Amid heavy competition, can Jubilant sustain trend after a strong Q2?

Heavy competition from online food channels to weigh on margins

The stock of Jubilant FoodWorks was trading up 4.4 per cent on Wednesday, on anticipation of better-than-expected numbers for the September quarter (Q2), as seen earlier. However, even as the frim delivered in-line results, investors seem disappointed as the stock fell 2.5 per cent in intra-day trade before closing 0.5 per cent down at Rs 1,193.

Led by a strong 20.5 per cent same store sales (SSS) growth, Jubilant clocked 21.3 per cent YoY rise in net sales to Rs 8.8 billion and net profit increased 60 per cent to Rs 777 million. The Street was anticipating the topline at Rs 8.7 billion and net profit at Rs 766 million. 

The good operating performance, wherein margins rose by 268 basis points (bps) YoY, were driven by improvement in gross margins, lower employee costs as well as rent (due to one-off item of Rs 10 million). A moderation in raw material cost as a percentage of net sales pushed up gross margin by 46 bps YoY to 74.6 per cent.

However, analysts are questioning sustainability of the trend in margins. The ensuing quarters are expected to see pressure on margins thanks to rising competition from online food aggregators. Jubilant’s top line in Q2 continued to be driven by delivery growth and 68 per cent of the delivery sales was through online (e-commerce) route.

The management says there is increase in competition from e-commerce delivery players. This is likely to lead to cost pressures in terms of promotional efforts and delivery manpower as seen in Q2. 

Though employee costs as a percentage of net sales were down 222 bps YoY, they were up 104 bps sequentially. Moreover, high fuel prices are adding to the woes in terms of higher logistic costs.

The management, however, is hopeful of curtailing costs. It says benign commodity prices (such as wheat) and productivity-boosting initiatives should help sustain profitability in the near term.

The high SSS growth in Q2 is also being seen as unsustainable, as it was helped by the low base (initial quarters) of FY18.

In this backdrop, it remains to be seen how Jubilant can continue clocking high growth rates and sustain profitability, especially amid the 37 new stores additions expected.