Jubilant outlier in food services pack

Well ahead of peers in same-store sales growth but QSR segment still depressed for a variety of reasons; cautious but optimistic on expansion

Jubilant FoodWorks surprised the Street on Thursday by reporting a strong rebound in same-store sales (SSS)  growth to 6.6 per cent in the March quarter. This was a second straight quarter of positive growth for the company and the highest in five.

In the  December 2014 quarter, Jubilant had 1.9 per cent SSS growth, raising hope of a rebound. However, analysts have cautioned this number is higher on account of a low base a year before, when the measure showed a 3.4 per cent fall.

More important, Jubilant is ahead of peers on SSSG for the quarter. Both Westlife Development (runs McDonald's in West and South India) and Yum! Brands (runs Pizza Hut, KFC and Taco Bel) saw sales fall by 4.8 per cent and 11 per cent, respectively, in the three months ending March. This is five quarters of a fall for these two companies, quarter-on-quarter.

Amit Jatia, vice-chairman, Westlife Development, said in a recent analyst call: “FY15 has been the most challenging year for the sector due to muted consumer sentiment, footfalls being under pressure and no growth in eating-out frequency. Specifically, eating out (growth) was stagnant in India. Western fast food is only one per cent of the total eating-out market in the country.”

What, then, aided Jubilant's growth? Good response to its new products, advertising & marketing, and price increases were reasons, analysts said. In FY15, it twice raised prices by three per cent. The company did not give a price-volume break-up of sales but said price realisations were good for the quarter.

 

Against this backdrop, Jubilant's management remains cautiously optimistic and expects SSSG to be in a high single digit or low double digits over the next two to four quarters. “We are yet to see concrete signs of revival in QSR (quick service restaurants) space and are not getting confident, given the negative SSS growth posted by some of our peers,” said Ajay Kaul, chief executive officer.

Navin Kulkarni, co-head, research, PhillipCapital, says: “While the rebound was firm, the Street was expecting Jubilant to report positive sales growth in the March quarter. This was reflected in the stock price today; it was trading up.” The stock was up 1.2 per cent on the BSE exchange and closed at Rs 1,569.60. The scrip has outperformed the S&P BSE Sensex over the past year and trades at 51 times the FY16 estimated earnings.

Analysts believe the current valuations adequately capture the positives and offer little upside potential. Of the 11 analysts polled by Bloomberg since April, six have a Sell rating, four have a Buy and one has Hold. Their average target price is Rs 1,425, a nine per cent fall from Thursday's closing price.

In the quarter, Jubilant's sales were Rs 542 crore and grew 25 per cent on a year-on-year basis. Net profit grew 26.1 per cent year-on-year to Rs 32 crore. Notably, sales were aided by the full-quarter impact of a three per cent price rise, implemented in November 2014. Lower input costs (down 154 basis points over a year before, to 21.3 per cent of sales), coupled with a 161 basis points fall in the tax rate to 30.3 per cent, aided net profit growth. The Ebitda (earnings before interest, taxes, depreciation and amortisation) margin inched up nine basis points to 12.9 per cent as compared to the year-before quarter.

While sales growth remained healthy, margins were diluted by new store openings in Dunkin Donuts. The latter's contribution to Jubilant's sales (in percentage terms) is in single digits and is likely to remain so over the next two years as well. Notably, this business has lower margins and diluted Jubilant's FY15 EBITDA margin by about 180 basis points. These stores typically take longer (or three years) than the Dominos stores to achieve break even. Jubilant added 8 new Dunkin Donuts stores in the quarter and the total store count now stands at 54 for this business. While company plans to add 30 Dunkin Donuts stores in FY16, it needs to take this tally to  120-150 levels to achieve break even. The break even of this business is thus another two-three years away.

The Domino’s business added 38 stores in the quarter and 150 stores in FY15. Jubilant plans to add 150 more in this business in FY16 and has earmarked a similar capital expenditure of Rs 300 crore in FY16. However, the company has gone slow in its plans to add another brand to its kitty, due to the economic downturn. Online Ordering (OLO) currently forms 29-30 per cent of delivery sales and the company believes this could move up to 40-50 per cent over the next few years. Jubilant is, therefore, significantly investing in OLO.

A tie-up with Indian Railway Catering and Tourism Corporation is in a nascent stage, with presence in 12 cities. Jubilant believes this revenue stream should grow significantly over the next few years.