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Steady quarter, multiple levers for aggressive growth and tackling competition; Buy on dips

View ‐ The stock is trading at rich valuations of 64x FY23 and 51x FY24 earnings but is developing into a solid 2‐3‐year growth story. We expect the rich valuations to sustain given increasing aggression on footprint expansion and technology advancement, multiple levers to protect margins despite competition and a strong long‐ term growth potential with entry into multiple new brands and geographies. It remains a good stock to keep buying on dips.

Quarter highlights – In‐line quarter with revenue up 131% yoy, Dominos growth of 131%, delivery channel growth of 124%; EBITDA margins under slight pressure coming in at 24.1% given 80bps GM decline with PAT margin at 7.1%; 29 new stores opened in India – 20 Dominos with 5 new cities, 3 each of Ekdum, Hong’s Kitchen and Dunkin; online ordering contribution to sales at 98.9% and app downloads strong at 6.8mn; 55% and 111% growth yoy in SL and Bangladesh, 2 stores opened in both markets.

Sales recovery trends – Taking 1QFY20 as base, sales recovery was 94% for 1Q with 94.4% in April, 87.7% in May and 99.5% in June despite lower operating hours in June as well; small towns had better recovery, own platform did better.

Management commentary – Recovery momentum interrupted by second wave in April and May but agility and responsiveness helped adapt the business, both dine‐in and takeaway channels impacted with delivery channel compensating, expect strong sequential improvement, store expansion muted due to on‐ground restrictions, expect significant structural changes to category to benefit JUBI – increasing digitalization, delivery model adoption, dine‐in adoption in smaller markets, preference for trusted brands and strong hygiene credentials and increasing value of consumer data.

Capex initiatives ‐ Investing aggressively in ramping up supply chain capabilities in commissaries in Bangalore and Mumbai and plan to open 150‐175 stores in FY22 continuing with aggressive footprint expansion.

Non‐pizza formats – Strong scale‐up plans for new formats starting with NCR markets, particularly happy with Hong’s Kitchen performance with full recovery and strong traction in new customer acquisition and repeat ordering; Dunkin should also recover with reasonable profitability once dine‐in normalizes; some are standalone stores while others focused on delivery are shared between the 3 brands.

Outlook on aggregators – While aggregators might keep growing, expect a trend of more restaurants to build own digital channels in the fight to get consumer data and improve margins.

Competitive intensity – As penetration of food services and frequency remains very low, see any investment in product innovation, supply chain, footprint growth from peers as beneficial for the category.

Intent on becoming a food tech powerhouse – Investing aggressively in technology to drive better user experience, supply chain efficiencies and data science capabilities; also trying targeted marketing using consumer analytics.

Will continue with variable employee costs ‐ Variable employee costs help in matching costs with demand patterns and increases efficiency, helps in better managing peak and trough demand.

Outlook on employee and rental inflation given competition – Not too worried as hire non‐store manpower from multiple streams, have managed to recruit and control costs even on store manpower; multiple real estate options available given COVID impact.

Order value vs number of users – Have seen strong growth in number of orders in delivery given efforts on driving usage of own app, dine‐in curtailment has impacted overall order numbers, order values have moved up.

Potential for Popeyes – See chicken category having large potential in India, don’t need much investment to build category, scale‐up would be much faster than other non‐pizza categories.

Margin outlook – Moderating RM inflation and higher efficiencies offset by higher technology/marketing investments and fuel costs should help in maintaining EBITDA margins; continue to deliver value for money to consumers despite working at highest in industry gross margins.

Pricing and discounting actions ‐ Increased delivery charges towards end‐June from Rs 32 to Rs 35 to offset fuel price inflation, some increase witnessed in promotions and discounts post unlock. 

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