Sell Jubilant Foodworks - Putting the cart before the horse? - Ambit

Rampant store expansion to cannibalise SSG in the future

Despite headwinds from weak consumer spending and rising competition, the firm has accelerated its run rate of new store openings, with tier-1 cities still contributing to over 50% of these new stores. This, we believe, will cannibalise sales growth over FY14-16. We currently forecast a revival in SSG to 13% in FY16 from 4% in FY14 and steady new store opening rate of 145 stores per year in the future with a potential of operating 2,000 stores in 10 years. A 10% further rise in our annual new store opening forecasts results in a 150-200bps incremental drag on SSG and a ~15% reduction in our DCF valuation.

EBITDA margin drag from competition, cannibalisation and Dunkin

After an EBITDA margin compression of 320bps over FY12-14, we expect only a 35-40bps expansion per year over FY14-18. As the high competitive intensity from Pizza Hut and other QS Rs. is likely to sustain in the future, the drag on EBITDA margins from heightened advert spends, promotions and price competition will sustain over FY14-18. We forecast an advert spends/sales ratio of 4.6% for FY14-16 (vs 4% in FY12) and gross margins of 73.8% (vs 74.3% in FY12). Moreover, Dunkin Donuts is yet to go through a learning curve around optimisation of store location, size, merchandise and marketing approach. We expect the format to operate 100 stores across India in FY16.

Our FY15 and FY16 EPS estimates are ~10% below consensus; SELL

We have downgraded our EPS forecasts for FY14/15/16 by 10%/20%/19% respectively given the headwinds related to SSG and EBITDA margins, as highlighted above. We expect 23% EPS CAGR in FY13-18 with an average RoCE of 32% over this period. This compares poorly against 57% EPS CAGR and 40% ROCE in FY10-13. The firm is unlikely to generate free cash flows in FY14 and FY15, given weak SSG, weak margins and high capex. Using a WACC of 14.5%, our DCF model generates a TP of Rs.900 (implying FY15 P/E of 34.6x).

Source : Equity Bulls

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