Jubilant profit pressure to continue

Subdued demand, high promotions to weigh on margin

Amid continued sluggishness in demand, Jubilant FoodWorks, the master franchisee of Domino’s Pizza, has managed to gain market share from peers such as Pizza Hut. This is evident from the higher same-store sales growth (SSSG) posted by Jubilant over the past six quarters. SSSG shows revenues earned by a retail chain's outlets that have been in operations for at least a year.

For the March quarter (Q4), Jubilant posted 2.9 per cent growth in SSSG versus a six per cent decline for Pizza Hut (owned by Yum! Brands). In fact, Yum! Brands’ SSSG has fallen for each of the past six quarters. On the other hand, Jubilant has managed to grow its SSSG 1.9 to 6.6 per cent in the past six quarters.

But, there is a flip side. While Jubilant’s revenues grew well at 14 per cent year-on-year to Rs 618 crore in the March quarter, they lagged behind the Bloomberg consensus estimate of Rs 634 crore. While the strategy of chasing higher SSSG appears positive amid slowing demand, it has had a bearing on Jubilant’s profit. The company’s Ebitda margin was lower by 79 basis points in the March quarter at 12.1 per cent compared to the year-ago quarter. Ebitda is earnings before interest, taxes, depreciation, and amortisation. For the full year, Ebitda margin came off from 12.7 per cent in FY15 to 11.8 per cent in FY16 despite benign input prices. Heightened promotions, rising employee costs, and rentals weighed on Ebitda margin. Higher tax rate (up 250 basis points to 32.9 per cent) restricted net profit, which fell 6.6 per cent year-on-year to Rs 295 crore, missing the Bloomberg consensus estimate of Rs 328 crore by 10 per cent.

Against this backdrop, and given that Jubilant has lowered Domino’s store additions from 150 in FY16 to 130-140 in FY17, and that of Dunkin' Donuts to 20 in FY17 versus 24 in FY16, most analysts have trimmed their FY17 estimates for the company.

While a pick-up in the economy will lead to some demand upsides, consumers today have many options. In order to keep growing the pizza business, Jubilant will have to invest in promotions, new products, and store additions. While its online ordering and railway catering businesses are growing at a decent pace, they will take some more time to contribute meaningfully to revenues. Despite diving 10 per cent after its results announcement on Saturday, the stock trades at 42 times FY17 estimated earnings, which is not cheap.