Analysts upgrade earnings outlook as Jubilant delivers on margin front

Market share gains, scaling up of network and takeaway trends to aid revenue growth

A strong margin performance in the September quarter (Q2), robust recovery and earnings upgrades led to a 6.3 per cent uptick in the stock price of Jubilant FoodWorks on Friday. Even as revenues in the quarter declined by over 18 per cent due to closure of some stores, the company, which runs the Domino’s chain of fast food outlets, surprised the Street with an improved operating performance.

Operating profit margins were up 290 basis points year-on-year (YoY) to 26.6 per cent, while they were at 6.3 per cent in Q1. The gains were led by lower raw material costs, closure of less profitable stores, lower discounting, savings on other expenses, and introduction of delivery charges. The company expects most of the benefits on the profitability front to sustain in the coming quarters.

On the revenue front, the company highlighted a strong recovery that improved progressively from 70 per cent of year-ago sales in July to about 96 per cent in October, signifying near normalcy. Given the store closures and decline in the dine-in segment, most of the gains came from delivery and to a larger extent from takeaways. The two formats registered a growth of 6 per cent and 50 per cent, respectively. The company expanded the convenience format with drive-and-pick-up facility in the previous quarter. It expects store count to rise to FY20 levels by the end of FY21 and sales growth to hit the positive trajectory in the March quarter.

Analysts at Motilal Oswal believe the company will benefit from multiple growth drivers, which include a rapid shift to the organised market, led by the closure of 20-30 per cent of restaurants due to the disruption caused by Covid-19. They also expect the trend towards delivery and use of digital channels by customers to place orders to help the company given its strong back-end and early mover advantage.

Given the improvement on the margin front, most analysts have upgraded their earnings outlook for the current and next financial year by 10-20 per cent each. While there is little doubt about growth prospects for the company, valuations at 65 times FY22 earnings estimates factor in the upsides. Buy on dips from a long-term investment objective.