Analysts Slash Jubilant Foodworks’s Outlook After Poor Q2 Show

Jubilant Foodworks (JFL), which operates Domino’s Pizza and Dunkin’ Donuts chains in India, has seen a sharp 5% decline in its stock price as analysts downgraded the stock after its poor second quarter numbers.

The company reported a 4.5% year-on-year (YoY) rise in revenues to Rs 13,448 million, while net profit declined 39.5% YoY to Rs 721 million during the quarter.

Most brokerages have turned cautious, downgrading their ratings and revising target prices downwards. Of the five brokerages checked by us, only two have Buys on the stock, while one has maintained a Reduce. The other two cut their ratings today.

Antique has downgraded JFL to ‘SELL’ from ‘BUY’ earlier, cutting its target price to Rs 435 from Rs 477 previously. Kotak Institutional Equities retained its ‘Reduce’ rating on JFL with a fair value of Rs 500.

Nuvama Research has downgraded JFL to ‘Hold’ from ‘Buy’ earlier and reduced its target price marginally to Rs 541 from Rs 549.

On the other hand, Motilal Oswal and Centrum both maintained their ‘Buy’, but with lowered target prices and earnings estimates.

“We believe there are strong long-term opportunities in QSR, and JUBI is themost efficient player in the Indian QSR space and is well placed to seize the enhanced QSR growth opportunity. It has a strong balance sheet and a consistently high RoCE of over 20%. We maintain our BUY rating with a TP of INR610/share,” Motilal Oswal said.

According to Antique, JFL’s Q2 performance remains muted with a 1.3% decline in like-for-like (LFL) growth, reflecting subdued demand. It notes that the delivery channel grew 7.9% but dine-in declined 3.8% during the quarter. Antique has lowered its FY24 and FY25 earnings estimates by 9% and 18% respectively, factoring in headwinds from competition and inflation.

Kotak noted that while JFL’s Q2 LFL/same store sales decline of 1.3%/3.5-4% was better than expected, there are no signs of a demand recovery yet. It pointed out out that JFL is targeting 15% revenue CAGR over the medium term, but Kotak’s estimates build in a lower 13% CAGR over FY24-26.

Centrum noted that the company withstood weak consumption trends and contained LFL decline to 1.3% in Q2. However, Centrum has lowered its FY24 and FY25 earnings estimates by 6.5% and 3% respectively amid margin pressures.

Nuvama pointed out that the recent stock rally is not justified by JFL’s muted operating performance. Nuvama expects limited upside given the demanding valuations and cuts its FY24 and FY25 earnings estimates by 17% and 11% respectively.

Demand Scenario Remains Challenging

The brokerage commentaries indicate that Jubilant Foodworks faced a slowdown in demand during Q2FY24 which impacted its overall performance.

Antique points out that JFL’s like-for-like growth adjusted for store splits declined 1.3% year-on-year during the quarter. This was led by a 3.8% decline in dine-in revenues as consumers downtraded to lower ticket items.

The Indian discretionary consumer goods market has been seeing a sharp deceleration, and even a decline, in revenue in recent months as the global crack-down on inflation and liquidity leaves its impact on India as well. Asset prices, including those of shares and real estate, have moderated during this period, while employment and salary increments have also become harder to come by. All this has hurt fast food players like Domino’s.

According to Motilal Oswal, there is no reason to expect a recovery in demand over the next few quarters given high inflation and macro concerns.

Kotak Institutional Equities also suggests that there are no clear signs of a pickup in demand yet, despite JFL’s Q2 LFL decline being marginally better than expected. It notes that demand levels have likely bottomed out but recovery remains elusive.

Centrum cautions that the competitive intensity in the pizza segment poses challenges.

Nuvama Research indicates that JFL’s same store sales growth needs to revive for any re-rating of the stock. But it sees this as a key challenge in the near term amid prolonged weakness in consumer demand.

Overall, brokers highlight that Jubilant Foodworks faced demand headwinds in Q2 which restricted its revenue growth. While the decline in LFL sales moderated compared to previous quarters, brokers remain cautious on the near-term demand outlook.

Margin Pressures Weigh on Bottomline Growth

The brokerage reports also highlight that Jubilant Foodworks faced margin pressures during Q2 which impacted its bottomline growth.

Antique points out that JFL’s earnings before interest, tax, depreciation and amortization (EBITDA) margins contracted by 341 basis points YoY to 20.9% in Q2. This was a result of higher employee, rent and other costs. Consequently, adjusted net profit declined 39.5% YoY during the quarter.

According to Motilal Oswal, adverse operating leverage dented JFL’s profitability, with EBITDA declining 10% YoY in Q2. However, it sees gross margin improvement as a positive, driven by the company’s cost optimization efforts.

Kotak notes that JFL’s pre-Ind AS EBITDA margin declined as network expansion costs and investments weighed on profitability. It expects EBITDA margin recovery to be gradual amid elevated costs.

Centrum points out that despite gross margin improvement, higher opex on rising employee and rent expenses led to a 10% YoY fall in JFL’s EBITDA during the quarter. It expects margins to remain pressured by input cost inflation and competition.

Nuvama Research also suggests that JFL’s recent stock rally is not justified by its muted earnings performance, underscoring risks from demanding valuations.

In summary, brokerages highlight that input cost inflation, adverse operating leverage and expansion costs are impacting JFL’s profitability. While gross margins improved sequentially, EBITDA margins remain under pressure in the near term.

Other Commentary and Management Outlook

The brokerages have, meanwhile, noted other aspects of Jubilant Foodworks’ business and outlook.

Domino’s is introducing new store designs and formats to revive growth and the company has retained its store addition target of 200-225 Domino’s outlets and 30-35 Popeyes restaurants in FY24.

The management aims to achieve long-term margins of 22.5-23% but expects only a gradual recovery amid high costs and competition.