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Jubilant FoodWorks: Outperformance in question

Pick-up in same store sales growth and improvement in profitability are imperative to justify high valuation and outperformance of the stock

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has slightly exceeded analysts’ estimates on sales growth but disappointed on the profitability front in the September 2012 quarter. This trend may continue for some more quarters as the company is still in the expansion phase, which includes growing the Dunkin’ Donuts business now. Given stretched valuation of 55 times FY13 estimated earnings, the (SSSG) needs to improve.

Growth slows, profits impacted
The company’s sales growth of 42 per cent year-on-year is a tad higher than the expected rate of around 41 per cent but is the lowest since the past eight quarters.

Store expansion (50 opened in the first half of 2012-13, including 26 in the September quarter) and price hike (though it partly affected volumes) helped. However, SSSG of 19.8 per cent, the lowest in the last 13 quarters, has come in lower than the expectations of 22-25 per cent. This is partly due to customers ordering lower-priced products.

Says Ajay Kaul, chief executive officer of the company, “Consumers are showings signs of not growing the frequency. They are not reducing the number of orders but the ticket-size is coming down.”

PROFIT GROWTH SLOWS
In Rs crore FY12 Q2’FY13
Net sales 1,017.5 342.0
% chg y-o-y 50.0 42.3
Operating profit 190.1 58.8
% chg y-o-y 58.7 34.6
Net profit 109.7 32.3
% chg y-o-y 52.3 30.0
Source: Company

The company’s performance on the profitability front was also disappointing, thanks to lower operating leverage on account of slowing SSSG, jump in expansion-related costs and opening of Dunkin’ Donuts (five stores now).

While analysts were expecting the operating profit margin to remain flat or slip marginally (by about 25-30 basis points), the same dropped by about 100 basis points to a seven quarter low of 17.2 per cent. Raw material costs were under control but employee costs (annual salary hikes) and expansion-related overheads like rent, among others (as percentage to sales), were up 150 basis points combined.

Weak operational performance was followed by jump in depreciation (store expansion) and taxation. Thus, even net profit margin declined 91 basis points and slipped below 10 per cent (9.4 per cent to be precise).

Store expansion-led growth
The company has increased its store addition target for Dominos from 100 earlier to 110 in FY13 (10 maintained for Dunkin’), a trend also seen in the past quarters.

While this reflects the strong opportunity (in Tier-2 and 3 cities) and will add to its topline, sustaining profitability is also important. Store expansion-related costs and new launches (read: higher promotions) will keep overall expenditure high.

Says Gautam Duggad, analyst, Motilal Oswal Securities, in a post-result comment, “New store opening will maintain momentum in sales growth, however, same store sales is important for margin improvement. For now, we maintain neutral on the stock largely due to premium valuation.” Dunkin’ Donuts (target of 80-100 stores in next five years) is at a very nascent stage to support profit performance.

The company is also expected to undertake price hike of 3.0-3.5 per cent in Domino’s Pizza, which may further affect volumes. In short, all is not hunky-dory for the company compared to the past.

Unless it is able to sustain higher SSSG and improve profitability, the high stock valuations may become difficult to sustain and so will the stock's outperformance.

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