Jubilant FoodWorks share price skids over 3%: HDFC Securities says this - What investors should know

HDFC Securities believes a large part of the recovery is priced in since the stock has run up sharply (40% in 6 months). They maintain REDUCE rating on the stock with a target price of Rs 1800. Delivery and takeaway channels returned to growth clocking growth of 6/50% YoY. Growth has not been sharp in October despite IPL due to the benefit of Diwali sales in the base.

Jubilant reported a mixed Q2 with a marginal miss in revenue and beat in the margin. Revenue/EBITDA was up -19/-9% YoY vs. the expectation of -17/-18%. SSG was at -20% (expectation of -15%), while LFL (like-for-like) was at -13% if we remove the store closure impact. Sequential growth was healthy (much better than peers), as system sales recovered to 85/92/96% of last year in Aug/Sep/Oct. Recovery has been driven by strong growth in delivery and takeaway channels, as dine-in has continued to remain under pressure. Delivery charges, along with benign raw material, were partially compensated by EDV (Every Day Value) offers; still, gross margin expanded by 350/80bps YoY/QoQ to 79%. EBITDA margins of the company expanded by 286 bps YoY. HDFC Securities slightly increased EPS for FY21/22/23 to reflect better margin. HDFC Securities roll forward their target price to Sep-22E EPS and value Jubilant Food at 45x P/E to derive a target price of Rs 1,800.

Delivery and takeaway drive recovery: 
 
Revenue declined by 19% YoY (+12% in Q2 FY20 and -60% in Q1 FY21), slightly off estimate of 17% YoY decline. SSG stood at -20% YoY while LFL SSG (excluding temporarily closed restaurants) was at -13% YoY. Delivery and takeaway channels returned to growth clocking growth of 6/50% YoY. Growth has not been sharp in October despite IPL due to the benefit of Diwali sales in the base. OLO continued to drive growth and 99% of delivery sales were through OLO. App downloads also surged to 43.8 mn. Hong's Kitchen added another store (five stores in two cities now) while Dunkin/Domino's added 5/10 stores respectively. The company closed 5/100 Dunkin/Domino's stores.

Delivery fee led gross margin expansion: 

Gross Margins expanded by 351 bps YoY (+67 bps in Q2 FY20 and +257 bps in Q1 FY21) vs an expectation of 272 bps YoY expansion on the back of levy of delivery charges. Gross Margin expansion is likely to be limited in the first half, owing to the lower delivery fee.
 
Robust EBITDA margin:
 
Focus on cost rationalisation led to Employee/Rent/Other expenses declining by 12/8/19% YoY. As a result of which EBITDA margin expanded by 286 bps YoY to 26.7% (+705bps in Q2 FY20 and -1,697 bps in Q1 FY21) vs an expectation of 31 bps YoY contraction. EBITDA declined by 9% YoY (expectations of -18%). Loss of rent concessions will also impact margins sequentially going forward. However, cost control measures are expected to compensate for the same partially. PBT declined by 21% YoY on account of increased depreciation and interest while PAT grew by 1% YoY.
 
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Call takeaways: 
 
(1) Almost 100% of the store network has now reopened, barring corporate parks
(2) Demand returned to normalcy in 159 towns for Domino's
(3) Rural and semi-urban recovery was much stronger than metros
(4) Jubilant Food will open 100 new Domino's stores and 10 Hong's stores in FY21
(5) Overall Capex for FY21 will be Rs 2 bn.