Pizza lovers! Wheat price, fewer stores may hurt Domino's owner

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Moneycontrol BureauLess number of store launch and high wheat prices may hurt pizza owner Jubilant FoodWorks. Due to trimming estimates on store guidance and cost pressures, Goldman Sachs has cut FY17-19 sales estimates by 2 percent and EBITDA estimates by 4-8 percent.

The brokerage firm is cautious about Jubilant FoodWorks growth in FY17 and has a neutral with a reduced target price of Rs 1100 from Rs 1197 a share.

Commenting on its same-store-sales growth (SSSG), Goldman Sachs says that management's lower store opening guidance will hurt growth. It expects only a small uptick of SSSG to 4 percent in FY17 from 3 percent in FY16 adding that fewer store openings should have a positive impact on SSSG but it remains cautious this time.  In March quarter, Jubilant’s SSSG rose 160 basis points quarter on-on-quarter. The brokerage has lowered Domino’s store openings for FY17 from 150 to 135, based on management guidance for 130-140 new stores. Jubilant has lowered its store opening guidance slightly as demand remains subdued. "Restaurant expansion continues to a core priority in order to expand reach. Aligned to this, for FY17, target of around 130 - 140 new Domino’s Pizza and around 20 new Dunkin’ Donuts. Focus on digitisation and reaching a wider audience through online ordering," the company said in a presentation note. It also sees rally in wheat prices to cause margin headwinds. Though cost of wheat, is relatively small contributor to cost of goods sold (COGS), is up roughly 15 percent and hence may reflect lower gross margins. Jubilant increased prices by 6-7 percent in second half of 2016 and Goldman Sachs thinks it is too early for it to take pricing action to pass on higher costs. In Q4, Jubilant’s gross margins improved 120 basis points. Higher expenses had already dragged March quarter results with standalone net profit at Rs 29.46 crore falling 6.56 percent at Rs 29.46 crore.  During the quarter, overall expenses increased by 15.41 percent to Rs 575.78 crore as compared to Rs 498.87 crore in the corresponding year-ago period.“We remain constructive on Jubilant’s long-term growth potential as we believe costs will begin to normalise with competition from food tech starting to ease. However, in the near term we remain cautious on SSSG trends,” Goldman Sachs says in a note.  Jubilant FoodWorks operates Domino's Pizza and Dunkin' Donuts chains in India under franchising agreement with the parent companies. As on May 2016, Jubilant Foodworks was operating 1039 Domino's Pizza outlets across 240 cities and 74 Dunkin' Donuts restaurants across 24 cities in India. Net sales in March quarter rose to Rs 617.83 crore, up 13.99 percent, from Rs 542 crore in the same period a year ago.

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