Jubilant FoodWorks may still be a tasty bite for investors as stock gains

Increasing footprint and higher share of online delivery indicate good growth potential

The stock of Westlife Development (Westlife), which runs the McDonald’s chain in the southern and western parts of the country, has always enjoyed premium valuation over its only listed peer — Jubilant FoodWorks (Jubilant). However, despite a higher base, the latter’s robust growth potential is likely to provide impetus to its valuation. 

The recent outperformance of Jubilant — which is the master franchisee of Domino’s Pizza in India, Bangladesh, Sri Lanka and Nepal — is also an indication that its stock is catching up on the valuation front. In the past six months, Jubilant has gained 37.5 per cent compared to 18.4 per cent rise for Westlife.

Even as the recent consumption trajectory has been muted, both the listed quick service restaurants (QSRs) have reported better growth than that clocked by consumer staple companies such as Dabur, Marico, among others. For Westlife, it’s lower base has helped it and also indicates good room to expand business.

However, even as Jubilant is larger, its revenue and profits have grown at a noteworthy pace (see table). The growth potential for Jubilant remains equally healthy, even as some analysts are worried over the impact of growing competition from online food aggregators (mainly after Amazon’s entry).

According to analysts at ICICI Securities, though Amazon’s potential entry into the food aggregator market could impact Jubilant’s near-term profitability, with the likelihood of more consumer discounts by Amazon, the long-term growth potential for Jubilant from an expanded market (because of online aggregators) remains intact. The domestic broking house expects Jubilant stock’s rerating to continue.

Source: Companies and brokerage reports

Jubilant’s favourable business structure, with online delivery accounting for around 50 per cent of its overall business, is a great advantage and should help the company fare better as the online food distributors would enable Domino’s to reach untapped areas.

Recent commentary from Jubilant’s management, supports this argument. It says, “There was significant growth in delivery, within that, of course, in online delivery, which more than compensated the headwinds that we faced in dine-in.”

Priyank Chheda, analyst at Reliance Securities holds a similar view. “Online food aggregators are expanding the industry and Jubilant has an edge over peers as it has end-to-end control on delivery and it has been a key beneficiary in changing eating habits of consumer,” says Chheda. Westlife, on the other hand, is more of dine-in play at least for now.

This apart, some financial parameters, too, place Jubilant in a relatively better light. For instance, Jubilant’s fixed asset turnover ratio, which indicates efficient utilisation of fixed assets to generate sales, is almost twice that of other major QSRs such as Westlife and Burger King (expected to get listed) and its operating profitability is also higher. Analysts believe this has helped Jubilant to deepen its footprint in the smaller towns, in a cost-effective manner.

Additionally, the company’s vast presence through restaurants and online channel would help it reap benefits from supportive macro factors like lower penetration of QSRs in the overall food services markets, changing behaviour of consumers, with preference to foods like pizzas, including burger.

The profit contribution of its other businesses like Dunkin’ Donuts and foray into Chinese cuisine (Hong’s Kitchen) are other long-term growth levers for Jubilant.  However, rising consumer inflation could have an impact on the entire sector.

In this backdrop, Jubilant seems a good option for medium- to long-term investors as it is still trading at a discount to Westlife. The latter’s current valuation, on financial year 2020-21 estimated EV/Ebitda (enterprise value to earnings before interest, tax, depreciation and amortisation), stands at 26 times versus 21 times that of Jubilant.