Jubilant Foodworks: A case of irrational exuberance?

Q1 2018 sales (Rs 678.8 crore) witnessed 11.5 percent growth on YoY basis guided by higher transaction volume resulting from the “everyday value “strategy. Management acknowledged the marginally positive impact of increased footfalls in malls due to advancing of the sales season, as well. On the gross margin front, a decline of 40 bps (YoY) was on account of higher offers during the season. However, EBITDA margin improved (+225 bps) thanks to lower employee costs and rent costs as well as productivity improvement that helped offset the raw material cost increase (+13.5 percent).

Lower drag from Dunkin Donuts

Management mentioned that there has been substantial reduction in margin drag from Dunkin Donuts. In Q1 2017, there was negative impact of 255 bps points which has been reduced to -145 bps now. The company expects Dunkin Donuts business to break even in FY19.

Net store opening slows down in the consolidation year

The company opened 13 new stores for Domino's in the last quarter and closed 5, citing ongoing evaluation of store continuation. The management reiterated its store expansion guidance of 40-50 stores in the current fiscal. In case of Dunkin Donuts, 9 stores were closed and only one new store was opened. In the year of consolidation, the management’s cautious approach to store addition deserves kudos.

What should you do with the stock?

While the management was confident about sustaining the momentum seen in recent results, we feel that the company has clearly come off the trajectory of high growth era when organic growth was in lower double digits.

As a ballpark figure, store expansion growth of about 6 percent (CAGR FY16-18E) and a SSSG(same store sales growth) of 6 percent would translate into a nominal topline growth of 12 percent, which is nowhere close to what got investors excited about in the past (FY13 at +40 percent).

With increasing competition and new product launches visible in the quick service restaurants segment, sustaining the growth might require continuous revamping in product categories. Though we take note of improvement in margins in the latest quarter, the company is still way off from the margin range of 17-18 percent visible a few years ago.

In light of this, we aren’t sure of the sustainability of the valuation premium (85x FY18 estimated earnings) compared to other consumer-oriented business multiples of 40-50x. We are of the view that such elevated valuation are not warranted in a business getting into a lower growth trajectory.

Further, urban consumer sentiments are still fragile. The management of Jubilant also admitted to a lack of broad based recovery in consumer sentiment.

Given this context, we would be cautious about Jubilant FoodWorks at this price level and advise investors to look at other opportunities in the consumption space having a better growth visibility and valuations.

Follow @anubhavsays