Recommendation From Miscellaneous Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

Jubilant Foodworks

GOT THE PIZAZZ TO BEAT THE GROWTH HUNGER!

HERE IS WHY
Consistent innovation in menu to drive growth
Price hike taken in last quarter to aid margins
Current valuation favours risk to reward ratio

There are concerns about the consumption growth moderating in India, however, there are some companies that have various levers to beat this slowdown and thrive. One such company is Jubilant Foodworks, part of the Jubilant Bhartia group. It is one of India’s largest food service company. At the end of first quarter of FY20, the company had a network of 1279 Domino’s Pizza restaurants across 271 cities. It added 26 new stores in Q1FY20 and the management has reiterated its guidance of opening 100 new stores in FY20. The company and its subsidiary have the exclusive rights to develop and operate Domino’s Pizza brand in India, Sri Lanka, Bangladesh and Nepal. At present, it operates in India and Sri Lanka. The company also has exclusive rights for developing and operating Dunkin’ Donuts restaurants in India and has 32 Dunkin’ Donuts restaurants across 10 cities in India.

The topline growth of the company for the first quarter of FY20 was 9.9 per cent on a yearly basis, which is below market estimates. It posted topline of Rs.940.1 crore for Q1FY20. This was due to lower-than-expected same-store sales growth (SSSG) which came at a modest 4.1% YoY. However, SSSG adjusted for store split was 5.8%, which is similar to Q4FY19. 

The EBITDA grew by 3.6 per cent on a yearly basis to Rs.1472 crore. The EBITDA margin came in at 15.7%, which contracted by almost 90 basis points due to increase in employee cost and higher advertising and marketing spends during the quarter on account of ICC World Cup. There was also another one-off expense that suppressed margins. Going ahead, it is likely to improve as it will rationalise its advertising expenses and the company has taken price increase in the latter part of the quarter after nearly three years, which is expected to support margin delivery going ahead. The net profit of the company came in at Rs.74.78 crore, which was higher by 0.14 per cent on a yearly basis.

Going ahead, what will help the company to drive growth is its consistent menu innovation such as the World Pizza League and focus on delivering value to the customers. To mitigate the shift in consumer behaviour to ordering as higher discounts are offered by online aggregators on ordering, the company is doing specific micro-marketing activity to drive delivery higher, which seems to be working as ordering growth continues to be faster than dine-in growth. The company has also made significant investment in its analytical and digital capabilities, which is showing results in the form of encouraging growth in online orders. Besides this, the company has also forayed into the Chinese fast casual segment and a good response from new markets like Bangladesh will present opportunities for future growth.

The stock of the company have already lost a quarter of its value from its peak and is available at price-to-earnings (FY19) of 48 times, which might look expensive. However, the stock has been trading at similar valuation. We believe earnings multiples of the company will remain and what will help the shareholders is growth in the topline and bottomline.