inflation weigh on margin

JUBI’s gross margin declined to 76.0% (-70bp) though increased QoQ, led by, (1) higher inflation in chicken/dairy, (2) adverse operating leverage, and (3) product mix driven by value segment. Despite higher employee cost (+21.1%), rent (+13.7%) and SG & A (+6.6%) the company EBITDA declined by 9.2%, settling post-INDAS EBITDA margin at 21.1% (-345bp). Management alluded its efforts on cost saving – Project-Vijay, coupled with lower milk and cheese inflation may recoup margins in 2HFY24. Q1 PAT plunged to Rs752mn (-41.1%) driven by higher depreciation/interest expenses at 26.5%/11.7%. Management maintained capex guidance of ~Rs7.5bn in FY24, expecting new dual capacity commissary in Bengaluru to be operational in Aug’23 serving 750+ store network. We expect significant cost savings on this account

Valuation and risks

As argued in our recent QSR Thematic report, JUBI in its rejuvenated approach to drive growth through portfolio expansion into high growth chicken QSR segment (Popeyes), coupled with enhanced consumer experience in value segment and by reimaging store could achieve midsingle digit LFL growth in our view. However weak demand, incremental competition in pizza QSR, and rising inflation in dairy pose short term challenges, yet expect JUBI to defend its current margin. We retain our estimates and maintain BUY rating with DCF-based TP of Rs570 (implying EV/EBITDA of 19.6x FY25E). Key risks to our call prolonged weakness in demand, rising inflation in key RM/PM & severe competition in chicken portfolio from peers.

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