Even as expectations were running high about the financial performance of India’s largest pizza maker, Jubilant FoodWorks, in the December 2011 quarter the company managed to surprise the Street. In fact, it exceeded the expectations on many key parameters, particularly same-store sales growth (SSSG), which indicates growth in business of stores operational for more than a year. Thus, the stock, which had risen 22 per cent in 2012 (up till February 7) versus the Sensex’s 14 per cent, ended with three per cent gains on Wednesday against the Sensex’s 0.5 per cent.
Going ahead, the outlook is positive for SSSG and margins, due to strong demand for its products, innovative efforts to meet customers’ needs, efficient cost management and easing of input cost pressures. Says Ajay Kaul, chief executive officer, “We expect to end FY12 with SSSG in excess of 25 per cent and the worst is behind us in terms of input cost inflation.” Even beyond 2011-12, growth prospects remain robust. However, given the stock’s rich valuations, near-term upsides appear limited.
Q3: Firing on all cylinders
The year-on-year sales growth of 49.2 per cent was significantly higher than the Street’s average estimates of 40 per cent thanks to robust SSSG of 30.1 per cent (against expectations of 25 per cent), store expansion (taking total to 439 stores in 100 cities), festive season and price increases (13 per cent till date in FY12). Jubilant added 28 stores in the quarter, more than the 26 in the same period a year before and the 19 in the September quarter.
The performance is laudable, given the significantly higher base—in the year-ago quarter sales were up 59 per cent and SSSG was up 36 per cent–and comes after a disappointing September quarter, wherein SSSG growth at 26.7 per cent was lowest in the preceding seven quarters and gross profit margin had declined to its lowest in 12 quarters (despite price rises).
The operating profit margin improved 121 basis points year-on-year to 18.4 per cent, despite substantially higher advertising expenses (December being a big month for the food industry). The company benefited from operating leverage on other overheads, especially employee costs and rentals (thanks to high SSSG). Net profit margin also improved but at a lower rate, of 76 bps to 11 per cent, due to higher depreciation (up 22 per cent) with the store expansion and more than doubling of tax outgo.
“Despite the slowdown, the company has managed to clock such high growth rates in sales and SSSG. Also, margins have improved despite a high-cost scenario,” says an analyst with a domestic brokerage.
Road ahead
Notably, the outlook for sales and SSSG remains robust on account of the huge potential for quick service restaurants (QSRs) in India. The management has revised its store addition target for 2011-12 to 85 from the earlier 80, reflecting its confidence on business growth potential. The company is also witnessing strong response to its first store in Sri Lanka and is upbeat on the outlook. However, the benefits of expansion in that country will accrue only in the long term.
Sequentially, while sales grew 15.2 per cent, total expenditure has risen only 14 per cent. This indicates that raw material prices have eased, auguring well for margins. Says Kaul, “The first nine months of FY12 have been quite challenging and going ahead, pressure on ingredients will not be there as compared to what we saw in the last 12-15 months, as inflation softened towards the end of Q3 (December quarter). We are not likely to raise prices in the next four-five months.”
While margins are at elevated levels, there is downside risk, too, due to higher adspends to counter rising competition, besides pre-operative expenses for launching Dunkin’ Donuts (in the first half of calendar 2012 and the first quarter of next financial year, to be precise). The company has spent Rs 2.44 crore in the first nine months of 2011-12 towards operationalising of Dunkin’ Donuts.
Grab small bites
The stock, up 90 per cent in a year at Rs 947, trades at rich valuation of 39.4 times 2012-13 estimated earnings, indicating limited upside in the near term. Says Vikash Mantri, analyst, ICICI Securities, in his report dated February 7, “We downgrade Jubilant FoodWorks to ‘reduce’ from ‘buy’, post the recent sharp run-up in the stock price by 26 per cent since our coverage initiation (December 1, 2011). Though we remain positive on strong growth prospects for the company and the QSR industry in general, the currently expensive valuation factors in heightened expectations and reduces the margin of safety.”
In the backdrop, analysts believe the stock is likely to remain range-bound, and track broader markets in the near term. However, investors with a perspective of over a year may consider it on dips.
