Volume growth to spice up gains for Jubilant, Westlife

Expectations of high same-store sales growth and improving margins led to higher investor appetite

Stocks of quick service restaurants Westlife Development, Jubilant FoodWorks and Speciality Restaurants have been hitting their 52-week highs this week on expectations that improving demand and new offerings will sustain volume growth going ahead. This, coupled with the recent trigger of revisions in the goods and services tax (GST) rate to five per cent from the earlier 18 per cent should help bring down overall prices.

Given that the new rates are without the benefit of input tax credit, companies such as Jubilant (Domino’s) have raised prices (before taxes) to negate the impact. While this will be neutral as far as profitability is concerned, it will help bring down the final cost for the consumer. Analysts at Anand Rathi Research say with the pricing actions from June to November 2017, the consumer may benefit from a five-seven per cent lower tax burden. 

However, the key trigger is higher sales growth, driven by improved demand. Both companies reported better-than-expected September quarter results with same-store sales growth (SSSG) trending up while rationalisation and cost-cutting efforts have helped boost operating profit margins. 

Westlife Development (McDonald’s), for example, reported SSSG growth of 8.4 per cent which was its ninth consecutive quarter of positive SSSG growth. This was on the back of increased footfalls driven by value offerings, higher contribution from brand extensions and price rationalisation. Analysts at Axis Capital expect the company to report a 17 per cent revenue growth over FY17-22. This will be led by high single-digit SSSG, which is expected to increase from four per cent in FY17 to the eight-nine per cent band in FY18 and FY19. This growth will rub off on operating leverage and efficiencies, which, coupled with distribution synergies (after implementation of the GST), are also expected to boost operating profit by over 31 per cent during this period. 

For Jubilant, SSSG growth at 5.5 per cent in Q2FY18 was the second highest in the past 10 quarters. Analysts at Nomura believe the company’s growing focus on increasing consumer value by improving the quality of its pizzas, and yet extending the everyday value offer has enabled it to up-trade consumers from mania to medium pizzas. This, coupled with cost reduction and measured expansion (cutting down on unprofitable units), should help boost operating profit margins, which, after hitting its all-time low levels (mid-single digits) last year has increased to 14.1 per cent in Q2.

While both companies have reported improvement in recent quarters, maintaining volumes will be important given the price hikes. Analysts at Ambit Capital say with the cushion provided by input tax credit taken away, near-term SSSG will be a function of the price hikes taken by Jubilant and discounts withdrawn to protect absolute operating profit. This uptick is temporary and volume growth in the longer term remains essential to sustain these margins. 

At the current price, Jubilant, whose price has doubled over the past one year, is trading at an expensive 62 times its FY19 estimates. Westlife’s stock price has increased 70 per cent over the past year and the management is hoping to post a profit at the end of FY18. Investors could take exposure to the stocks on dips.