A pick-up in same-store sales for Jubilant FoodWorks appears unlikely at the moment. Weak macros are not only impacting the frequency of consumption of existing consumers, but also hampering addition of new consumers.
Price hikes (8% normal hike + 5% service tax = 13%) have also impacted the demand (SSS in FY12 was 30% despite a 12% price hike) .
Competition is intensifying both from Pizza and non-Pizza QSR players. Unlike in earlier down-cycle, players have continued with their expansion plans to benefit from demand revival going forward. Jubilant FoodWorks does not expect a V-shaped recovery in demand; however, improved consumer sentiment after elections could provide succour.
Jubilant has opened 24 Dunkin stores. As per the management, most stores have achieved cash breakeven. However, it will continue to impact margins adversely by 100 bps in FY15.
Margins of Dunkin are less than Jubilant. Thus, even if Dunkin becomes profitable, it will still be margin dilutive.
The current demand scenario does not warrant much optimism from near-term performance viewpoint. However, we believe that Jubilant is the best play on urban consumption recovery, given the operating leverage residing in its business model. The stock trades at 39.5x FY15 EEPS. We retain the Ďsellí rating and look for better entry points.