Jubilant FoodWorks - Initiating Coverage - BUY Risk Reward Ratio Turning Favourable despite Near-term Uncertainties - Reliance Securities

Jubilant FoodWorks (JFL) has been undergoing a tumultuous time for last few quarters - marked by stagnant Same Store Sales (SSS) growth, pressure on margins and high level exits - with which the stock has corrected by 40% in past one year and by 22% in past three months. Despite near-term uncertainties, we believe that risk reward ratio is turning to be favourable, while revival in SSSG could be the most vital factor to watch out for, going forward.

We peg JFL's SSS growth at 7% & 8% for FY18E & FY19E, respectively on the back of steady recovery in consumer demand and higher sales of value added products. Expecting 14% & 21% CAGR in revenues and earnings through FY16-19E, we initiate our coverage on the stock with BUY recommendation and Target Price of Rs1000, which implies 21% upside from current level.

Key Investment Highlights

Expected Recovery in SSSG: SSSG remains the key for meaningful turnaround in JFL's performance, going forward. Although demonetization drive is likely to dampen JFL's performance in 2HFY17E, we believe that gradual recovery in consumer confidence, increased promotions, moderation in competition from food aggregators and success of new products could take SSSG to higher levels, going forward.

Strong Cash Generation: While JFL's operating cash generation has fallen from 15% to 10% of sales in past four years, it still remains strong as the Company generates operating cash in the excess of Rs2.5bn annually. Notably, in past four years JFL has doubled its store count from 550 to 1,100 and added several commissaries without adding any debt on its books, which is impressive.

Impressive Cost Control: Although revenues have been impacted materially in the past four years on account of poor SSS growth and additional impact of Dunkin Donuts, JFL has maintained solid control over its costs. While overall expenditure witnessed 24% CAGR through FY12-17E, JFL has remarkably been able to maintain its total expenditure per store constant in the last four years.

Financials & Valuations

We expect JFL to post revenues of Rs30.4bn & Rs35.4bn & net profit of Rs1.4bn & Rs2bn in FY18E & FY19E, respectively. We peg JFL's SSSG at 7% & 8% for FY18E & FY19E, respectively on the back of steady recovery in consumer demand and higher sales of value added products. Based on expected EPS of Rs21.3 & Rs31, the stock currently trades at price earnings multiple of 38.8x FY18E & 26.6x FY19E earnings. We initiate our coverage on the stock with BUY recommendation and Target Price of Rs1,000 based on a combination of DCF and PE valuation methodology.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs.834.3 as compared to the previous close of Rs. 843.9. The total number of shares traded during the day was 27741 in over 1737 trades.

The stock hit an intraday high of Rs. 850 and intraday low of 830.1. The net turnover during the day was Rs. 23152801.

Source : Equity Bulls

Keywords