Jubilant Foodworks Ltd. share price target

JFL added 26 Dominos stores in 3QFY17 on net basis and closed the quarter with total count of 1,107 outlets spread over 260 cities (shut down 6 Dominos stores as well). As per the Management, JFL mitigated the challenges arising from demonetization through offering multiple cashless payment options to consumers and new products offerings that received an encouraging response. The Management mulls opening...

same-store sales (SSS) and resignations of its CEO Ajay Kaul (who will continue until March 2017) and CFO Ravi Gupta in a short space of time. Management has guided for positive SSS from 2QFY17, but there are no initial signs of recovery in our retail coverage universe. Customer fatigue due to deals by online/offline players across the year as mentioned by Titan's management in its recent quarter update is particularly hurting the QSR/food tech segment....

We met JFLs CFO and Head IR. We conclude our discussion on these 5 points. (1) On resignation of CEO, Mr. Ajay Kaul (2) QSR market dynamics (3) Near & Medium term outlook on SSG (4) Outlook on EBITDA margin (5) Perspective on Dunkin Donuts

Search for new CEO has begun; Ajay Kaul to stay until 31 March 2017: The company has begun its search for a new CEO (submitted exchange filing of current CEO's resignation). The new CEO can be from within the system or from outside it. We expect this post to be filled...

1) Working with vendors to drive efficiencies in supply chain. 2) Six Sigma project initiated to reduce headcount further (already successful in reducing 1-2 employees/store due to OLO and cost cutting). 3) Automation in commissaries (The Greater Noida mega commissary will be up and running by FY17-end). 4) Will use data analytics in a bigger way. Use of data analytics in Domino's India was significantly less compared to the US and Japan. Studying customer ordering patterns and customizing promotions...

JFL’s revenues grew by 6.7% YoY to Rs 6.1bn, while SSG was negative 3.2% YoY. EBITDA & APAT contracted by 14.2% & 31.1% YoY, respectively.Industry growth remained challenging as SSG for Pizza Hut, KFC and Specialty Restaurants were down by 7%, 1% & 8%, respectively. JFL management is confidant on achieving positive SSG in Q2FY17 & also plans to gear up for the upcoming festive season. However, considering the weak industry growth & JFL’s lack of price hike, we expect FY17 growth would remain challenging. We expect 13.3% & 16.6% sales growth in FY17 & FY18, respectively.

JFL is strong player and has consistently gained market share. However, considering (1) weak industry growth (2) limited tailwinds for sales & margin & (3) lower store expansion, we cut EPS estimates by 28% & 27% for FY17 & FY18. Based on 48x P/E (20+% discount to historical P/E) on FY18 EPS, we reduce TP to Rs 1,172 (earlier TP Rs 1,342). We downgrade stock to NEUTRAL.

Top takeaways from Q1FY17 : SSSG at -3.2% entered negative territory after seven quarters of positive growth and was below our estimate of 3%. Gross margins expanded 110bps yoy and 30bps qoq on soft input prices. Employee expenses grew significantly on addition of new stores and wage inflation. EBITDA margin fell 230bps yoy and 200bps qoq on negative operating leverage. Network expansion for Dominos and Dunkin’ Donuts was slower at 23/6 restaurants.

Phillip Capital have cut their estimates for FY17/18 by 21%/26% on weak overall recovery and worsening per store economics. The overall and per store metrics of the company have deteriorated in past few quarters with no signs of sustainable recovery in sight. Also, we expect the EBITDA margins of the company to deteriorate further in FY17/18 as SSSG will be significantly below cost inflation. Based on DCF valuation and implied PE of 50x FY18, we value the stock at Rs 1065 and downgrade the stock to Neutral.

Buy Jubilant Food Works CMP at Rs. 1078 and add on Dips to Rs. 1078 - 1000 for the Sequential Targets of Rs. Rs. 1200 - 1300

JFLs 4QFY16 revenues were in line, but APAT missed estimates. Revenues grew 14.0% YoY to Rs 6.2bn, whereas APAT declined 6.6% YoY to Rs 295mn (vs. estimate of Rs 352mn).

SSSG at 2.9% was positive for the sixth straight quarter, but below our estimate of 6% Gross margins expanded 120bps yoy, but fell 50bps yoy on extended Buy One Get One (BOGO) offer for three weeks in Q4FY16...