To miss same store growth, margin forecast: Jubilant Food

Jubilant Foodworks plans to open 10 stores more than the 125 it had initially planned for this financial year, even as sales from existing stores have dropped sharply in both quarters. Jubilant is the franchisee for Dominos Pizza and Dunkin Donuts in India.

Jubilant had forecast an 8-10 percent same store growth (SSG) at the beginning of the year. However, growth was 6 percent in June quarter and 6.6 percent in the September quarter.

In an interview to CNBC-TV18, Jubilant Foodworks CEO Ajay Kaul said that the company would not be meeting the original guidance, but did not specify the revised target.

"It doesn't give me joy in saying that it (environment) is not improving, it is stationary and we do not hope to see improvement in the next one-two quarters. It’s only around the election time and thereafter, where there will be a change in sentiment," Kaul said.

The company's second quarter revenues rose around 28 percent year-on-year to Rs 437 crore, but steep increases in raw material costs, wage bills and rents shaved 220 basis points from the operating margin and restricted the net profit growth to just 2.8 percent.

The company had forecast operating margin for the full year at 16.5 percent, but Kaul admitted that it would be touch to achieve that.

He says the company could bump up margins by sacrificing on marketing and promotion spends, but that could be counterproductive.

"If we were to reduce these, the margins would tend to go up but then the key question would be how would the customer sentiment in terms of consuming our product fall, and that is anybody’s guess," he said.

The decline in once scorching growth rates is worrying investors in Jubilant, but Kaul is quick to point out that his company is not doing badly.

"If you take the top five-six players in this market, the aggregate level industry growth for Q2 was a negative 2-3 percent. Therefore, when you compare 6-7 percent same store growth against those number then we are beating our honourable opposition in this race in terms of market share," says Kaul, adding that his goal is grow his company much faster.

And despite the downtrend in margins and same store growth in the last couple of quarters, the stock price has been steady so far. It tumble to a low of Rs 928 in June, but then went to hit a peak of Rs 1389 early November.  At today’s market price of Rs 1250, the stock is quoting a little over 50 times expected FY14 earnings. And many analysts feel that is a bit rich given near term pressure on revenues and margins.

But Kaul says he is still upbeat about the medium-to-long term consumption story. That explains the decision to open more stores amid the gloomy setting.