Off the menu! 5 reasons why most analysts have downgraded Domino's pizza maker Jubilant FoodWorks

Shares of Domino's pizza maker Jubilant FoodWorks slipped as much as 5.4 per cent to Rs 455.90 apiece on the BSE on May 18, a day after the company reported below-than-expected results for the quarter ended March 2023 (Q4FY23). The company reported a 70 per cent decline in consolidated net profit at Rs 28.54 crore, impacted by higher expenses and raw materials costs. It had posted a consolidated net profit of Rs 96 crore in the year-ago period.

Its consolidated revenue from operations rose 7.9 per cent to Rs 1,269.85 crore as against Rs 1,175.97 crore in the year-ago period while total expenses were higher at Rs 1,205.15 crore as compared with Rs 1,038.27 crore in the corresponding period a year ago, the company said in its earnings release. On a standalone basis, the company's revenue grew around 8.2 per cent to Rs 1,252.3 crore while net profit declined by 59 per cent to Rs 47.5 crore.

Analysts at Nirmal Bang note that the company's standalone topline growth of 8.2 per cent YoY was lower than their estimates of Rs 1,280 crore. Like for Like (LFL) growth stood at -0.6 per cent YoY (vs est. 4.3 per cent). EBITDA declined by 12.9 per cent YoY to Rs 250 crore (vs est. Rs 300 crore). Adjusted PAT (APAT) declined by 46.7 per cent YoY to Rs 62 crore. However, the brokerage mentioned that after a few quarters of the absence of same-store sales growth (SSSG) data, the decision to share SSSG levels was not only a welcome move from a disclosure perspective but also because of evidence that the gap between LFL and SSSG is not as steep as feared earlier. 

Same-store sales growth refers to the year-over-year growth in sales for restaurants opened before the previous financial year. Like-for-like (LFL) sales growth refers to the year-over-year growth in sales for non-split restaurants opened before the previous financial year, Jubilant FoodWorks explains. 

That said, here're five reasons why most brokerages tracking the stock have downgraded it/cut the target price post-March quarter nos - 

• The company mentioned in its concall that the demand trends did not change materially in the fourth quarter and it expects sentiments to improve only after two-three quarters.

• Cheese prices remain elevated. Analysts believe that Jubilant FoodWorks' operating and net margins are unlikely to go back to the high levels of the past for a couple of years because of persistent cheese inflation, the impact of focus on low-priced products on near-term operating margins and higher depreciation because of addition of nearly 200 stores every year. 

ALSO READ | Jubilant FoodWorks Q4 results: Profit falls 70%; board announces Re 1.2/share dividend

• Another reason why the stock has witnessed a downgrade or cut in target price is an increase in initial losses in Popeyes and sustained high capex guidance of Rs 700 crore, including Mumbai commissary, note Amnish Aggarwal and Harish Advani, the research analysts at Prabhudas Lilladher.

• That apart, heightened competition in the QSR segment has also analysts worried.

• Moreover, focus on value, discipline about not taking price increases despite a severe inflationary environment, improving quality of dine-in experience as well as product experience, scaling up of the loyalty program, etc all indicate a willingness to invest for long-term sustainable growth even at the cost of slower-than-expected earnings in the near term, as per analysts.

Jefferies has a "Hold" rating on the stock. The target price has been cut to Rs 450 from Rs 480 earlier. Citi has also cut the target price to Rs  598 from Rs 619 earlier; however, it has a "BUY" call on the stock. Among domestic brokerages, Prabhudas Lilladher has cut the rating on the stock from Buy to Accumulate with a target price of Rs 515. Nirmal Bang Securities has also downgraded the stock to Accumulate with a target price of Rs 495.

The stock eventually ended at Rs 474.80 apiece on the BSE, down 1.24 per cent.