Jubilant FoodWorks falls 5% on disappointing Q2. Should you buy, hold or sell?

Morgan Stanley has an 'Equal Weight' rating on Jubilant FoodWorks stock with a target price of Rs 493 per share.

Jubilant FoodWorks shares tanked 5 percent on October 26, a day after the Domino's Pizza and Dunkin' Donuts' operator reported a disappointing set of numbers for the September quarter.

The fast-food chains operator's net profit fell 26 percent and revenue was down 5 percent from the year-ago period, missing Street estimates. Despite the subdued earnings, analysts believe that there are strong long-term opportunities in the quick-service restaurants (QSRs).

Jubilant FoodWorks is the most efficient player in the Indian QSR space and is well-placed to seize the enhanced growth opportunity, analysts said.

At 9:20 am, shares of Jubilant FoodWorks were trading  4.7 percent lower at Rs 504.10 on the National Stock Exchange (NSE).

Sales decline, margins take a hit

Jubilant’s like-for-like (LFL) sales dropped from the previous year, marking the third consecutive quarter of decline as price-conscious consumers tightened their belts amid inflation.

For the company's valuation to improve, same-store sales growth (SSSG) and LFL sales growth must revive, which remains a challenge, brokerages said.

Also Read | Jubilant Foodworks Q2: Net profit falls 26% to Rs 97.20 crore, revenue up 5.15%

The EBITDA margin contracted to 20.87 percent on higher expenses due to investments in technology and higher employee spends. Jubilant FoodWorks management’s efforts toward product innovations, faster delivery and store revamping aided the delivery business, but dining revenue remained sluggish in Q2.

"While improvement in delivery LFL or order growth is positive, it is not enough," said Nuvama Institutional Equities in its report.

Should you buy, hold or sell?

According to Morgan Stanley, sequential improvement in Jubilant FoodWorks' operating metrics is a positive. But it cut FY24-FY26 estimates by 9-12 percent, factoring in a weaker topline in Q2 and a lower margin outlook. It has an “equal weight” call on the stock with a target price of Rs 493 a share.

Jubilant Foodworks' delivery system, back-end advantages, robust balance sheet, and loyalty program give it a competitive edge, analysts at Motilal Oswal said. It has a strong balance sheet and a consistently high return on capital employed (RoCE) of over 20 percent, the domestic brokerage said. It has stuck to a “buy” rating on the stock with a target price of Rs 610 a share.

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Analysts at Nuvama said while there are positives such as margin improvement efforts, order growth and delivery LFL, they do not outweigh the demanding valuation and earnings.

The brokerage has a “hold” call on the stock with a revised target price of Rs 541, down from Rs 549.

Non-cheese inflation affecting margins and longer term competition from Pizza Hut and other brands impacting growth are the key risks for the company, they said.

Also Read | Earnings Snapshot: Axis net higher, TechM Q2 USD revenue down, Jubilant Food SSSG shrinks

On October 25, Jubilant FoodWorks share closed marginally higher at Rs 527.30 on the National Stock Exchange (NSE). The stock has gained around 18 percent this year, outperforming the benchmark Nifty.

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