Jubilant: Strong top line revives sentiment

Aggressive store expansion plans indicate firm’s confidence for the longer term

Jubilant Foodworks (Jubilant), the master franchise of Domino’s Pizza and Dunkin’ Donuts in India, reported a 2.2 year-on-year (YOY) fall in net profit to ~75.9 crore in the September 2019 quarter (Q2), which was way below Bloomberg consensus expectations of ~94.5 crore.

A one-time expense on account of provisioning for investments in stressed firms such as Dewan Housing Finance Corporation, and for deferred tax, were key reasons for the miss in net profit.

However, despite the consumption slowdown, Jubilant’s net sales grew 12.1 per cent YOY to ~988.2 crore in Q2, and was ahead of analysts’ expectations of ~964.5 crore. This enthused the Street, with the stock gaining over 5 per cent on Tuesday, outperforming a 0.85 per cent decline in the benchmark Sensex.

In-line same-store sales growth (SSG), price hikes, and strong store additions drove the top line.

Jubilant clocked 4.9 per cent SSG in Q2, against the Street’s expectations of 3-5 per cent.

Notably, the reported SSG comes on the high base of 20.5 per cent SSG in the yearago quarter and also better than June 2019 quarter’s 4.1 per cent.

In Q2, the overall demand was led by the delivery segment, while the dine-in segment was under pressure amid weak consumer sentiment. What’s also encouraging is the company’s aggressive store expansion.

In Q2, Jubilant added 40 stores, the highest in last 15 quarters and has also revised its store addition target for FY20 to around 120 from 100 earlier.

This kind of aggressive store expansion clearly indicates the management’s confidence of long-term growth and should also support delivery sales, say analysts.

Further, Jubilant will also start expanding its Hong’s Kitchen (Chinese cuisine segment) footprint from this quarter onwards.

Strong top line growth along with operating leverage helped Ebitda (earnings before interest, tax, depreciation and amortisation) margins, which shot up 704 basis points YOY to 23.8 per cent due to the positive impact of new lease accounting (IND AS 116). Adjusting for IND AS impact, margin was marginally lower by 37 basis point to 16.4 per cent.

Overall, Jubilant’s Q2 show and upward store addition guidance is likely to renew investor sentiment to some extent for Jubilant, says Priyank Chheda, analyst at Reliance Securities.

Recently, expectations of growth pressure from online food aggregators had impacted the stock. However, while the management believes that online food aggregators are likely to strengthen Jubilant’s delivery sales, the jury is still out on this.