Buy Jubilant FoodWorks; target of Rs 2134: HDFC Securities

HDFC Securities' research report on Jubilant FoodWorks

SSG grew at 4.9% (exp 3.5%) while like-like SSG (adj. for splitting stores) stood at 6.5% (exp of 5%). Robust growth in delivery and price hikes (3-3.5%) compensated for dine-in pressure and slowdown in smaller towns. We believe SSG will accelerate hereon led by softer base, improvement in consumer sentiments and new launches (Indian masala pizza range and in-house beverages). We expect 8/9/7% SSG in 2HFY20/FY21/FY22E. Net revenues grew by 12% (vs. exp of 9.5%) as ex-SSG growth accelerated. JFL continues to split key markets (50% of new stores) with new store additions. In 2Q, JFL opened 40 stores (15 quarter high) with new store design. Management upgraded their store guidance to 120 stores in FY20 vs. 100 earlier. We don’t expect margin pressure owing to aggressive store openings as co has levers to drive SSG, expand GM and deliver cost savings. App downloads grew at 101/17% YoY/QoQ (25mn app downloads) led by in-store activations. This highlights JFL’s success in new customer acquisition despite competition from aggregators. We now expect JFL to drive consumer frequency (loyalty program). GM expanded by 67bps to 75.3% (vs. exp 75.8%) despite steep dairy inflation. PepsiCo deal, optimisation in promotions and price hikes supported margin expansion. We expect dairy inflation to moderate in 2H led by onset of flush season and normal monsoons. We model 180bps GM expansion over FY19-21E owing to (1) PepsiCo deal, (2) Price hikes and (3) Pan-India launch of in-house beverages. Employee costs grew by 16% (in-line) owing to min. wage hike, store expansion and investments in tech team. Adjusting for IND-AS 116, rent/other expenses grew by 12/13% resulting in 10% adj. EBITDA growth (vs. exp of 8.5%). Adj EBITDAM declined by 36bps to 16.4%.

Outlook

JFL reported a quarter marked with several positives (healthy SSG, 15 qtr high store expansion, robust app downloads and GM expansion). 2QFY20 SSG beat the street and our expectations despite slowdown in consumption, flooding and heavy base (21% SSG base). We believe earnings upcycle will begin from 3QFY20 onwards which will re-rate the stock. We upgrade our EPS estimates by 1-3% and revise our TP to Rs 2,134 (earlier 2,092). JFL remains our top pick in the consumer space. Reiterate BUY.