Maintain REDUCE on Jubilant FoodWorks - Uninspiring 3Q; recovery priced in - HDFC Securities

Mr. Varun Lohchab, Head Institutional Research, HDFC Securities & Mr. Naveen Trivedi, Institutional Research, HDFC Securities

Jubilant's 3QFY21 was slightly weaker than expected as the company saw a miss on revenue and margins. Revenue/EBITDA was up 0/10% YoY vs. expectation of 3/16%. SSG was at -1% (HSIE +1%), while LFL (excluding temporary closures) was in line at +1%. The company returned to expanding its network with 57 new stores openings (50 for Domino's) and entered into Biryani with its brand 'Ekdum!'. Delivery charges, along with benign raw material, drove gross margin expansion by 340bps YoY. Effective cost control also led to healthy EBITDA margin expansion. Despite encouraging sequential growth (system sales recovered to 100% for 3QFY21 and 106% in Jan-21), Jubilant did not get benefits of pent-up demand and improvement in macros like other discretionary companies. We expect the recovery to gain pace in 4QFY21 and healthy growth in FY22. We maintain our EPS estimate for FY21/22/23. We value Jubilant at 50x P/E on Mar-23E EPS and derive a target price of Rs 2,204. We believe a large part of the recovery is priced in since the stock has run up sharply (40% in 6M). Maintain REDUCE.

Sequential recovery continues: Net revenue remained flat YoY (+14% in 3QFY20 and -19% in 2QFY21), clocking a strong 31% QoQ growth. However, it was below our expectation of 3% YoY growth. SSG stood at -1.4% YoY (HSIE +1%) while like-for-like growth (excluding temporarily closed restaurants) stood at 1.7%. YoY. OLO contribution to delivery stood at 98%. System sales recovered to above 100% of last year as demand continued to improve sequentially. Domino's sales in Jan were up by 6% YoY.

Store expansion across brands: Jubilant opened 50 new Domino's stores, 2 Dunkin' Donuts and 5 Hong's Kitchens, along with its entry into Biryani with its own brand- Ekdum! Store expansion spree will continue across JFL's brands. Hong's and Ekdum! have been receiving solid consumer response and expanding the addressable market (Biryani and Chinese are top delivery cuisines) for JFL.

Delivery fee led margin expansion: GM expanded by 340bps YoY to 78.3% (-65bps in 3QFY20 and +351bps in 2QFY21) vs HSIE +329bps YoY. Employee/rent expenses grew by 6/10% YoY while Other expense declined by 2% YoY. EBITDA margin expanded by 242bps YoY to 26.4 (+557bps in 3QFY20 and +286bps in 2QFY21) vs expectation of 27.1%. EBITDA grew by 10% YoY (HSIE 16%). PBT was up 20% YoY while PAT grew by 21% YoY.

Call takeaways: (1) Dine-in remained under pressure due to continued restrictions. It is expected to return to pre-COVID level in the near term; (2) Bird flu led to a shift from non-veg to veg in North and West; (3) the company will scale Hong's across markets in 2021; (4) Jubilant will open ~110 new Domino's stores in FY21; (5) Domino's store potential in India is seen at 3,000 in the medium term.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs.2828.9 as compared to the previous close of Rs. 2644.3. The total number of shares traded during the day was 119312 in over 10723 trades.

The stock hit an intraday high of Rs. 2868.45 and intraday low of 2681.85. The net turnover during the day was Rs. 335116137.

Source : Equity Bulls

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