Weak demand may cap Jubilant FoodWorks rally, it rose 14% from july low

HDFC Securities expects similar weak trends for the September quarter, noting signs of stress in demand even in Tier-II and Tier-III cities

Even as discretionary demand continues to be sluggish, and the July-September quarter is expected to witness weak same-store sales growth (SSSG), the stock of the country’s largest listed quick-service restaurant (QSR), Jubilant FoodWorks, is up 14 per cent from its July lows.

Brokerages say caution is warranted until there are trends that indicate an uptick in consumer sentiment and higher dine-in volumes.

The muted demand trends are visible across QSR chains, which have witnessed decelerating SSSG rates for some quarters now. The April-June quarter saw a negative SSSG for the sector, with Jubilant recording a 1.3 per cent decline.

While the average daily sales (ADS) for the quarter at Rs 81,049 was down 1.3 per cent year-on-year (Y-o-Y), on a sequential basis, ADS rose 3 per cent due to the Indian Premier League and the holiday season.

Reported per-store revenues of the company saw a 7 per cent drop Y-o-Y and were similar to the trends witnessed over the previous two quarters. Given the sluggish operating trends, overall revenue growth was capped at 6 per cent, even as new store additions were up 14 per cent Y-o-Y.

Highlighting the weak trends, HDFC Securities believes that the September quarter would be no different.

According to analysts of the brokerage, led by Naveen Trivedi, “Signs of stress on demand are witnessed even in Tier-II/-III cities, with food courts in malls wearing a deserted look. Moreover, one additional month of Sawan is expected to further dampen SSSG in the second quarter of 2023-24.”

Emkay Research also believes that the demand environment has worsened after the June quarter, and recovery hopes may get delayed further. In addition to weak demand, higher competitive intensity within the segment and market-share loss are the other worrying factors.

Say Devanshu Bansal and Bhavika Choudhary of Emkay Research, “While the arrest of a month-on-month dip in bill size is a positive, muted order growth remains a bigger challenge. This tallies with our thesis of the pizza category losing its share to chicken/burger and rising competition within the pizza space.”

In addition to sales growth, most brokerages expect margins to be on the weaker side in the September quarter. The operating profit margin of the company was down 400 basis points (pre-Ind-AS) to 13.4 per cent due to raw material cost inflation, negative leverage, and wage hikes in the June quarter.

While Emkay Research expects dairy prices to moderate on a sequential basis, the recent spike in vegetable/wheat prices is an incremental challenge that can keep gross margins under check in the near term.

Given negative SSSG trends and elevated raw material prices, the brokerage expects the dip in operating profit margins to continue. On a sequential basis, margins are likely to remain similar to the first quarter.

Centrum Broking, however, expects Jubilant to defend its current margins despite weak demand, incremental competition in the pizza QSR, and rising inflation in dairy, which pose short-term challenges.

The brokerage expects the company to achieve mid-single-digit sales growth, given its new approach, which will drive growth through portfolio expansion into the high-growth chicken QSR segment (Popeyes), coupled with an enhanced consumer experience in the value segment and by remodelling Domino’s stores/look.

While there are hopes of recovery for the sector and Jubilant in the October-December quarter, brokerages are cautious. Given short-term pressures, they believe that the recent rally in the stock has made the risk/reward unfavourable for investors.