Jubilant Foodworks fails to cheer analysts about growth despite good Q2 score

Only if input costs normalize, the company is expecting some margin improvement in H2

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Master franchise for Domino’s Pizza operations in India, Jubilant Foodworks, reported a good set of second quarter numbers with the net profit up 9.8 percent on-year to Rs 131.5 crore from Rs 119.8 crore and revenue from operations reaching Rs 1,301.5 crore with  a 16.6 percent rise over last year.

The stock, however, slumped over 6 percent intra-day on Wednesday. Jubilant Foodworks was quoting at Rs 574.85 apiece on the National Stock Exchange, down by 6.18 percent, around noon. It was among the top BSE mid-cap losers.

Concerns on margins

EBITDA margins for the quarter declined to 24 percent as against 25.8 percent YoY due to high raw material costs. Raw material and beverage costs grew 23 percent on-year to Rs 310 crore as against Rs 242 crore in the year-ago period. Cheese, flour, fats and oil are some of the key inputs for the company.

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“Gross margins are down by 200 basis points YoY and if raw material costs remain at the level they are now, then margins too will remain at the same level,” the company told analysts.

Only if input costs normalise, it may expect some margin improvement in the second half of the fiscal.

Concerns on same store sales growth

In February, Jubilant Foodworks announced that it will not disclose same-store sales growth (SSSG) data in its quarterly numbers. “There is no large difference between SSSG and like-for-like (LFL) sales, and we do not expect this gap to widen either,” said the management.

Essentially, SSSG measures the growth in revenue from store locations that have been in operation for at least one year. Like-for-like growth is a measure of growth in sales, adjusted for new or divested businesses.

For this quarter, Jubilant Foodworks LFL growth stood at 8.4 percent. “Historically, SSSG has always been 2 percentage points lower than LFL. In that sense, SSSG for this quarter would be 6.4 percent,” said Karan Taurani of Elara Capital. Analysts had expected both the growth numbers to be in double-digits.

Also Read: Jubilant Foodworks: Steady earnings growth to continue

The company opened 76 new Domino’s stores and entered 22 new cities in the quarter. “We have been making deeper in-roads to tier-2 and tier-3 cities,” the management said on the earnings concall.

Of the new store additions, one-third were split stores, which indicates store additions in existing cities. Two-thirds are non-split stores or newer markets. “When a store opens in a new market, footfalls tend to be greater. This should have translated to higher growth numbers,” said Shirish Pardeshi of Centrum Broking.

The company management also did not provide any clarity on the revenue contribution from the 9 million app downloads and pan-India ‘Cheesy Rewards’ loyalty program, he added.

Taurani went on to say that the competition has intensified in the QSR space and pizza is no longer as exciting a proposition as it was in pre-Covid era. “Another key monitorable is new CEO Sameer Khetarpal’s strategy on scaling up Ekdum, Dunkin Donuts and Popeyes,” he said.

At trailing twelve month price-to-earnings ratio of 81.52, the stock remains expensive. “We await unfolding of early trends before turning constructive on the stock. We have a ‘hold’ rating with a target price of Rs 595,” analysts at Emkay said in a note.

HDFC Securities has a target price of Rs 525. “Since the valuation is rich, we maintain Reduce rating,” they noted.

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