Demand pressures persist for Jubilant FoodWorks

Even as company is taking measures to drive cost efficiencies, rich valuations remain a concern

Don't get carried away by Jubilant FoodWorks topping revenues and net profit expectations for the December quarter (Q3), because most expectations were on the lower side in anticipation of demonetisation. Though a fall of 3.3 per cent in same store sales growth (SSSG) is better than expectations of double-digit dip, results throw up some concerns. SSSG denotes sales growth coming from stores that have been in operation for at least a year.
 
As the company narrowed down its promotions to more-targeted segments and did away with schemes such as "buy one pizza get one free", revenues grew 3.9 per cent year on year to Rs 659 crore, ahead of Bloomberg estimate of Rs 644 crore. However, high costs of raw materials, rentals, depreciation, and others pulled down operating profit margin as well as net profit in the quarter. Higher costs towards store expansion as well as standard escalation in rentals fired up expenses in Q3. Sharp rise in other income, coupled with lower tax rates, could not offset these much, as a result, net profit fell 31.9 per cent year on year to Rs 20 crore versus expectations of Rs 18 crore.

 
Demonetisation had an impact on orders received through telephone (which make up half of Jubilant's revenue), probably because currency crunch from note ban discouraged customers from ordering on phone and then paying cash on delivery. The management believes note-ban effect will phase out in two to three months. "Demonetisation has impacted demand in semi-urban cities far more than in big cities," said the management. The company's online ordering segment, where payments are typically non-cash, continues to grow at a good pace.
 
Jubilant is focusing on cost efficiencies, tapping benefits from goods and services tax, and eyeing break-even for Dunkin Donuts in three years. A sustained rise in SSSG must accompany all this. Valuation of 51.55 times the company's one-year forward estimated net profit leaves little room for upside from current levels.