Price hikes & volumes may keep Jubilant FoodWorks hot for Street

Despite margin concerns, growth outlook & strong balance sheet can support valuation

Jubilant FoodWorks (Jubilant), the country’s largest listed quick service restaurant (QSR) player, has been one of the better-performing stocks within the discretionary space over the past year, gaining 30 per cent. In the near term, the stock movement will likely be influenced by recent price hikes, December quarter earnings, and the impact of the Omicron virus. 

The company has raised prices by 5-6 per cent on an average across its portfolio. Analysts at Morgan Stanley view the pricing action positively as it helps offset part of margin pressure with a limited impact on demand. This is because even after the price hikes, Domino’s prices are the lowest among pizza makers. The company continues to stick to its value-for-money proposition, which coupled with lack of price hikes over the past few years, have been among the key reasons for driving same-store sales growth. In addition to price hikes, what should mitigate higher costs are gains on the operating leverage and the production efficiency fronts. 

The decision to hike prices came after the gross and operating profit margins in the September quarter declined 54-66 basis points YoY. The margin deterioration was on account of higher raw material costs (cheese and palm oil), increased freight expenses, and normalised rent expenditure. Among other margin challenges have been investments in maintaining product and service quality and digital capabilities, besides marketing spends.

While there are some headwinds on the profitability front and the margin trajectory needs to be tracked, there is consensus among brokerages on the growth potential for the sector, led by multiple structural factors, such as urbanisation, convenience, and online delivery. These are expected to help organised QSR players — such as Jubilant — increase their revenues at 15-20 per cent rates over five years. 

The ongoing trends were strengthened further with the onset of the pandemic.

Highlighting this, analysts led by Dhairya Dhruv of Motilal Oswal Financial Services believe the pandemic led to the closure of up to 40 per cent of restaurants, especially in the unorganised space, which yielded market share gains for the bigger players. Increased adoption of mobile and online ordering, cost optimisation efforts, and attractive rentals have boosted the financials of the QSR chains. 

The gains on the penetration front and reliance of consumers on trusted brands were among the reasons that led the management to guide for the opening of 150-175 stores (against the earlier guidance of 135 stores) for FY22, with half of this number already operational in the first half of the current financial year. The company believes that its domestic operations have the potential of absorbing 3,000 outlets of Domino’s, as compared to the earlier guidance of 1,800-2,000 stores. The current store count stands at 1,435.

Besides the core pizza category (Domino’s), the company has diversified its presence in other food categories, such as Chinese (Hong’s Kitchen), Biryani (Ekdum!), and more recently into chicken when it acquired the franchise for Popeye’s. Given that it did not make much headway with Dunkin Donuts (doughnuts franchise), the Street will keep an eye on the success of the diversified ventures as it starts to expand. 

Besides the tailwinds on the operational front, analysts at Motilal Oswal Financial Services say the company has the best balance sheet among QSR players with a return on capital employed of over 20 per cent for many years now. This, according to them, helps fund its profitable store expansion, as well, which is supported by its triumvirate moats of delivery, value, and technology. 

At the current price, the stock is trading at 66 times its FY23 earnings estimates. Given the growth potential of the core pizza business, increasing penetration on the back of store expansion, and diversified revenue streams, investors with a long-term investment horizon can consider the stock on dips.