Jubilant stock has had an impressive run this year, with the stock price nearly doubling year-to-date in 2017. The company has benefitted from a three-pronged strategy of (i) focussing on productivity gains through cost optimisation, (ii) leveraging technology to enhance customer experience and (iii) gaining customer wallet share through improved product offerings and mix, which have helped it increase earnings and expand margins. The company has adopted a more disciplined approach to opening new stores, and pursued same-store sales growth (SSSG) as a way to drive topline.
Recent results have reinforced this strategy: In Q2FY18, Jubilant registered revenue growth of 9.2%, helped by tight control of costs, closure of a handful of underperforming stores, and operating leverage. This resulted in Ebitda margin expansion of 440 bp (despite a gross margin compression of 66bp) to 14.1% (highest in last 14 quarters), while PAT jumped c125% y-o-y. Management passed on all benefits of GST to consumers and believes that this SSSG momentum is sustainable. But how much should investors pay for it? At current valuations Jubilant builds in very rich earnings growth expectations and offers very little margin of safety. Current stock price suggests that Jubilant needs to compound its earnings by c20% for the next 15 years beyond 2020.
This is a very difficult ask and leaves very little tolerance for any shortfall on expectations of SSSG and margins. We maintain our Hold rating and increase our target price to Rs 1,640 as we revise estimates and roll our valuation forward from July 2017 to December 2017.