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MOSL: JUBILANT FOODWORKS (Neutral)-Strong all-round performance drives huge beat

Jubilant Foodworks: Strong all-round performance drives huge beat; High base to keep incremental earnings growth under check

(JUBI IN, Mkt Cap USD2.2b, CMP INR1199, TP INR1300, 8% Upside, Neutral)

 

• Jubilant Foodworks (JUBI) reported 16.8% sales growth YoY to INR9.3b (est. INR8.9b) with same store sales (SSS) growth of 14.6% YoY (v/s our est. of 10%). Total store count stood at 1,200, with 33 new Dominos' stores (35 stores opened, two stores shut) in 3QFY19. EBITDA grew 24.6% YoY to INR1.7b (est. of INR1.4b). Adj. PAT grew by 46.2% to INR965m (est. of INR748m).
• 9MFY19 performance: Sales, EBITDA and Adj. PAT grew 21.1%, 44.4% and 79.9%, respectively. Gross margin was down 10bp YoY to 74.9% while EBITDA margin expanded 280bp YoY to 17.3%.
• Concall highlights: (1) More than 50% of the store additions over the last few years have been in existing areas. While this is beneficial over the medium-to-long term, it could pressurize SSSG in the short term; (2) Management does not expect any pressure on 'delivery' manpower costs, going forward.
• Valuation & View: We have raised our FY19/FY20 EPS by 10.7%/0.8% led by beat in 3QFY19. While performance during the quarter was creditable, challenges to earnings growth will emerge owing to the extremely high base of 26.5%, 25.9% and 20.5% SSSG for the next three quarters. Despite our assumption of 2-year CAGR of 15-17% SSSG going forward, SSSG is likely to be relatively muted. Moreover, with store expansion now resuming, fixed cost absorption will be a challenge until new stores scale up. Initially, we also expect an adverse impact on SSSG of older stores in proximity to the newly opened store. Over the past two years, gains were seen in overall EBITDA margin level due to improvement in the 'Dunkin' Donuts' business; from a very high level of losses to breakeven stage now, which we believe is unlikely to sustain at the same pace.