Cost inflation overhang set to hit Jubilant FoodWorks in near term

The country’s largest listed quick-service restaurant operator, Jubilant FoodWorks, saw its share price end sharply lower as the Street is worried that high inflation will eat into its margins.
 

The stock was down 7.55 per cent in trade on Wednesday and ended at Rs 566.45 per share.
 

The management also called out the high inflation impact on its gross margins at a conference call with analysts, post results.
 

“We've continued to face high inflation. This has significantly impacted our gross margin, which came in at 76.2 per cent. It was lower by 200 basis points year-on-year (YoY) and 50 basis points quarter-on-quarter (QoQ),” Ashish Goenka, chief financial officer (CFO) told analysts.
 

Goenka also said that it will not pass on the impact of higher raw material costs to the consumer.
 

“Currently, we are not looking at any further price increase and would be looking at absorbing some of these cost increases in our margins,” Goenka said. 
 

He added, “We are of course driving productivity initiatives across the organisation to mitigate the impact.”

 

In a post results note, Phillip Capital said that near-term issues, which could impact its same-store sales growth are consumer inflation.
 

Inflation will likely reduce discretionary spending and the delivery business (70 per cent of sales) could be impacted due to consumer fatigue. The company has already initiated price hikes, making it difficult to take another round of increases.

ICICI Securities also said in its report on the company that its July-September quarter revenue was decent but not exciting. This is because of the price hike and store expansion trajectory. “Inflation woes continued to hurt margins,” the brokerage said in its report. It also said that, “Essentially, the pressure to ramp up stores was not just to fortress the customers but also the investor base.”
 

Motilal Oswal, which has a buy rating on the stock, believes that the demand environment continues to be positive.
 

It also stated in its report that both the start of regionalisation of product mix and strong response to the loyalty programme of the company are encouraging.
 

“While material cost pressures remain, there appears to be no material concerns on lease rentals and employee costs,” the brokerage said.
 

Prabhudas Lilladhar also pointed out that the new managing director, Sameer Khetarpal, has clearly outlined digital/tech initiatives as one of the focus areas. It will employ analytics across all areas of operations to drive further efficiencies.
 

It has cut its earnings per share estimates on the back of an inflationary environment, lack of price hikes and scope of margin improvement in the near term as well as lower other income.
 

Of the 25 brokerages that have come out with a recommendation post results, 17 have a buy/accumulate/overweight. Six are neutral/hold and two have sell ratings, according to Bloomberg data. Their average one-year target price is Rs 658.