Inflation bites off Jubilant Food's Q1 profit; analysts serve earnings cut

What's also worrying the Street is the likelihood of a dismal Q2FY24 performance, which they feel will be marred by soaring milk, cheese and vegetable prices, and an embargo on Ukraine's wheat exports

The markets have given a thumbs down to Jubilant FoodWorks for the April-June quarter (Q1) of 2023-24 (FY24).

The company, which owns and operates Domino’s Pizza and Popeyes chain of stores, reported a (standalone) net profit of Rs. 75.2 crore in Q1 of FY24. This is a drop of 25.5 per cent year-on-year (YoY) from Rs. 101 crore. However, it grew quarter-on-quarter (QoQ) from Rs. 47.5 crore.

What’s worrying the Street is the likelihood of a dismal Q2FY24 performance, which it feels will be marred by soaring milk, cheese and vegetable prices. It would also be due to an embargo on Ukraine’s wheat exports.
 

“We expect operating performance to improve starting Q3FY24, led by weak base, cricket World Cup (expect 500 bps or basis points growth tailwind in Q3), and gross margin recovery. It will be aided by likely easing of dairy inflation, and synergies from strategic initiatives,” said Jaykumar Doshi of Kotak Institutional Equities in a note, co-authored with Umang Mehta and Praneeth Reddy.

At the bourses, shares of the company fell 3.5 per cent in intraday trade to a low of Rs. 460 on Wednesday, before settling 2 per cent lower at Rs. 468 apiece. By comparison, the BSE Sensex ended 0.53 per cent higher at 66,707 levels.

Meanwhile, for the recently-concluded quarter, revenue from operations increased 5.6 per cent YoY/4.6 per cent QoQ to Rs. 1,309.7 crore. The growth was driven by Domino’s Delivery channel sales, which increased by 8.4 per cent.

The average daily sales of mature stores came in at Rs. 81,049, up 2.7 per cent, sequentially. Domino’s like-for-like (LFL) growth, however, slipped 1.3 per cent. It added 22 net new stores of Domino’s Pizza, taking the total to 1,838 stores across 394 cities. Popeyes expanded to 17 restaurants across four cities.

Earnings before interest, tax, depreciation, and amortisation (Ebitda) declined 9.2 per cent YoY, but were up around 10 per cent QoQ to Rs. 276.4 crore.

Ebitda margin contracted 345 bps YoY, but was up 97 bps to 21.1 per cent during the quarter under review.

Earnings cut
 

According to analysts, network expansion was slower when compared to the recent pace of 60-store adds.

For Jubilant Food’s valuations to improve further, same-store-sales growth /LFL growth will have to revive, which, analysts at Nuvama suggest, remains a challenge at present.
 

“The company has taken multiple initiatives — loyalty and reduced delivery times in work — whose impact hasn’t yet shown up fully. Along with near-term challenges, competition from Pizza Hut and other brands could structurally lower growth in the long-term,” wrote Nihal Mahesh Jham and Abneesh Roy of Nuvama Institutional Equities, in their report.
 

The brokerage has cut FY24 Ebitda and profit after tax (PAT) estimates by 3.2 per cent and 6 per cent, respectively. FY25 estimates for the same were reduced by 2.1 per cent and 5.5 per cent, respectively.

Prabhudas Lilladher, too, has slashed FY24/FY25 earnings per share (EPS) estimates by 21.5/14.9 per cent, and rating from ‘accumulate’ to ‘hold’. This was led by sustained demand pressures in the pizza industry amid rising competition, poor sales growth with flat YoY dine-in sales, high inflation, and increase in losses in Popeyes with store expansion.

"Demand and margin pressure would sustain in Q2FY24 with gradual recovery from Q3.  While long-term QSR opportunity in India remains attractive, near term upside in Jubilant Food seems capped. We estimate 16.3 per cent PAT CAGR over FY23-25, and cut target price to Rs 490 from Rs 515 earlier," it said.

That said, analysts feel the management’s efforts on improving dine-in LFL growth, its decision not to hike prices amid the transient high-cost environment in wheat and cheese, and building the technological and analytical edge are welcome moves that will create value in the medium-term.

"We believe Jubilant Food is poised to take advantage of long-term opportunities in the QSR space. After a steep stock price correction of 25 per cent from its peak, valuations appear reasonable at 29x FY25E pre-Ind AS Ebitda for a business that has RoE superior to QSR peers and other retail companies. We reiterate our 'Buy' rating with a target price of Rs 570," said Motilal Oswal Financial Services.