Jubilant Foodworks: ‘Add’ with a fair value of Rs 1,800

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Published: April 21, 2020 1:30 AM

Even as dine-in business could stay hit for a while, we believe Domino’s delivery sales should start picking up much sooner.

The food services space in India has been a tough space, anyway. The food services space in India has been a tough space, anyway.

We expect Domino’s to be among the key early/sharp-recovery stories in the consumer discretionary space in the post-Covid phase. Even as dine-in business could stay hit for a while, we believe Domino’s delivery sales should start picking up much sooner. Domino’s own delivery fleet, brand strength and effective communication should serve as competitive differentiators as consumers look for comfort on food/delivery safety from the food delivery players. Reiterate ‘add’ with a revised fair value of Rs 1,800/share (from Rs 1,900). The food services space in India has been a tough space, anyway. Restaurants (standalone or chain), fine dining or casual dining or quick service, earnings above cost of capital are far and few in between.

This is an important aspect to bear in mind when assessing the direct and derivative impact of the Covid situation on the food services business. We summarize our top- level thoughts below: The already-high mortality rate in the industry will increase further in the short term, especially in the fine and casual dining space. Even after the lockdown is lifted, we believe restaurants will be asked to operate with significant reduction in seating capacity for a reasonably long time. This, plus the lingering consumer reluctance to dine in, could put significant pressure on the cash flow situation of several restaurants, in our view. Not all food formats lend themselves well to delivery, we note.

Some food items travel better than others. Confidence in food safety and delivery process will start featuring high on the attributes consumers seek from the food delivery industry. Trusted, well-entrenched brands have a natural edge over no-name dark/ghost/cloud kitchens on this front, in our view. This should mean a pause/ reduction and then slow growth on the supply side in the delivery space.

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