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In line result, outlook improving

* 3QFY21 result was largely in line up to the operating profit level, but lower than expected depreciation led to a PAT beat.

* There was a near 100% recovery in 3QFY21 to pre-COVID levels, despite dine-in being weak (42% recovery). This indicates that delivery performance continued to be strong, given that dine-in was ~30% of sales pre-COVID. The management reckons that the weakness in dine-in is a supply-side issue, with 50% capacity restriction due to COVID-19 guidelines. Once these restrictions are lifted, dine-in too will do better.

* The narrative of structural gains for QSRs in a post-COVID world remains strong. Valuations of 69x/49.8x FY22E/FY23 EPS leave limited upside from a one-year perspective. Maintain Neutral.

Result largely in line

* JUBI reported flat standalone sales YoY at INR10.6b (in line), with SSS growth of -1.7% YoY (in line).

* Like-for-Like (LFL) growth (refers to year-over-year growth in sales for nonsplit restaurants opened before previous fiscal) stood at -0.2%. LFL growth, excluding restaurants temporarily closed due to COVID-19, stood at 1.4%.

* The company closed no Domino’s Pizza stores and opened 50 new stores, leading to 1,314 stores at the end of 3QFY21. It added a net one Dunkin’ Donuts store, taking its total count to 27. It added five restaurants in new brands (Hong’s Kitchen and Ekdum!), taking the total count to 10.

* Gross margin were up 340bp YoY to 78.3%.

* Staff costs increased 6% YoY to INR2.2b.

* Other expenses (including rent) declined 1% YoY to INR3.3b.

* EBITDA grew 9.9% YoY to INR2.8b (in line).

* Higher gross margin was partially offset by increased staff costs as a percentage of sales (up 120bp YoY). Other expenses came in 20bp lower YoY. EBITDA margin expanded 240bp YoY to 26.4% (in line).

* Adjusted PAT grew 20.6% YoY to INR1.3b (v/s our estimate of INR1.2b).

* 9MFY21 sales/EBITDA/PAT declined 24,9%/26.9%/51.5% YoY.

Highlights from the management commentary

* JUBI witnessed near 100% recovery, but dine-in continued to remain slow (41.6% recovery only). Even though there was a sequential improvement, capacity restriction at 50% was a major barrier to a full recovery.

* The management believes there is a potential to open 3,000 stores in the medium term (1,314 at the end of 3QFY21). This is a revised estimate from the 2,000 levels mentioned in earlier years.

* It believes that dine-in recovery in the overall market won’t be a headwind for a delivery-based player like Domino’s because of its ubiquitous access, affordability of products, and variety of formats.

Valuation and view

* There is no material change to our earnings forecasts. FY21E/FY22E/FY23E estimate increased by 1.7%/0.5%/1.6%.

* JUBI has been the biggest success story in the Indian QSR industry in terms of growth with its delivery-based business model. It offers the highest margin and best return-ratios among peers. Post-COVID, its longer-term prospects appear even brighter with: a) faster shift toward organized players in the Indian Food Service industry, b) Key domains – delivery and takeaway – gain further traction, and c) increased usage of technology by customers, which facilitates growth for players like JUBI (that are at the vanguard of this move). The introduction of delivery charges (without any negative feedback on ratings) and closure of 105 least profitable stores are factors driving structural margin improvement.

* Valuations of 69x/49.8x FY22E/FY23 EPS leave limited upside from a one-year perspective. Maintain Neutral with a TP of INR2,920 per share.

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