Muted demand environment to hit Jubilant FoodWorks' near term earnings

The stock of the country’s largest listed quick service restaurant or QSR, Jubilant FoodWorks has shed over 23 per cent from the start of January and is now trading close to its 52-week lows. After a muted December quarter in the pizza category due to the ongoing slowdown as well as severe competitive pressures, brokerages had downgraded the stock.

The company reported a sales growth of 3 per cent Y-o-Y on the back of a 6.2 per cent growth in the delivery business. However, this was offset by the decline in dine-in which fell by 5.6 per cent. Delivery accounts for about 65 per cent of Jubilant’s revenues. Growth for this channel was led by a combination of volume and higher order value. Elara Securities, however, says that sustaining it may be a challenge as overall demand remains muted over the near term.

The company’s like-for-like (LFL) growth for the December quarter fell 2.9 per cent over the year ago quarter on account of pressure on dine-in and little or no positive impact from the festive season and the Cricket World Cup. This was the fourth consecutive quarter of a decline in LFL growth for the pizza market leader.

Most brokerages highlight the competitive challenges both within the category as well as from aggregators. Says Kunal Vora of BNP Paribas Research, "Pizza, the most delivery-friendly option, is facing intense competition as more cuisine options have become available to consumers. While inflation may also be hurting demand, there are other factors at play, and we think the road to recovery could be longer than what the market estimates."

The brokerage has pointed out that since FY19, aggregators have scaled up significantly, with 4 times growth in the number of Zomato’s restaurant partners. Gross order value growth was even higher. Zomato had 254,000 restaurant partners as of Q3FY24, 48 times the total stores of listed QSR firms. This has increased the options available to consumers.

BNP Paribas Research has an underperform rating on the stock as it believes that a swift recovery and strong long-term sales growth are more than priced in. The stock is trading at 60 times its FY26 price to earnings ratio even after assuming a sharp recovery in sales growth and margins over FY24-26. The brokerage believes that the risk/reward balance is unfavourable and there is a high likelihood of disappointments continuing.

In addition to pressures on the topline, the company and the sector also faces a challenge on the margin front. For Jubilant, while gross margin expansion came in at 120 basis points Y-o-Y to 76.7 per cent, this did not percolate down to the operating level. Operating profit margins were flat on a sequential basis at 20.9 per cent due to spending on promotional costs. Increased advertising costs were aimed at perking up demand and to counter the rise in competition.

Say analysts led by Naveen Trivedi of Motilal Oswal Research, "As near-term demand is expected to be soft, we do not see the operating print improving anytime soon. The backend investments (commissaries in Bangalore, Mumbai) will further keep the profit before tax margin under pressure. We believe the current valuation does not capture the full earnings pressure." The brokerage has downgraded its rating to neutral post the December quarter earnings.  

Analysts are also factoring in the value of its overseas businesses of DP Eurasia (Turkey) and Bangladesh after the company increased its stake in the two businesses to nearly 100 per cent. Nuvama Research has pegged the value of DP Eurasia at 20 times CY23 net profit based on the global peer average which adds Rs 38 to its sum of the parts valuations.

Analysts led by Nihal Mahesh Jham of the brokerage, have adjusted down Domino’s India’s LFL estimates, which has led them to cut the company's FY25 and FY26 net profit by 11-13 per cent. They have also reduced the target price to earnings multiple for Domino’s to 45 times from 50 times pre-Covid ten year average. This is to factor in the structurally lower LFL and growth due to increased competition and the brand’s reasonably high penetration.