Motilal Oswal recommended sell rating on Jubilant Foodworks with a target price of Rs 850 in its research report dated July 17, 2017.
Motilal Oswal's research report on Jubilant FoodworksResults above expectations: 1QFY18 net sales grew 11.5 % YoY (est. of + 3%) to INR6. 8b, EBITDA rose 37.8 % YoY (est. of + 3%) to INR 796m and adj. PAT increased 25.6% YoY (est. of -4.8 %) to INR 181m. SSS grew 6.5% YoY (est. of -3%) for the quarter.
Gross margin shrunk 40bp YoY to 76. 4% (est. of -200 bp). Lower staff costs (- 130bp to 21.7%), other expenses (-120bp to 31.3%) and rent costs (-20bp to 11.6%) led to EBITDA margin expansion of 22 0bp YoY to 11.7% (est. of flat margin).
Concall highlights: (1) SSSG of 6.5% in 1QFY18 was led by growth in business volumes , mostly due to good response to ‘Everyday Value’ strategy for Domino’s Pizza . (2) Benefits of cost rationalization efforts in association with AT Kearney will be witnessed mainly in 3QFY18 and 4QFY18. (3) 255bp negative impact due to Dunkin Do nuts on margins in 1QFY17 came down to 145bp in 1QFY18.Outlook
Valuation view: Changes to the model have resulted in 21.8%/15.6% increase in FY18/FY19 EPS. There is, however, no visibility on sustained SSSG growth beyond the current year, with persistent weak urban consumer sentiment. For a business that sells an expensive product and where competition has made significant inroads into its forte of delivery, significant job creation needs to happen and incomes need to rise sharply – there has been no evidence of this so far. Although admirable, most of management’s efforts are just damage - control, in our view. Double -digit SSSG is essential for sustained margin growth for a business with cost inflation of 6 -7%. Despite assuming staggering 54% EPS CAGR over FY17 -19, the stock trades at 61.5x FY19 E EPS for a business that does not make 15% RoE, even in FY19. Maintain Sell with a revised TP of INR850 (multiple unchanged at 38x June 2019 E EPS).
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