Buy Jubilant FoodWorks; target of Rs 1778: HDFC Securities

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HDFC Securities' research report on Jubilant FoodWorks

SSG growth moderated to 4.1% owing to (1) Dine-in slowing down (industry-wide), (2) Heavy base (26% in 1QFY19) and (3) Impact from splitting stores (like-like SSG at 5.8% vs. exp of 6%). We believe moderation in SSG is not on account of aggression by aggregators which is in contrast with Domino’s US commentary. In India, eating out frequency is still in its nascent stage and hence aggregators (growth accretive to JFL) are allies who are activating the market. Net revenues grew by 10% (vs. exp of 12%) as ex-SSG growth accelerated. Interestingly, app downloads grew by 98/21% YoY/QoQ (21.6mn downloads) led by in-store activations. This highlights JFL’s success in new customer acquisition. Eventually, JFL will focus on driving frequency via its app (loyalty program coming). Management has taken a ~3.5% tactical price-hike (after 3 years) in late June, which will support SSG and margins hereon. Headline pricing remains constant at Rs 99/199 (everyday value offer) with focus on volumes. GM expanded by 93bps to 75.5% (vs. exp 76.1%) driven by PepsiCo deal and partially offset from dairy inflation and higher promotions. We model 125bps GM expansion over FY19-21E owing to PepsiCo deal, price hike of 3.5% and moderation in promotions. Launch of in-house beverages is a key monitorable (GM accretive). Employee costs grew by 18% (in-line) owing to min. wage hike, store expansion and investments in tech team. Adjusting for IND-AS 116, rent/other expenses grew by 10/12% resulting in 4% EBITDA growth (vs. exp of 16%). Adj EBITDAM declined by 93bps to 15.7%. GM expansion, splitting stores, investment in tech (labor efficiencies and higher marketing ROI) drives our adj. EBITDAM expansion by 140bps over FY19-21E.

Outlook

JFL performance was weak owing to moderation in discretionary spend, a heavy base (26% SSG) and aggressive A&P spends (>12% YoY). We cut our estimates by 3% to factor 1Q miss and moderation in 2Q SSG but maintain our estimates for 2HFY20 (supported by price hikes and recovery in macros). Near-term headwinds provide a great opportunity to buy. We value at 46x on Jun-21 EPS, arriving at a TP of Rs 1,778. Maintain BUY.

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