Jubilant Foodworks - Convincingly addresses delivery recovery concerns - ICICI Securities

Beyond the 1Q performance, what's pleasing for the bulls are (1) recovery in delivery and takeaway businesses in Aug'20 (+10% and +55% YoY sales growth),(2) confirmation of lower competitive intensity to lead to market share gains, (3) manpower cost rationalisation (converted all delivery personnel to hourly rostered flexi-timers), (4) network optimisation plan (closing down 105 unprofitable stores (mostly dine-in focused and in malls or tech parks)), and (5) continuation of delivery charges. We however believe that, although the consumer is less-value- focused at the moment, the delivery charge is likely to be eventually passed on to consumers in some form of discounts, to maintain the value-for-money positioning. Pace of recovery in dine-in and any potential M&A activity (JUBI has a strong balance sheet with Rs7bn of cash) are other tailwinds. ADD.

- Screaming recovery in July, August as restrictions have eased: In 1QFY21, Revenue / EBITDA declined 60% / 89% YoY and there was a loss of Rs 0.7bn. This performance was due to SSG decline of 61% (store closures, restricted operating hours). Monthly performance improved with business recovering to 56.1% in June'20 from 24.1% in April'20. This further improved to 84.6% in Aug'20. JUBI also added 19 (opened 24 and closed 5) new Domino's restaurants taking the network to 1,354 stores across 288 cities (added 6 new cities). Jubi plans to close ~105 unprofitable Domino's stores (largely dine-in focused, located in malls and tech-parks) and open ~100 new stores (smaller delivery and takeaway focused stores) in FY21 to maintain its store network and improve margins. We like the agility.

- Delivery and takeaway platform growing in August: Delivery and takeaway have recovered faster and grew 10% and 55% YoY in Aug'20. However, dine-in continues to struggle with recovery to just 16% (Aug'20) of previous year sales. Average number of stores operational also increased to 78% in June'20 from 51% in April'20 - further increased to 83% in Aug'20.

- Profitability impacted by negative operating leverage despite cost savings and rent concessions: Gross margin expanded 260bps YoY due to benign dairy cost and lower discounts. However, EBITDA margin declined 1700bps YoY to 6.3% due to negative operating leverage, despite cost savings - employee cost (-19% YoY) and net rental savings of Rs 294mn. Management expects input cost to remain benign in rest of FY21.

- Valuations and risks: We increase our earnings estimates by 4%, modelling revenue / EBITDA / PAT CAGR of 11 / 19 / 36 (%) over FY20-22E. Maintain ADD with DCF-based revised target price of Rs2,400 (earlier Rs 2,300). At our target price, the stock will trade at 53 P/E Sep-22E. Key downside risk is raw material costs turning inflationary.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs.2244.55 as compared to the previous close of Rs. 2292.75. The total number of shares traded during the day was 44337 in over 2986 trades.

The stock hit an intraday high of Rs. 2295.85 and intraday low of 2204. The net turnover during the day was Rs. 100208814.

Source : Equity Bulls

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