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Delivery business outperforms; focus on network expansion

* Jubilant Foodworks (JUBI) reported sales growth of 10% YoY to INR14.4b (in line) in 1QFY25. Domino’s LFL was 3% (in line), and same store sales are also turning positive (at ~1.5-2.0%) after six quarters. Delivery business performed well, growing 16% YoY and improving the share to 69%, while dine-in contracted 6% YoY. Waiving of delivery charges transitioned dine-in demand to delivery.

* Domino’s has added 34 new stores and entered 6 new cities in 1Q. The store expansion spree for Domino’s and other brands will continue and plans to open 180 Domino’s stores in FY25.

* Gross margin was up marginally (+10bp YoY to 76.1%), while EBITDA margin contracted 180bp YoY to 19.3%. This contraction is attributed to increased investments in technology, supply chain enhancements, and adverse operating leverage. Additionally, the company intensified its value proposition by offering free delivery.

* Weak operating margins were further hit by higher depreciation (investments in backend) and interest costs. PBT declined 33% YoY, and margin came in at 4.7% in 1QFY25.

* The international business was doing well with 15%/17%/42% revenue growth in DPEU/Domino’s Sri Lanka/Bangladesh.

* The QSR industry is still reeling under pressure on unit economics. Outperformance of delivery demand has aided healthy traffic growth for JUBI. The growth recovery still looks more gradual, and operating print will also lag some quarters for meaningful revision. Owing to its rich valuation, we reiterate our Neutral rating with a TP of INR550. EBITDA in line; PBT down 33% YoY

* SSS turning positive –JUBI reported sales growth of 10% YoY to INR14.4b (est. INR14.2b). LFL grew by 3% (inline).

SSSG is turning positive and was close to 1.5-2%.

* Store expansion continues – JUBI opened 52 net stores in India, taking the count to 2,148 stores. Domino’s: It opened 34 new Domino’s Pizza stores to reach 2,029. Popeyes: It opened eight new stores, taking the count to 50. Hong’s Kitchen: It opened five stores, taking the count to 33. Dunkin’ Donuts: It opened five new stores, taking the count to 36.

* Weak EBITDA margin – Gross profit reported 10% YoY growth of INR11b (est. INR 10.9b). Margin improved slightly by 10bp YoY to 76.1% (est. 76.5%). EBITDA flattish YoY at INR2.8b (est. INR2.8b). Margins contracted 180bp YoY while expanded 20bp QoQ to 19.3% (est. 19.5%). PBT margin was at 4.7% vs. 3.8% 4QFY24 and 7.7% 1QFY24.

* Decline in PBT/PAT – PBT (before exceptional items) declined 33% YoY to INR683m (est. INR774m). Adj. PAT dipped 32% YoY to INR515m (est. INR579m).

International business

* Dominos Sri Lanka’s revenue rose 17% YoY to INR174m. During the quarter, no store was opened in the country.

* Dominos Bangladesh’s revenue grew 42% YoY to INR170m led by network expansion. Bangladesh saw two store additions, taking the total count to 30 stores. DPEU

* Domino’s system sales stood at INR7,151m. Domino’s Turkey LFL growth was 10.3%.

* COFFY’s system sales came in at INR657m; LFL growth was 8.7%.

* Revenue for DPEU was INR4,614m (up 15.4% YoY) with an Op. EBITDA of 25.0% and PAT margin of 9.2%.

* In DP Eurasia, the company opened 12 stores in 1QFY25, taking the total count to 829 stores.

Highlights from the management commentary

* There has been no major improvement in the underlying demand situation. Growth was led by delivery channel initiatives like free delivery and Lunch Feast (meal at INR99).

* The company's sharp focus on delivery value to the consumer helped to deliver 8.5% YoY growth in Domino's India, driven by 3% LFL growth.

* Gross margins of the DP Eurasia (64-65%) business are structurally lower than JFL standalone (76%) due to the franchisee-driven business model.

* Management plans to open 180 stores for Domino's India, 50 for Domino's in Turkey, and 20 for Domino's in Bangladesh in FY25. In COFFY plan to open 70 stores, 50 stores for Popeyes restaurants, and 25 Hong's Kitchen outlets.

Valuation and view

* There are no material changes to our EPS estimates for FY25 and FY26.

* The QSR industry is still reeling under pressure on unit economics. Outperformance of delivery demand has aided healthy traffic growth for JUBI. The growth recovery still looks more gradual, and operating print will also lag some quarters for meaningful revision.

* We value the India business at 65x P/E and international business at 40x P/E on FY26E to arrive at our TP of INR550. Reiterate Neutral.

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