No near term respite for Jubilant FoodWorks, stock down 11% over 2 sessions

Weak consumer sentiment, higher inflation is hurting sales

The stock of the country’s largest listed quick service restaurant (QSR) company, Jubilant FoodWorks is down 11 per cent over the last two trading sessions. Double digit cuts in operating profit and earnings per share estimates for FY24/25 on disappointing December quarter results and muted near term outlook led to the correction in the stock price.

The near term overhang on the stock was on account of lower than expected operating metrics in Q3FY23. The like-for-like (LFL) or same store sales growth was marginally higher at 0.3 per cent and was way lower than Street expectations of a 6 per cent growth. The three year growth rate for this metric is at 2.5 per cent.

What impacted sales for the company after strong revenue performance in October riding on festive demand was the sudden dip in demand in November. While there has been an improvement in December and January, the same is below expectations.

The flattish LFL performance, cost pressures and weak operating leverage hit the margin performance. Gross profit margin fell by 210 basis points due to the inflationary trend in cheese and flour prices. Operating profit margins came in below estimates at 22 per cent; it was down 460 basis points y-o-y as staff costs and other expenses rose by 200 basis points and 40 basis points respectively over the year ago period.

Vishal Gutka and Binay Shukla of PhillipCapital Research expect some headwinds for LFL. They highlight that persistent consumer inflation will lead to reduction in discretionary spending and Jubilant’s delivery heavy business could see a slowdown as it faces consumer fatigue. Raw material pressure may be difficult to offset given that the company has already taken multiple hikes over the past one and half years. Higher fuel expenses and employee cost inflation add to the multiple pain points for the company, believes the brokerage.

The company is eyeing 6-8 per cent LFL growth on the back of better price value offerings, improved menu and enhancing its customer loyalty programme. In addition to this, the company’s aggressive expansion is expected to help deliver a 20 per cent plus revenue growth over the next two years. Jubilant has a target of increasing its network by 250 stores over the next year and a half and believes that there is a potential of 3,000 stores (current store count at 1,701) in India. While it has diversified into multiple cuisines, the scale up of the same will be keenly monitored by the Street.

While the near term outlook is weak, most brokerages are positive on the structural growth opportunity for the sector as well as the stock. Say Krishnan Sambamoorthy and Aditya Kasat of Motilal Oswal Research, “Longer-term opportunity in QSR remains immense and Jubilant with its moats is poised to take advantage of the same.”

The other thing working in its favour are valuations given that it is down 32 per cent from its October highs and is trading near its 52-week lows. Valuations, after a steep stock price correction of about 45 per cent from its peak, appear reasonable at 25 times FY25 enterprise value to operating profit or a business that can compound earnings at 20 per cent and has return on equity levels superior to QSR peers and other retail companies, says the brokerage.