Value offers spice up growth at Jubilant FoodWorks

Jubilant FoodWorks ended 2017-18 on a strong note, with its March quarter numbers beating estimates on all counts. Despite a lower base from the year-ago quarter, it reported 27.3 per cent increase in revenue, aided by a strong 26.5 per cent growth in samestore sales (SSS), its highest in six years for its core Domino’s Pizza business.

After a muted 0.6 per cent average SSS growth over FY1417, things have improved since the beginning of FY18. Growth improved 6.5 per cent at the start of the year and increased to 18 per cent in the December quarter. Introduction of everyday value offers in April last year, coupled with more toppings and selective reduction in prices, has been aiding overall volumes, with improvement in each of the past four quarters. The company indicated the growth came from both in-store and delivery sales, with the latter growing faster, driven by online orders.

A strong revenue performance also rubbed off on the margins at the operating level. Operating profit doubled over the year-ago quarter to ~1.2 billion, while margins were up over 600 basis points (bps) to 16.4 per cent. With the company focused on improving of operating leverage, rationalising costs and being prudent in the opening of stores, margins are expected to be maintained at the current level.

The company has cut losses on Dunkin’ Donuts by half, and expects the business to break even at the end of the financial year. This should be positive for margins and profit. However, analysts believe cost inflation (both on raw material and staff costs), investment in opening new stores, improving delivery capabilities and opening of a large back-end centre will limit margin expansion. The ability to pass on higher costs, while maintaining volume growth, will be one of the key factors the Street will watch.

The company has indicated it will continue to look at product innovation, invest in technology (digital and online platforms), value-for money-offers and improving of customer experience to drive business. It extended the everyday value offers, earlier available for medium sized ones (~199), to regular sized pizzas (~99) as well. The impact of the ~99 offer, launched at the end of the March quarter, is expected to be felt in the current quarter.

Analysts say given the current offering and low penetration, the company can maintain over 10 per cent SSS growth on an annual basis (it was 13.9 per cent in FY18). This will be driven by higher frequency of existing customers, addition of new customers, given lower ticket price offers, and expansion into newer markets. The company has formed a joint venture with Golden Harvest to launch its operations in Bangladesh, which could be a new growth trigger.

There are multiple positives which would add to the sentiment for the stock, including a 1:1 bonus. However, analysts also believe the positives are already priced and the stock has gained 2.5 times over the past year. With the stock (fell two per cent on Tuesday) trading at 51 times its FY20 estimated earnings, upsides from the current level seems limited. The stock, however, is expected to sustain these valuations, given its market leadership, scalability of the business and faster rate of growth over the long term, says an analyst at a domestic brokerage.