Will Jubilant FoodWorks deliver on analysts’ optimism?

Company has struggled to grow profitably in recent times, but analysts remain bullish

Jubilant FoodWorks stock surged as much as 7.6 per cent on Thursday after upgrade by Goldman Sachs to "buy" from "neutral" earlier. One-year target price for the stock has been raised 36 per cent to ~1,228 by the foreign brokerage.

Analysts at other agencies also remain bullish. They believe Jubilant can overcome near-term demand hurdles and grow strong after that. Bloomberg consensus estimate sees the company's standalone net profit growing 18 per cent in FY18. The growth looks good, but sprouts from a low base.

Moreover, rising competition and slowing demand have weighed on Jubilant's financials for some time now. Its same-store sales or SSS have swung from a growth of 3.2 per cent in FY16 to a decline of 0.8 per cent for the nine months that ended in December. SSS shows sales from stores that have been open for at least a year. Jubilant's operating profit margin, too, has contracted from 14.7 per cent in FY14 to 9.6 per cent in the nine months that ended in December. Standalone net profit has been falling since FY14 and Bloomberg consensus estimate sees 21 per cent fall for FY17 over FY16. So where is this optimism coming from?

Steps to tighten costs, perhaps. Jubilant has hired consultant AT Kearney to help reduce costs; has closed six unprofitable Domino's stores in October-December; and has cut back on opening new stores. All these steps will gradually bear fruit.

"We believe Jubilant's valuation has yet to factor in two key changes that make us positive. One is less competition, with delivery start-ups focusing more on profitability. Second is Jubilant's emphasis on SSS over store expansion," said Goldman analysts. The brokerage is equally positive on operating profit margin, which it sees improving 260 basis points over FY1720. "On operating profit estimates for FY17-19, we are one to seven per cent ahead of Bloomberg consensus expectation," says the brokerage.

Improvement in SSS, however, is a pre-requisite for re-rating of the stock. With demand not picking up, uncertainty looms for SSS.

The stock, which trades at 48 times the company's FY18 estimated net profit, looks fairly valued now, going by Bloomberg consensus estimate.