Jubilant FoodWorks plunges 12% as brokerages downgrade stock post CEO exit

Shares of Jubilant FoodWorks plunged 14.6 per cent and hit a fresh 52-week low of Rs 2,444 per share on the BSE in Monday's intra-day trade as most brokerages downgraded the stock post CEO Pratik Pota's resignation. The stock settled 12 per cent lower at Rs 2,513 apiece as against 1.7 per cent rise in the benchmark S&P BSE Sensex. 

According to analysts chief executive officer Pratik Rashmikant Pota's resignation is a setback for the company, especially in the near-term, as the company faces macro headwinds in the form of sticky inflation, higher probability of significant increase in petrol / diesel price in coming weeks, and potential employee cost inflation which usually follows significant increase in food and fuel inflation.

"Recent CEO resignation is likely to further add to woes, since the company needs to recruit a person with solid credentials who will be able to converge single tail pony (Domino pizza) into diversified QSR player given its ambition of having a super app and being a multi-cuisine player. With uncertainty prevailing at the helm, stock would remain sideways, since the company is at a critical juncture," said a report by Phillips Capital.

Motilal Oswal Financial Services added that Pota's resignation comes as a "negative" surprise since the Board of Directors had approved his re-appointment last year for three years from April 2022 until March 2025. 

"We believe the exit of Pratik Pota could have an adverse short-term impact on the stock, considering the phenomenal efforts during his tenure. While he has developed a good second rung, we will have to watch out for his successor and the strategic outlook ahead," it said in its latest report.

Global brokerage Macquarie and JPMorgan, too, have sounded caution saying the CEO's exit "adds to uncertainty" and "raises concerns around execution and earnings growth".

"Pota's exit comes at a crucial time as the company has embarked on a transformation journey (multi-QSR platform from a single-brand QSR) and is on the verge of accelerating store additions for new brands (pan-India roll out of Hong's Kitchen and scale-up of Popeyes in FY2023E). Dependency on CEO is high even as Jubilant Food augmented its management team in the recent past. A leadership change at this juncture would likely slow down the growth engine due to some inevitable execution slippage. Jubilant's management bench strength is weak in our view and it competes with startups for talent," said Kotak Institutional Equities.

Earnings forecast cut amid macro headwinds 

Analysts believe Jubilant FoodWorks's operating margin could come under pressure in the medium-term as troika of food, fuel and employee inflation weighs on profitability. Jubilant, they say, will have to significantly improve its price value equation in current inflationary environment (post double digit price hike it has taken in past 18 months), as online food aggregators (Zomato, Swiggy) have increased promotions with respect to delivery fee waivers and are offering free deliveries to customers taking subscription plans. 

"Since Pizza delivery business has high operating leverage (78 per cent gross margin in FY21), any reduction in net sales realization could disproportionately impact earnings. Notably, Jubilant FoodWorks might also have to increase its salary (employee costs accounts for 19-20 per cent of sales) for store level employees, if current inflation persists, as state government are likely to increases minimum wages across various slabs in order to combat food and fuel inflation," said Phillip Capital.

That apart, on-ground checks suggest that delivery volumes at industry level have been moderating, as mobility improves and consumer prefer to dine-in . Given higher salience of Jubilant from delivery and takeaway channel (70 per cent of overall sales) relative to competition, the brokerage believes Jubilant FoodWorks will find it difficult to navigate the current storm as reduction in delivery volumes are unlikely to be compensated via increase in dine-in business.

Phillip Capital has cut Jubilant Food's EPS estimates by 21-23 per cent for FY21-24 while those at JPMorgan have cut EPS estimates for FY23 and FY24 by 11 per cent and 8 per cent, respectively. Macquarie has cut EPS estimates for FY22/23/24 by 3 per cent/13 per cent/15 per cent, and Morgan Stanley has trimmed the same by 15per cent and 24 per cent for FY23 and FY24.

"We cut FY23/24 revenues by 3 per cent, EBITDA margin by 50-60 bps and EPS by 8-9 per cent. Jubilant Foo has re-rated to 50-55X PE from 20-25X PE over FY2017-22. Execution slippage during CEO transition could result in some de-rating," cautioned Kotak Institutional Equities.