Jubilant Food: Better late than never; CMP Rs.1007, TP Rs.1250; Buy (CLSA)

[Rajesh Desai]

 

 

Jubilant Food: Better late than never; CMP Rs.1007, TP Rs.1250; Buy (CLSA)

Change in focus from growth to ‘profitable growth’

 

Jubilant Food seems to have changed track from ‘growth’ to ‘profitable

growth’. Closure of six stores, a first in almost a decade, highlights

management’s focus, and the pause in price hikes to offer value is also a

welcome step. Cost optimisation seems to be the mantra and consultants

have been appointed to derive more savings ahead. Overall, the 3Q was

better than our subdued forecast although same-store-sales growth

(SSG) at -3.3% was disappointing in the context of the 5% of Westlife

(N-R; McDonald’s West and South India). We tweak estimates and retain

BUY with a Rs1,250 TP (was Rs1,100) based on a 50x Dec-18CL PE.

 

3Q earnings above our estimate

Jubilant’s 3Q Ebitda declined 12% YoY to Rs640m which was 7% above our

estimate. Gross margin came in slightly ahead and was stable QoQ. A

moderate rise in staff costs and other expenses helped but lower revenues

still drove a 1.7ppt decline in the Ebitda margin to 9.7%. Overall net earnings

declined 32% YoY to Rs200m – 22% ahead of our estimate.

 

SSG turned negative due to demonetisation

Jubilant reported a 3.3% YoY decline in SSG after a positive comp in the

earlier quarter. Management indicated this was entirely owing to

demonetisation as Oct started quite well and there was a big decline in Nov,

after which there was some stabilisation. The liquidity crunch impacted orders

over the phone the most while dine-in and online delivery grew, in our view.

There was some stabilisation in December and the recent trend is even better

but normalcy will take more time. Westlife’s performance was better, due to

its lower dependence on delivery, where the cash crunch was felt the most.

 

Rising focus on costs

Cost savings and optimisation seems to be a key focus area as evident from

steps such as store closures (six closed in 3M/9M) and headcount

optimisation. Management now aims to open 115 stores in FY17 (135 earlier)

– the focus is clearly on ‘profitable’ growth. To optimise costs, Jubilant has

also appointed consultants, and gains should be visible in the coming months.

 

Maintain BUY

We slightly upgrade our FY17-19CL EPS to reflect the 3Q results. We believe

Jubilant is a good play on recovery in consumer sentiment and retain BUY

with a TP of Rs1,250 (50x Dec-18CL). Cost saving programmes should help

but given the leverage, a pick-up in SSG is key to strong earnings growth as

well as stock performance.

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