Jubilant to deliver extra cheese on value, with slice of pizza recovery

Domino's Indian franchise gains steam as pizza outpaces burger rivals amid shifting market dynamics

Jubilant FoodWorks, India’s largest listed quick-service restaurant (QSR) chain by market capitalisation, is expected to maintain its outperformance versus peers with steady performance in the January–March quarter (Q4) of 2023-24 (FY24), faster recovery in the pizza category, strong value offerings, and ongoing expansion.

The stock has delivered a 14 per cent return since the beginning of June, three times the QSR average and twice that of the S&P BSE Sensex during this period.

One key reason for Street’s optimism about Jubilant, the Indian franchisee of Domino’s Pizza, is the expected reversal in the fortunes of the pizza category. While pizza sales lagged behind burgers in the first half (H1), they showed stronger performance in the latter part of FY24.

According to analysts at Prabhudas Lilladher, led by Amnish Aggarwal, “From the second half of FY24, burger players started to feel demand pressures due to slowdown, geopolitical factors, and possibly competition (other cuisines and new players).”

While pizza chains are nearing the end of their downturn, burger chains are yet to fully experience the effects of rising competitive pressures. Analysts foresee a quicker return to mid-single-digit same-store sales growth (SSSG) for pizza chains compared to burger chains.

Jubilant benefited from a waiver of delivery charges that redirected dine-in demand to the delivery channel. This move helped achieve 0.1 per cent positive growth in SSSG after four quarters of decline. Delivery sales grew robustly by 12 per cent year-on-year (Y-o-Y), capturing 68 per cent of total sales, while dine-in sales contracted by 6 per cent.

The waiver also enabled Domino’s to outperform peers sequentially by the end of FY24. Emkay Research notes that Domino’s delivery sales grew 2 per cent quarter-on-quarter compared to a 0.6 per cent decline for Zomato in Q4, expecting similar or better trends moving forward with the full benefit of the delivery waiver realised in H1 of 2024-25 (FY25).

Analysts Devanshu Bansal and Vishal Panjwani of Emkay Research believe that Jubilant’s near-term investments, faster deliveries, enhanced product offerings, and loyalty programme could stimulate a virtuous consumption cycle and mitigate pricing-led competition in the pizza category. Emkay Research maintains an ‘add’ rating with a target price of Rs 525.

Despite gains in delivery and improved gross margins due to lower raw material costs, operating profit margins declined by 100 basis points (bps) to 19.1 per cent Y-o-Y. This pressure on profitability stems from increased investments in technology, supply-chain enhancements, and operating deleverage. Additionally, the value proposition of the delivery charge waiver weighed on profitability.

Looking ahead, Jubilant aims to enhance market share through volume growth while maintaining a focus on value offerings and expanding its customer base.

During Q4FY24, Domino’s added 67 new stores and entered 14 new cities, bringing its total store count across brands to 2,096, with Domino’s accounting for 1,995 of them.

For FY25, Domino’s plans to open 180 stores in India, 50 in Türkiye, and 20 in Bangladesh, with a medium-term store potential of 4,000 stores in India alone.

HDFC Securities highlights Jubilant’s efforts to solidify its price-value proposition, addressing earlier losses to local and regional competitors amid rising competitive pressures and consumer downtrading due to hyperinflation.

Notwithstanding dairy price increases, the company has refrained from price hikes over the past two years and introduced value-for-money offerings such as the Rs 99 menu and innovations like the Cheese Volcano. In addition, a 15 per cent reduction in capital expenditure per store has contributed to cost efficiencies.

Analyst Vishal Gutka of HDFC Securities has upgraded the stock from ‘reduce’ to ‘add’ with a target price of Rs 685, including a 40 per cent share of the DP Eurasia business.

The brokerage has also raised the enterprise value-to-operating profit multiple for the India business from 30 times to 35 times, as it foresees improved visibility in same-store sales.

However, some brokerages, like Motilal Oswal, maintain a ‘neutral’ rating on the stock with a target price of Rs 480, citing ongoing demand challenges within the QSR industry and the need to monitor near-term growth metrics closely.