The Jubilant Foodworks stock would have appreciated much more than the 22 per cent that it has in 2011, if the Noida-based company had not reported a disappointing performance in the September 2011 quarter. Analysts expect the coming quarters to be even more challenging for the company -- and feel the worst is not over for the stock, which has corrected 7 per cent since the announcement of its Q2 FY12 results on November 3.
Market participants find the stock’s valuation at 34 times the FY13 estimated earnings quite high, given weakening fundamentals going ahead. As Manav Vijay, analyst at Edelweiss Securities, says, “there is hardly any cyclicality risk factored in the model at current valuations, where margins are close to its peak.” Adds Amnish Aggarwal, analyst, Motilal Oswal:, “The valuation leaves little room for any negative surprise.”
Not immune to slowdown
In Q2, the company’s same-store sales growth at 27 per cent y-o-y was the lowest in seven quarters (partly due to a higher base of 44 per cent in the same quarter last year). Despite the price hikes in the quarter, its gross profit margin at 73.6 per cent was lowest in 12 quarters, and same-store volume growth was less than 20 per cent compared to the 30 per cent it had clocked in the June quarter. To an extent, this slower growth indicates that companies, including Jubilant, which derive revenues from products based on discretionary spending, are also affected by the economic slowdown.
| SLOWING GROWTH | ||||
| in Rs crore | FY10 | FY11 | FY12E | FY13E |
| Net sales | 424.0 | 678.0 | 1022.7 | 1422.7 |
| % chg | - | |||
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Challenging outlook
The outlook for the 1995-founded company’s business is challenging on many counts. Some analysts expect same-store sales growth to slow down further due to continued lower discretionary spending, especially in urban areas where inflation pinches more. Even though food inflation eased recently, it has to be sustainable and that is unlikely given upward risk of crude prices.
However, the management is confident of exceeding the 20 per cent sales growth for FY12. Aggarwal from Motilal Oswal also maintains his estimates of 28 per cent same store sales growth for the second half of FY12 on the back of a relatively lower base and the management’s aggressive focus to increase same-store sales momentum. However, investors should wait for further clarity in its December quarter results.
Also affect sales will be price hikes, around 8 per cent in the first half of FY12 and another 3 per cent in November 2011 against its policy of 6 per cent per annum hikes. Same-store sales growth is the mainstay for the company’s future business expansion and growth of its new venture Dunkin’ Donuts (80-100 stores in the next five years).
The company had targeted to open 80 stores in FY12, and is confident of its store expansion target. So far, it has opened 33 stores in the first half. Another 29 stores are expected to be opened in the current quarter. While the target looks achievable, investors should keenly watch out for any slippage thanks to the slowdown.
The company’s margins, which are close to its peak, are exposed to downside risk due to several factors. High food inflation, especially in milk products like cheese, can increase costs. The benefits of operating leverage seem to be reducing -- staff costs and other expenditure as a percentage of sales had a high correlation to same-store sales growth in Q2. The company is also increasing advertising expenditure to counter the slowdown. Moreover, the preoperative expenses of Dunkin’ Donuts and tax outgo can also hurt profitability.
Given that the performance slipped in Q2 and the weak outlook for the next few quarters, analysts had tweaked the company’s earnings estimates lower by around 5 per cent each for FY12 and FY13. There is a possibility of further downgrades in estimates if the December 2011 quarter doesn’t meet expectations, and consequently, a correction in the stock price.