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Chasing growth with pangs (read weak internals)

Simply put – JUBI’s headline growth is not a problem. What’s concerning (to the street) is the quality of this growth with two issues – (1) Stagnant revenue per store with accelerated store expansion (mainly Domino’s) & big price hikes and (2) Execution in new brands – it has utilised a lot of the management bandwidth with a (still) sub-par outcome.

On the first bit – the thing to ponder is would JUBI have embarked on the aggressive growth expansion had both Yum! franchisees not shown the renewed aggression? Essentially the pressure to ramp-up stores was not just to fortress the customers but also the investor base (narrative and growth optics shouldn’t but still matter). We do understand that the opportunity is a lot of bigger but these are realised in the long-term with some associated costs in the near-term, which are getting reflected in the (adjusted) profitability metrics of JUBI.

2Q revenue performance was decent but not exciting considering the price hike and store expansion trajectory. Inflation woes continued to hurt margins (not a surprise though) – GM down 200bps YoY to 76.2% and EBITDA margin down 170bps YoY to 24.3%.

There should be some excitement around new CEO as JUBI looks to strengthen its positioning to further accelerate growth and eventually realise crosssynergies across formats. We continue to remain constructive. Maintain BUY.

* Revenue print decent but unexciting: Net sales were up 17% YoY to Rs12.9bn. On QoQ basis, revenue was up 4%. On 3-year CAGR basis, revenue was up 9.2%. That said, revenue per store during the same time is not materially higher (store splits, expansion in lower tier markets and ramp-up effect). LFL growth was 8.4% YoY. We note that the revenue print needs to be seen in the context of two price hikes (including 5-6% in April) – management highlighted that the impact of price hikes was partly offset by down-trading / lower order size while number of orders and customers continue to see healthy growth.

* Margins performance largely on expected lines: The price hikes were still lower than the food inflation pressure (on YoY basis). Gross margin contracted 200bps YoY to 76.2%. Reported EBIDTA was Rs3.1bn, implying margin of 24.3%. Staff costs and other expenses were up 18% and 15%, respectively. However, a 24% YoY increase in depreciation expense led to 1% YoY decline in PBT – management highlighted besides higher store-related costs, they have also increased investments in commissaries and digital assets. Adjusted PAT was down 3% YoY to Rs1.2bn.

* Other highlights: (1) During the quarter (a) it added 76 new Domino’s stores (total: 1,701) and entered 22 new cities (total 371). (b) Added two stores in Popeyes and one store for Dunkin’. (2) OLO to delivery sales was 97.7% with 98.0% of OLO done from mobile. (3) Quarterly app downloads continued to be strong at 9.0mn. (4) Dominos Cheesy Reward is getting decent traction crossing 7.2 mn since its launch in May 2022.

* Valuations and risks: We cut our FY24E earnings estimates by ~2%, modelling revenue / EBITDA / PAT CAGR of 21 / 24 / 28 (%) over FY22-24E. Maintain BUY with DCF-based revised target price of Rs720 (was Rs750). Key downside risk is raw material costs turning inflationary and increase in competitive intensity.

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