Maintain ‘reduce’ rating on Jubilant Foodworks

JUBILANT Foodworks' (JUBI's) Q4FY16 results disappointed at the revenue, EBITDA and PAT levels. While revenues were 4.2% below expectations, EBITDA margins contracted by 80bps y-o-y, with adjusted PAT declining 6.6% y-o-y. With no immediate recovery of consumption in sight, aggressive expansion strategies in the core Domino’s business and mounting losses in the Dunkin business have us worried. Accordingly, we cut our 2017/18F earnings by 6.3%/13.4% and reiterate our ‘reduce’ rating.

The consumption slowdown continued this quarter as well, albeit only for JUBI, with company SSSG of 2.9% compared with sequential improvements for its competitors. Despite this, the company continues to expand: its pan-India store count has now reached 1,026. Increasing employee and rental costs continue to pose problems, with EBITDA margins contracting 80bps y-o-y despite favourable input prices.

In the last two years, earnings for JUBI have bottomed, with the stock seeing a sharp de-rating in the last year. We believe the period of negative earnings surprise is going to continue for the next few quarters, therefore we cut our target multiple from 35x to 32x. This, along with a 13.4% cut in FY18F earnings, results in a 20.7% cut in TP to R845. At R1,059, the stock is trading at 40.1x FY18F earnings. We maintain our ‘reduce’ rating on JUBI, given the risk to nearter m ear nings.