Analysts likely to slice earnings estimates for Jubilant FoodWorks

Jubilant has not toned down its expansion plans and targeting to add 150 Domino's Pizza restaurants and 25 Dunkin Donuts outlets in FY15

Jubilant FoodWorks (Jubilant) put up a dismal show in the March quarter.

Continued weakness in demand trends, negative same- store sales (SSS) growth and weak margins dragged down performance. Jubilant's total income stood at Rs 434 crore, up 18.6 per cent over the March 2013 quarter and was largely driven by new stores added. Its earnings before interest, taxes, depreciation and amortisation  margin and net profit stood at 12.8 per cent (down 390 basis points year-on-year) and Rs 25 crore (down 23.7 per cent), respectively, significantly lower than consensus Bloomberg estimates of 14.6 per cent and Rs 33 crore, respectively.

Following the weak show, most analysts are likely to trim their earnings estimates for FY15.

Abneesh Roy, associate director, institutional equities, research, Edelweiss Securities, says, “The results were much below our expectations and,  hence, we are likely to trim our FY15 estimates for the company. Slowdown in SSS growth and margin pressure are medium-term concerns.”

However, Jubilant has not toned down its expansion plans and is targeting to add 150 Domino’s Pizza (same as FY14) restaurants and 25 Dunkin Donuts outlets in FY15. While the Dunkin Donuts expansion will add to Jubilant's top line, the business generates lower margins than the pizza segment and will dilute margins in the near term. The company expects Dunkin Donuts stores to payback in about four years as against three years for Domino’s stores. The management hopes to bring this segment’s margins and payback in-line with the pizza business in the longer term. While the company will benefit in case of economic recovery, intensifying competition across businesses are some concerns.

Given the near-term pressures, most analysts remain bearish on Jubilant. Of the 15 analysts polled by Bloomberg since April, 10 have a ‘sell’, one has a ‘neutral’ and four have a ‘buy rating’ on the stock. Their average target price stands at Rs 1,040, reflecting a downside of 12 per cent from Monday's closing price of Rs 1,191.

Jubilant's SSS growth has been under pressure for two-three years, thanks to weakness in discretionary spending. SSS growth has fallen from 25 per cent to a negative 3.4 per cent (worse than analysts' expectations of one-two per cent fall) in the March quarter—SSS growth was 7.4 per cent in the year-ago quarter. SSS growth reflects the trend in sales of stores that existed in the year-ago period.

This is the second quarter in a row when the company has witnessed a fall in SSS. Most of Jubilant’s top line growth was thus driven by revenues from new stores and new product launches, besides an about two per cent price hike in Domino’s in the quarter.

With its new product, Junior Joy Box, Jubilant plans to tap a larger part of the children market in India. Apart from Dunkin Donuts, online ordering, pizza theatre stores are likely to drive new and repeat sales for the company. While it took a higher price rise of 10 per cent in FY14 to combat higher input costs, the company expects to raise prices by six per cent in two phases of three per cent each in FY15 on expectations of lower input cost inflation.

Ajay Kaul, CEO, Jubilant FoodWorks Limited said, “We are determined to use our strengths to face SSG slippages. We have concentrated on leveraging our experience and tools such as promotions, innovation and cost efficiency initiatives to tide over downturns. The current weakness has not deterred our confidence in the long term growth opportunities. On the contrary we continued to invest and have set the stage for future performance gains and earnings growth."