Jubilant Foodworks: More gains ahead for the stock

The strong performance in Q3 and cost efficiencies have led to revision of operating profit estimates and target prices

Jubilant Foodworks gained 19 per cent in two trading sessions after a strong performance in the December quarter and expectation of a strong earnings growth trajectory. The biggest trigger for the stock was the 17.8 per cent same-store sales growth, the highest in nearly five years. This was way above the 10 per cent growth that most analysts had estimated. 

With the company indicating a flat industry growth, it means that Jubilant is gaining market share at the expense of unorganised players post the implementation of the goods and services tax. Given higher value proposition for its products, this too seems to have led to improved demand. The management indicated that positive customer feedback on improved product quality aided acquisition of new customers as well as higher frequency of consumption from existing customers led to strong same-store sales. 

Going ahead, analysts at Morgan Stanley say that recovery in urban discretionary consumption should spur demand growth, allowing Jubilant to realize the full benefit of ongoing cost control and rationalised losses from Dunkin.

The strong top line also reflected in the operating profit margins which expanded 750 basis points over the year-ago quarter to 17.2 per cent, which is about 110 basis points shy of its all-time high margin of 18.3 per cent. The margins were also ahead of expectation of 14 per cent on the back of higher volumes (operating leverage) and the company’s ongoing efforts at cost rationalisation which included the closure of nine loss-making Dunkin Donuts format stores. The company has reduced the store count for this format to half over the last couple of years.

What could help the company on the profitability front is the commissioning of the Noida centre (back-end supply) this month. The centre, which has the ability to serve 600 stores, is expected to improve cost efficiencies through automation, lower freight costs and consolidation of two existing smaller centres. 

Given the strong performance, analysts have revised their operating profit estimates for FY19 and FY20 by 20 per cent each both on account of improved visibility as well as benefits from cost efficiencies.

Though the stock is trading at 57 times its FY19 earnings estimates, most analysts are bullish about the long-term prospects and believe that there could be a further 20 per cent upside from the current levels.