Long-term investors can have a bite of Jubilant FoodWorks

Store additions, innovative offerings, break-even of Dunkin Donuts franchise and foray into Chinese cuisine point to good prospects in long run

Slowing discretionary consumption in recent times and lower same-store sales growth (SSSG) in the April-June 2019 quarter (first quarter, or Q1) by Jubilant FoodWorks had hurt investor sentiment, leading to a 12 per cent fall in the stock over the past three months. Although the near-term prospects appear somewhat subdued, there is a silver lining.

The stock’s decline in past few months means that, at 36x 2020-21 estimated earnings, it currently trades at 19-20 per cent discount to its one-year forward average long-term valuations. This makes it a good buying opportunity for long-term investors, as there are many factors suggesting Jubilant’s long-term growth prospects remain strong.

“(With) accelerated pace of store expansion, every day value offerings, and the all new Domino’s ad campaign, SSSG is expected to remain robust over the long run,” analysts at Edelweiss Securities had said in a note after the Q1 results.

The overall earnings would also get support from Dunkin’ Donuts, which achieved break-even in 2018-19, and Hong’s Kitchen, a new Chinese cuisine format launched by Jubilant.

Long-term investors will have to be patient, with the likely softness in near-term growth. Factors such as high competitive intensity and slowing discretionary consumption are likely to keep near-term SSSG under check. This could also weigh on the company’s profitability and overall earnings, as SSSG has a direct bearing on profitability of retailers and quick service restaurants.

In Q1, Jubilant disappointed the Street with an SSSG of 4.1 per cent, against 14-17 per cent average quarterly SSSG in FY18-FY19. Higher base of about 26 per cent in the year-ago quarter, store splits, and lower dine-in footfall had weighed on SSSG in the June quarter.

According to Priyank Chheda, analyst at Reliance Securities: “Heavy discounts and multiple options by online food aggregators and weaker consumption sentiments in the discretionary space would lower Jubilant’s SSSG in the ensuing quarters.” The broking firm has a ‘sell’ rating on the stock.

Nonetheless, the festive season is expected to reverse the slowing consumption trend to some extent. Price hikes taken by the company at the end of Q1 to mitigate high input cost pressure should also support profitability.

According to a Bloomberg consensus, 23 of the 31 analysts polled have a ‘buy’ rating on the stock. Their reduced average target price (from Rs 1,560 in May to Rs 1,378 now) still suggests around 15 per cent upside in the stock, from the current levels of Rs 1,196.