Analysis: Why is Jubilant FoodWorks underperforming?

Near term pressures such as rising competition and slowing same store sales growth not reflected in current valuations

Jubilant Foodworks (Jubilant) scrip has fallen nearly 4 per cent over the past five trading sessions; underperforming both BSE FMCG (up 1.2 per cent) and BSE 200 indices (up 2 per cent). Recent newsflow in the sector such as launch of McCafe by McDonalds (rising competition for Dunkin Donuts) and continued worsening of same store sales (SSS) growth at its peer Yum! Brands (KFC, Pizza Hut) are some of the key reasons for this under-performance. Jubilant itself is struggling with slowing SSS growth given the slowing discretionary spends amidst a weakening macro.

"Slowing SSS growth for Yum! Brands in India could be a negative dampener on Jubilant Foodworks. Also, Pizza Hut home service number of stores has expanded by 31 per cent and KFC has also expanded very sharply which could hurt Jubilant", says Abneesh Roy, FMCG analyst at Edelweiss Securities.

Jubilant's SSS growth stood at 6.3 per cent in the June 2013 quarter- an 18 quarter low for the company. In the September quarter as well, this metric is expected to grow at a subdued 5-6 per cent. Its peer Yum! on the other hand, reported muted 2 per cent SSS growth in India for the quarter ending 31st August 2013. Analysts believe the pressures are higher in its Pizza Hut business while KFC has been holding up relatively better. Interestingly, over the past seven quarters, average SSS growth for Jubilant has been higher at 16 per cent versus 4 per cent for Yum!. Analysts attribute this to different strategies adopted by the two companies.

“While Pizza Hut's offers are through-out the week including the ‘busy’ weekends; Domino’s has been running ‘buy one get one free’ pizza only on Wednesday and has been regularly pushing new products, rather than an across the board discounting/promotions”, says Vivek Maheshwari, Consumer sector analyst at CLSA.

For the September 2013 quarter, new store additions could fuel revenue growth of about 27 per cent to Rs 435 crore. However, higher promotional expenses and Dunkin Donuts' expansion costs is likely to trim EBITDA margin by 70 basis points to 16.5 per cent, estimate analysts. Consequently, the net profit growth could remain subdued at 10.9 per cent to Rs 36 crore estimate analysts.

Given the slowing demand, both these companies are banking on new store additions to drive growth. "We believe that near term pressures could weigh on the stock performance but see this as an opportunity to buy given the strong structural story which is also reflected in aggressive store adds", believes Maheshwari.

However, Jubilant's current valuations (48 times FY14 estimated earnings) appear expensive and do not adequately reflect its slowing growth and near term pressures. As per Bloomberg data, most analysts have a Sell rating on the stock and expect about 8-10 per cent downsides from current market price of Rs 1,142 per share.