Jubilant FoodWorks rating: Valuation expensive, maintain neutral

Management expects near-normalcy by the exit of FY21.

Jubilant FoodWorks (JUBI)’s 1QFY21 results were weaker than expected, especially in terms of operating margins. Depreciation and interest costs were also higher than anticipated.

Nevertheless, recovery in system sales was sharp in July ’20 and Aug ’20 to 69.8% and 84.6%, respectively, of last year’s levels for the corresponding months. Three events underpin higher growth and profitability for JUBI beyond the Covid-19-impacted FY21, the ongoing structural push towards delivery; the introduction of delivery charge; and opportunity created by the crisis to close down 105 of its least profitable (and dine-in dependent) stores. This would lead to all-time high Ebitda margins in FY22, resulting in 33% upward revision in our EPS projections for FY22. Valuations of 65x FY22 are expensive. Maintain Neutral.

JUBI reported sales decline of 59.5% y-o-y to Rs 3.8b (est.: Rs 4.2b), with same-store sales growth (SSSG) of -61.4% y-o-y (est.: -63%). Like-for-like (LFL) growth stood at -61.5% (this refers to y-o-y growth in sales for non-split restaurants opened before the previous FY). LFL growth, excluding the restaurants temporarily closed due to Covid-19, stood at – 47.3%. 24 new Domino’s Pizza stores were launched (net addition of 19 stores) and four stores for Dunkin’ Donuts were closed down in 1QFY21. Gross margins were up by 260bp y-o-y to 78%. Staff costs declined 18.7% y-o-y to Rs 1.5b. Other expenses (incl. rent) declined 59.9% y-o-y to Rs 1.2b. Ebitda declined 89% y-o-y to Rs 241m (est.: Rs 487m). The Ebitda margin stood at 6.3% (est.: 11.5%) v/s 23.3% in 1QFY20. Adj. PAT loss stood at Rs 726m (est.: Rs 393m loss) v/s profit of Rs 748m in 1QFY20.

Management expects near-normalcy by the exit of FY21. A fundamental shift is expected toward delivery-based players. Management expects a significant amount of restaurant closures, to the extent of 20–30%, in FY21 due to Covid-led disruption. A delivery charge of Rs 20 was introduced for the first time in 1QFY21, which is already an accepted industry practice for peers. JUBI plans to shut down 105 non-profitable Domino’s stores, largely in malls and tech parks, which are dine-in focused. Maintain neutral, with TP of Rs 2,110 (55x Sep’22 EPS).

Even more impressive than the recovery in July and August has been the emerging shift toward delivery on account of Covid. JUBI is expected to be the biggest beneficiary of this shift in the QSR space.

The introduction of delivery charge (without any negative feedback on ratings) and closure of 105 least profitable stores would further aid recovery in profitability beyond FY21. Valuations of 65x FY22, however, fully capture the upside from a one-year perspective.