Jubilant FoodWorks' healthy growth offset by margin, valuation concerns

The stock of the country’s largest quick service restaurant (QSR) player Jubilant FoodWorks has been hitting its 52-week highs recently. 

Since the start of November, the stock has gained 25 per cent while the Sensex was down about 1 per cent over the same period. 

 

The company continues to outperform its peers even in a soft demand environment and analysts believe it will maintain its sales momentum even in the second half of FY25.

 

The sector, too, is expected to recover next year (CY25) after bearing the brunt of consumer slowdown in CY24.

 

In addition to a poor consumption climate, rise in competitive intensity from smaller QSR brands and Cloud kitchens (aided by aggregators such as Swiggy/Zomato) are hitting the organised QSR market. 

 

Analysts led by Percy Panthaki of IIFL Research highlight that CY24 has been a slow year for the sector. However, going into CY25, there should be some recovery considering factors like benefit from low base, menu innovations and improved affordability.

 

Moreover, with food inflation moderating and the return of urban consumption soon should manifest in QSR sales as well.

 

Given that Jubilant has run up quite a bit, the brokerage prefers Devyani International followed by Sapphire Foods India.

 

During the September quarter, Jubilant was able to outperform its peers, riding on the strong performance of its delivery channel. The channel posted a growth of 16 per cent and was aided by the waiver of delivery charges. 

 

Domino’s India reported its highest orders, highest app traffic and conversion, and the highest volume throughput per store in Q2.

 

This was achieved on the back of higher investments in brand/customer facing technology, delivery fee waiver, increased product innovation and higher store density. These enabled 20-minute deliveries. 

 

Overall, like-for-like (LFL) growth at 2.8 per cent for Jubilant was largely led by the delivery LFL growth of 11.4 per cent.

 

Its peers lagged with Sapphire Foods reporting a drop in LFL growth of 3 per cent in Pizza Hut and 8 per cent in KFC.

 

Devyani reported a dip for this metric by 5.7 per cent for Pizza Hut and 7 per cent for KFC.

 

Restaurant Brands Asia (Burger King India) reported a 3 per cent fall while Westlife Foodworld saw LFL slip by 6.5 per cent. 

 

Even as LFL growth has been strong, the Street will track the progress on the margin front.

 

The company disappointed by delivering an operating profit margin of 19.4 per cent which was 150 basis points (bps) lower than the year-ago quarter. This was on account of higher promotion expenses and free delivery offer.

 

Given the ongoing offers and inflationary risk, most brokerages believe margins will be in the narrow range of 19-20 per cent, going ahead.

 

Despite the pressure on market share, the company’s focus remains on volume-led growth and market share gains, customer acquisition and store expansion while keeping a lid on costs.

 

The company will also aim to increase share of the dine-in business which declined 6 per cent despite higher footfalls. It will introduce a lunch menu priced at Rs 99 for dine-in customers.

 

The decline in dine-in and strong growth in the delivery business have taken the share of the latter to 70 per cent. 

 

Given the concerns, Kotak Institutional Equities has a reduce rating.

 

Analysts led by Jaykumar Doshi of the brokerage say the company is moving in the right direction, but margin recovery would be gradual. The brokerage is waiting for reasonable valuations and/or decisive improvement in QSR demand.