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Jubilant Foodworks: Same-store growth slows; time to sell?

Analysts say intensifying competition, high store penetration in tier-1 cities and cannibalisation in several places will limit same-store sales growth going ahead. Furthermore, expansion of Dunkin' Donuts, which is unlikely to break-even for 4 years and higher ad spends will keep margins in check.

August 06, 2013 / 10:20 AM IST
 
 
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Nachiket Kelkar
moneycontrol.com


Jubilant Foodworks has expanded rapidly in recent years, churning out Domino's pizzas at break-neck speed to satisfy the hunger of India's burgeoning middle class. The company rode high on the country's consumption boom, but now finds itself battling the economic slowdown.


The company is still expanding aggressively, this time with Dunkin' Donuts in addition to Domino's. But the sales growth has sharply slowed and there are still no clear signs of a pick up yet.


Its same-store sales growth in the April-June quarter slowed to just 6.3 percent, down from 7.7 percent in Jan-March and sharply lower than the 22.3 percent in the year ago quarter.


Same-store sales measure sales at stores that have been open for at least one year and don't include any new stores that may have been opened, thus giving a more clearer picture of demand.


Analysts feel the same-store sales growth will pick-up gradually, but future same-store sales growth is unlikely to be anywhere close to the 30 percent growth it has reported in the past.


"High store penetration in tier-1 cities will support new store opening through store splits, thereby cannibalising same-store sales growth and resulting in a drag on rental costs. Also, increasing competitive intensity will limit market share gains. Consequently, Domino's sustainable same-store sales growth is not likely to exceed 13-14 percent," feel Rakshit Ranjan and Shariq Merchant of Ambit Capital.


Furthermore, competitors like Pizza Hut, McDonalds, KFC and other international as well as homegrown chains are also ramping up. That means Jubilant Foodworks will have to keep increasing its advertising and promotional spends to maintain its market share. That will keep margins under pressure.


The company is also expanding its new Dunkin' Donuts chain, which the Ambit analysts say, is unlikely to break-even in the next four years, given the intense competition. That will also keep earnings in check.


"We expect reported same-store sales growth to revive to 8-10 percent over the course of FY14 and to 14% in FY15 especially once the  increase in service tax for restaurants announced in the recent budget becomes part of the base in FY15. However, we do not expect any further rise in same-store sales growth for Domino's thereafter and also we do not expect EBITDA margins to expand substantially in the foreseeable future (management has guided for 16.5 percent EBITDA margin this year)," Ranjan and Merchant say.


Also Read: Jubilant Food still sees 8-10% FY14 same-store sales growth


Other analysts share similar views.


"Slowing same-store-sales growth remains a cause of concern. Moreover, with the Dunkin' expansion picking up steam, we expect the margin pressure to intensify. A weak macro environment combined with the company's aggressive expansion plans bode ill for its cash generation ability near term," said Manish Jain and Anup Sudhendranath of Nomura Financial Advisory and Securities India.


Ambit Capital says it may cut its FY14 earnings estimates on Jubilant Foodworks by 2-3 percent.


Similarly, Kotak Institutional Equities too has cut its earnings estimates for the company by 3-4 percent for FY14 and FY15.


"Even as we are believers in strong footprint expansion led growth potential and like the management's execution track record, we are not too convinced about the sustainable nature of healthy same-store sales growth; scale and competition will catch up at some point, even if store-splitting does not," said Kotak analysts Rohit Chordia and Anand Shah.


VALUATIONS EXPENSIVE


Jubilant Foodworks shares closed down 0.3 percent at Rs 1,135.40 on NSE on Monday. The stock has been one of the few successful IPOs in recent years. Since its debut in Feb 2010, the stock has jumped close to eight fold. Since March this year though, Jubilant Foodworks is down 9 percent.


However, several analysts say one should "sell" or atleast "reduce" the stock.


"Whilst a stock correction after these (Q1) results would raise the prospects of a good entry point for a firm with  strong execution capabilities, we expect  further moderation in fundamentals and even lower entry points over the next six months driven by weak same-store sales growth," said Ambit's Ranjan and Merchant.


"Even as we see no reason to be skeptical about the company's long-term growth potential, we continue to find valuations running ahead of fundamentals. Macro-linked growth cyclicality does not reflect in the 41 times 12-month forward PE," said Chordia and Shah of Kotak.


Kotak has a target price of Rs 925, Nomura has a target price of Rs 765 and Ambit's target price is at Rs 856.

nachiket.kelkar@network18online.com

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