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Result below our expectations, 1QFY22 resilient despite the lockdown

We cut our FY22E/FY23E EPS forecast by 12.5%/5.2% on account of: a) JUBI’s lower than expected 4QFY21 result, and b) the effect of the lockdown so far in 1QFY22 due to the second COVID wave.

* The impact would have been more if not for the resilience shown in AprMay’21, as per the management commentary. Continued strong growth in the Delivery channel has meant that the severe impact on Dine-in was mitigated to some extent at the broader level. This led to ~90% recovery compared to the pre-COVID run-rate in these two months. This will result in a lower impact compared to discretionary peers for 1QFY22 and lead to healthy growth in the subsequent part of the year as the lockdown restrictions are lifted.

* We like the structural story in QSRs and JUBI is the best of breed on most parameters. However, valuations of 63x FY23E EPS are expensive. We maintain our Neutral rating.

Recovery continues, but performance below our expectations

* JUBI reported a sales growth of 14.3% YoY at INR10.3b (est. INR11b), with SSS growth of 11.8% (est. 19%).

* Like-for-Like (LFL) growth (refers to YoY growth in sales for non-split restaurants opened before the previous FY) stood at 13.7%. LFL growth, excluding restaurants temporarily closed due to COVID-19, stood at 15.1%.

* It opened 50 new Domino’s Pizza stores and closed four, leading to 1,360 stores at the end of 4QFY21. It closed net three stores of Dunkin’ Donuts, taking the total store count to 24 in 4QFY21. It added two restaurants – Hong’s Kitchen and Ekdum! (biryani) – taking the total count to 12.

* Gross margin rose 310bp YoY, but fell 80bp QoQ to 77.5%.

* EBITDA grew 47% YoY to INR2.5b (est. INR3b).

* EBITDA margin expanded 540bp YoY to 24.3% (est. 27%). Employee expenses fell 230bp, while other expenses (including rent) were flat YoY.

* Adjusted PAT grew 131% YoY to INR1b (est. INR1.3b).

* Sales/EBITDA/adjusted PAT declined 15.7%/11.9%/22.5% YoY in FY21.

* The board of directors recommended a dividend of INR6 per share for FY21.

Highlights from the management commentary

* JUBI witnessed ~90% recovery in both Apr’21 and May’21 v/s pre-COVID levels, despite Dine-in being minimal.

* Cheese and edible oil costs are rising, but the management does not expect any significant impact on profitability due to cost savings.

* It said store openings would at least be close to the gross level addition seen in FY21 (i.e. 135, with net store addition of 25). It also stated that network expansion wouldn’t have any material impact on margin.

Valuation and view

* We cut our FY22E/FY23E EPS estimate by 12.5%/5.2% due to the lockdowns triggered by the second COVID wave impacting the Dine-in business. Nevertheless, the company continues to show strong momentum in the Delivery and Takeaway channel.

* 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. Once the pandemic ends, its longer-term prospects appear even brighter with: a) faster shift toward organized players in the Indian Food Service industry, b) key channels – Delivery and Takeaway – gaining further traction, and c) increased usage of technology by customers, which facilitates growth for players like JUBI (that is at the vanguard of this move). The introduction of delivery charges (without any negative feedback on ratings) and closure of 105 least profitable stores in FY21 is driving a structural margin improvement.

* Expensive valuations (63.2x FY23E EPS) suggest that the upside seems to be fully captured in the price from a one-year perspective. We maintain our Neutral rating with a TP of INR2,970 per share (55x Jun’23E EPS).

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