Cost inflation, exceptional expense spoil Jubilant FoodWorks Q1 show

Jubilant FoodWorks declared steady April-June quarter results for the 2022-23 financial year (Q1FY23), but inflation impacted margins and profits. The revenue was up 41 per cent year-on-year (YoY) and 7 per cent quarter-on-quarter (QoQ) to Rs 1,240 crore, which is up 32 per cent versus pre-Covid-19 level of Q1FY20. The like-for-like growth was 28 per cent. The Ebitda was Rs 304 crore, up 44 per cent YoY, with the Ebitda margin at 24.6 per cent, which is down 45 basis points QoQ due to serious raw material inflation.

The COGS (cost of goods sold) rose 44 per cent YoY (up 8 per cent QoQ) due to inflation. Profit after tax was at Rs 101 crore, down 46 per cent YoY and 13 per cent QoQ. This included an exceptional item of non-cash impairment of Rs 26 crore on investments in the Sri Lankan subsidiary. Adjusted for that, PAT rose 10 per cent QoQ and 87 per cent YoY to Rs 127 crore, but other income was also up 32 per cent YoY, which leads to possible questions about quality and sustainability of this section.

Given store expansions with 58 new Domino’s outlets in Q1 with a footprint across 349 cities, and the possibility of dine-in recovering, alongside growth in delivery, the medium term growth possibilities seem good. But options like higher delivery charges or price hikes could impact demand, given that this is a highly competitive sector. The management believes that price hikes in the second half of 2021-22 will be sufficient to manage raw material inflation.

The management guidance and responses at the concall were interesting. The Ebitda margins are expected to remain in the 24-25 per cent this fiscal and the acquisition of 40 per cent stake in Roadcast Tech Solutions will help improve efficiencies in delivery.

The management also said that the first quarter since Covid-19 without store restrictions saw sequential improvement in footfalls, dine-in levels and delivery sales. The management thinks price hikes have been accepted and no further hikes are required. The new loyalty programme launched for Domino’s should increase order frequency, and recruit new customers. So far, as the new businesses are concerned, Hong’s Kitchen and Ekdum requires further work on unit economics, format, etc. and Hong’s is scheduled to expand outside NCR only in 2023-24. The company will continue to work with food aggregators and it is rebranding Dunkin Donuts as Dunkin.

The company has a strong balance sheet with effectively zero debt and excellent working capital management. It has nearly 40 per cent RoCE (return on capital employed) while the RoE (return on equity) is around 24 per cent. However, it is very highly valued with a trailing PE of over 81x and enterprise value/Ebitda of 33x. It is ploughing back most of its free cash flow into new store expansions, with guidance for a target of 250 new outlets this fiscal. There’s a management transition in progress with the former chief executive officer resigning in March 2022, and leaving after June 2022. This induces an element of uncertainty, which may be negative.

The stock reacted by going down 3 per cent to Rs 550 levels. Adjusted for the 5:1 stock split in April, the stock has lost 24 per cent since January 2022. Most analysts have ‘buy’ calls, however, with target prices in the range of Rs 700 – Rs 840. But HDFC Securities has a ‘reduce’ call with a target of Rs 500.