Jubilant FoodWorks: Fundamentals yet to catch up

Limited upside as recovery in same-store sales growth still a few quarters away

Jubilant FoodWorks has witnessed a 4.4 per cent cut in consensus FY16 estimated earnings per share (EPS) since September this year, taking the total cut to 22.7 per cent in the past year. Bloomberg consensus now factors an FY16 EPS of Rs 31.9 for Jubilant versus Rs 33.38 in September and Rs 41.3 a year ago. Continued weakness in Jubilant’s same-store sales growth (SSSG) due to slowing discretionary spends is a key reason for these downgrades. This metric fell from 7.7 per cent in the March 2013 quarter to a negative 2.4 per cent in the June 2014 quarter. Consequently, Jubilant has reported a fall in net profit for three consecutive quarters. Notwithstanding these pressures, half of the 15 analysts polled by Bloomberg since September remain positive on the stock.

One reason for the optimism is Jubilant’s aggressive store expansion plans (capex of Rs 200 crore) along with a likely revival in SSSG following improved discretionary demand in the next two or three quarters. Analysts believe Jubilant stands to benefit long-term, given the lower penetration of quick service restaurants (QSR) and its leadership position in India. The firm can also add another franchise besides Pizza and Donuts to drive growth.

Competition has intensified in recent quarters in the QSR space with Yum’s Pizza Hut, Sbarro getting aggressive in India. Currently, almost all profits are derived from Dominos as management continues to take Dunkin’ Donuts national. The break-even of Donuts business is likely to be gradual, as the franchise achieves scale. Also, while store expansion will contribute to revenues, it will impact near-term profitability. Some analysts believe pizza prices in India are relatively higher and can normalise in the medium term, adding pressure to margins.

JP Morgan analysts, while hoping that Jubilant’s SSSG would trend up to high single-digit only over the next four-to-six quarters, say competitive intensity remains fairly intense in the QSR space. Hence, they have lowered their FY16 EPS estimates by 15 per cent.

While the unanimous belief is that revival in SSSG is crucial to Jubilant’s prospects, analysts differ on the timing. While Jubilant always commands a scarcity premium in the market, continued weak financial performance could put pressure on the premium, say analysts. The average target price of analysts polled by Bloomberg stands at Rs 1,187, versus the current price of Rs 1,227. At 38 times FY16 estimated earnings, valuations appear full. It is perhaps why the stock has again started lagging the broader market.