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Last Updated : Sep 06, 2016 04:19 PM IST | Source: Moneycontrol.com

High pizza cost tricky? Analysts like Jubilant Food post poor Q1

Brokerage firms like JP Morgan, Credit Suisse and Morgan Stanley are overweight on the Domino's Pizza maker hoping for a positive growth in Q2.

Though Jubilant Foodworks slumped 10 percent intraday on Tuesday on a slew of downgrades and poor June quarter results, there are few analysts who are still betting on it.

Brokerage firms like JP Morgan, Credit Suisse and Morgan Stanley are overweight on the Domino's Pizza maker hoping for a positive growth in Q2. Deustche Bank has a hold rating with an expectation that the stock may stay volatile and continue underperformance.

Few negatives that the firm observed in Q1 earnings are that it had launched ‘Pizza Mania Extreme’ during Q1 an extension of its highest selling pizza range and its promotional activity especially of ‘Buy 1 Get 1 Free’ had visibly stepped up which dragged its earnings.

It opened only 23 new Domino's stores in Q1, lowest in five years. Its current run rate of new store openings is lower versus guidance of opening 130-140 new stores in FY17. Deutsche Bank says its decision of moderate store expansion as lack of revenue visibility, likely market share loss and consumer behaviour changes (shift away from pizza).

Jubilant Foodworks reported revenue, EBITDA and adjusted PAT growth of 7 percent,  (-) 14 percent and (-) 31 percent. Its Q1 operating margins dropped 230 basis points (bps)  in the domestic business against an same-stores-sales growth (SSSG) decline of 3.2 percent YoY. Its Q1 EBITDA margin at 9.5 percent is the lowest since the IPO in FY10.

It also adds that Jubilant is not ramping up delivery boys, an indication of its muted outlook on same-store volume growth. "Its number of employees has also declined QoQ despite 23 new stores. To cater to any volume surge, the company has to plan one month in advance to ramp up delivery boys. If management is expecting a turnaround, employees per store should have seen an increase which is down to 26 employees versus 30-35 earlier," It says in a note.

Meanwhile, Morgan Stanley has set a target of Rs 1450 per share despite weak operating performance in 1QF17 reflecting long-held concerns as margins are linked to SSSG.  However, the reason for being positive is that it expects Jubilant Foodworks to be a key beneficiary of acceleration in urban consumption growth.  “Once the growth is entrenched we expect markets to reward businesses with higher operating leverage,” it says in a note.

Morgan Stanley also adds that Q1 results will likely test conviction of even long-term investors in the stock.


JP Morgan has a target price of Rs 1210 per share.

It states investor focus will be on underlying demand trends and expectations of same-stores-sales growth (SSSG) recovery, promotional/competitive intensity in the quick service restaurant (QSR) segment, margin outlook , consumer response to the new product offerings and  incremental capex plans.  Key disappointment was negative SSSG growth of -3.2 percent which the management assured to improve in Q2. 

Credit Suisse agrees that negative SSSG growth of 3.2 percent after six consecutive quarters of positive growth is disappointing but is positive on management's positive commentary. It states that another listed QSR player, Westlife (McDonald's) had delivered 3 percent SSSG in Q1, also shows a sequential deterioration from 8 percent in Q116.

Credit Suisse has a target price of Rs 1250 per share with a view that transitioning to IND AS accounting also has an EBITDA margin impact of 40 basis points (bps) as these costs were charged to employee expenses.

Analysts are also banking on its latest entrant in management as Sachin Sharma has taken over as the new CFO. 

However, Citi and Nomura are negative on the stock. Citi maintains sell rating with a target of Rs 945 per share. It is worried about the consistent fall in average revenue per store and says that inclusion of some newer stores opened in the last two years in the same-store base also probably pulled down the overall SSSG.

It expects sequential pick-up as management maintains 130-140 stores guidance for FY17 but has seen a cut in Dunkin guidance yet again (15 store adds in FY17). Dunkin store closures also rose – five YTD after three in FY16.

It says Citi will focus on strategies discussed is last Q as rational pricing (high pizza prices have been a key concern) and lower store openings. “Both moves are
strategically correct and could help the business bounce back in due course. This may, however, hurt the stock given the expectations; as seen in Q1, it may be a while before a material earnings uptick,” Citi adds.

Nomura also has a reduce rating with a target of Rs 845 per share stating that weak growth led to an impact on margins as well, with the margins unable to recover as increasing employee and rental costs took a toll.

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First Published on Sep 6, 2016 10:02 am