Fresh toppings needed for Jubilant FoodWorks

Despite recent correction, continued demand pressures in the business will weigh on the stock

Demonetisation has added to the woes of Jubilant FoodWorks, which was already under pressure due to slowing demand and tepid same-store sales growth (SSSG), rising competition and top-level exits. Around 75% of the company's revenues – excluding online ordering that forms 47% of total orders – come from cash payments.

“Demonetisation has hit Jubilant harder than discretionary peers like apparel brands and multiplexes as it is inherently tough to make digital payment for phone orders,” says Abhishek Ranganathan, analyst at Ambit Capital. With an eye on margins, the company has not increased promotional intensity to offset the increased pressures.

These concerns have led to a sharp correction in Jubilant's scrip. The stock has corrected 13% since demonetisation, lagging the S&P BSE Sensex's fall of 3.5%. In contrast, Domino’s has seen strong growth in its global business as well as stock price in recent times.

Despite the fall in Jubilant’s share price, investors should not rush to buy the stock, say analysts.

Indian consumers’ changing food preferences and multiple cuisine options available to them to choose from has impacted the growth in pizza sales for the industry. Intense competition from a host of peers as well as aggregators such as Swiggy has also had a bearing on Jubilant’s growth. These trends 

are unlikely to reverse in a hurry.

“Jubilant’s earnings, which depend disproportionately on the system SSSG levels, continue to carry a high degree of near-term uncertainty notwithstanding the expectation of an economic revival (after demonetisation-related pain is over),” says Rohit Chordia of Kotak Institutional Equities.

Analysts even question the slight improvement in Jubilant’s SSSG to 4.2% in the latest September quarter. The same was aided largely by new product launches (BurgerPizza). Without a slew of new offerings, it will be difficult to improve the momentum even after the cash crunch situation improves, say analysts. Two top-level exits (chief financial officer and CEO) in a short span of a few months add to the uncertainty around the company. All these will weigh on the stock.

Going forward, analysts estimate that a 5-6% SSSG is required to see some improvement in operating profit margins, which have come off from 18% levels in June 2012 quarter to 9.7% in the September 2016 quarter. Although the company continues to add new stores in both Domino’s and Dunkin' Donuts, sustained improvement in consumption demand is key to Jubilant’s prospects and its stock, say analysts.