Q4FY23 Review: Jubilant Foodworks: A challenging year ahead

18 May 2023 , 10:38 AM

Jubilant disappointed with lower-than-expected sales growth of 8% and 13% decline in Ebitda. The company is going through a difficult time – demand slowdown, relatively higher penetration of the Pizza category, high input cost inflation, and high capex. Analysts of IIFL Capital Services cut their adj. Ebitda by 9%/6% for FY24/25. Their FY25 EPS is now 30% below Street. The stock is trading at 31x FY25 EV/Ebitda; they maintain REDUCE with price target of Rs440.

Poor growth in Q4FY23: 

JUBI reported sales growth of 8% (1% below IIFLe) with LFL sales declining by 0.6% (estimated SSSG decline of 3%). Ebitda declined by 13% (4% below IIFLe) with margin contracting by 488bps to 20.1% (pre IND AS margin of 12.3%), driven by pressure in gross margin and operating de-leverage. JUBI added 250 stores in FY23 in Domino’s India (store count of 1,816) and ramped up the store count in Popeye’s format to 13. It has incurred a cash capex of Rs7.7bn during the year, which includes ~Rs2.5bn towards a new commissary in Bengaluru.

Multiple headwinds: 

Demand has been hit across QSR, but the impact on Pizza category is higher. Dine-in has not recovered for Jubilant as it has for other QSRs; the company will have to remodel stores to improve experience, which will take time and money. At the same time, input cost pressures are higher too. Pizza as a whole and Dominos as well are relatively well penetrated, which leaves lesser room for growth via store additions vs other formats. Analysts of IIFL Capital Services are forecasting Ebitda margin of 22.5% in FY25 i.e. ~250bps higher than Q4 margins.

Downgrade of 6-9% in adj. Ebitda: 

Analysts of IIFL Capital Services factor in near-term weakness in demand as well as margins, resulting in a 9%/6% downgrade in FY24/25 adj. Ebitda. While the company is taking various initiatives to tap the long-term India QSR opportunity, FY24 is expected to be a challenging year with disproportionately higher competition in the pizza cuisine, margin pressure and high capex. The stock is trading at 31x EV/adj Ebitda= (FY25). They find the risk-reward unfavourable at this level and maintain their REDUCE rating on the stock with a target price of Rs440.