Jubilant still upper crust even as near-term margins slice up stock

Aggressive store expansion, new menu choices ought to boost growth for QSR

Since its July-September quarter (second quarter, or Q2) results last month, the stock of the country’s largest listed quick-service restaurant (QSR) player Jubilant FoodWorks has underperformed its peers and the benchmarks. Domino’s India franchise was down over 16 per cent in this period, compared to peers that shed about 8 per cent on average. The benchmark BSE Sensex was down 2 per cent.

A sharp cut in earnings estimates, on the back of rising inflationary pressures, management’s decision to restrict price hikes, and limited scope for margin improvement in the near term, weighed on the stock.

The company also underperformed peers on same-store sales growth of 8 per cent year-on-year, compared to Westlife Foodworld’s 40 per cent and Restaurant Brands Asia’s 27 per cent. While the former is the West India franchise of McDonald’s, the latter is the India franchise of Burger King.

Notwithstanding the underperformance on operational parameters and near-term margin worries, some brokerages believe the company will be a strong medium- to long-term bet, given the aggressive expansion, new initiatives, diversified portfolio of brands, and market-share gains.

The market leader, which dominates the pizza segment in the country, announced earlier this week that it would deliver pizzas within 20 minutes across 20 zones. In addition to expanding its store network, the shorter timelines were enabled by optimising in-store process improvements, dynamic resource planning, and technology (tech) upgrades.

Analysts at ICICI Securities, led by Manoj Menon, believe that the 30 per cent improvement in the convenience format, along with the simplicity of the loyalty programme that offers a free regular-size pizza after every sixth order, could help the company reignite consumer demand for its franchise and gain meaningful delivery market share from competition.

As was the case with overseas markets such as the US where Domino’s gained market share regardless of increased competitive intensity, the brokerage expects similar market-share gains in India, driven by superior execution.

The company’s network expansion and store opening momentum have remained strong.

In Q2, it added the highest number of stores among QSRs, with Domino’s India increasing its presence by 76 outlets. At 1,701 centres, Domino’s store count is more than twice the combined presence of Pizza Hut represented in India by Sapphire Foods and Devyani International with an overall count of 715. The company has guided for 250 store additions in 2022-23 and is expected to expand at above-industry rates.

In addition to store expansion, Domino’s has recently customised its regional offerings. It is offering multiple products specifically for the eastern region and Gujarat, which should help expand its base. It also remains the only QSR player to have the widest choices across food formats with a presence in North Indian/biryani (Ekdum!), Chinese (Hong’s Kitchen), chicken (Popeyes), bakery/dessert (Dunkin’ Donuts), and pizza (Domino’s). The company has also made a foray into the ready-to-cook category with the launch of ChefBoss. The offerings in this business include pasta, table sauces, stir-fry sauces, and dips.

For Motilal Oswal Research, the QSR sector remains attractive - both on the growth outlook and margin perspective - and Jubilant remains its top pick in the space. The key investment argument for the brokerage is that Jubilant has the best balance sheet to fund expansion. Its proven track record of managing both store expansion and healthy same-store sales growth and its technological edge over peers are additional positives. The analysts believe that the experience of the new chief executive officer from Amazon India is expected to further augment clear leadership on the tech front.

The target price for the stock, which is currently at Rs 511 per share, is in the price range of Rs 660-720. The company is valued at 48x its 2023-24 earnings estimates and could be a good investment for the long term.