Stock corner: Buy Jubilant Foodworks, venture has promise

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Published: April 2, 2019 1:06:25 AM

Maintain Buy on JUBI with DCF-based TP of `1,650. At our TP, the stock will trade at 46x P/E multiple Sep-20e. Key downside risk includes pressure on margins from aggressive new store expansion.

Fast casual is also more likely to benefit from delivery model than casual dining.

We believe Hong’s Kitchen (HK) could potentially add c.35% to Jubilant Foodworks (JUBI’s) FY2021 fair value (if it’s to reach 1,200 stores (same as Domino’s today) by FY2030e). We returned optimistic from HK store visit in Gurgaon (Delhi)—fast casual positioning, outlet location, trendy exterior and branding inspires confidence in attracting footfalls. Lessons from Dunkin’ about the don’ts in a dine-in model improves success probability of HK. Entry into Chinese cuisine expands JUBI’s addressable market by 3x. BUY.

JUBI recently launched its own brand ‘Hong’s Kitchen’ restaurant (first store in Gurgaon), marking its foray into the Chinese food market. A fast casual positioning (set between fast food and casual dining) fits well with JUBI’s strengths—focusing on value-for-money and delivery. On the core Domino’s business, near-term performance could see a boost from cricket tournaments (IPL and upcoming World Cup).

Foray into Chinese food expands addressable market by 3x

Chinese cuisine is the second largest segment in India (behind North Indian food) and is pegged at 19% of the total food service market, thereby expanding JUBI’s addressable market by 3x (pizza is just 6% of the total market).

What is ‘fast casual’ format

A fast casual is an intermediate concept between fast food and casual dining, usually not offering full table services. However, fast casual has higher quality food than fast food restaurants, with fewer frozen or processed ingredients. The value-for-money model fits well with JUBI’s core positioning. Fast casual is also more likely to benefit from delivery model than casual dining.

Hong’s Kitchen—first impressions

We returned optimistic from our store visit to Gurgaon. Ground floor corner location at the mall’s entrance, trendy exterior and turquoise blue hard to miss branding inspire confidence in attracting footfalls. The store is adequately staffed. An open kitchen makes for a lively and engaging experience for customers. Separate vegetarian and non-vegetarian kitchen areas could go well with vegetarian customers’ preference. The menu is affordably priced, in sync with JUBI’s value-for-money proposition under the new management. We estimate a meal for two to cost `500-600 on average. It is listed on food aggregators but an own app could mean that it will do its own delivery, in line with company strategy.

Learnings from Dunkin’ —Keeping a close watch

During our visit, JUBI’s operations team was present at the store, keeping a close watch on the store performance and managing any initial hiccups. JUBI plans to initially expand in NCR region and is already looking out for locations for store expansion.

Valuation and risks

Maintain Buy on JUBI with DCF-based TP of `1,650. At our TP, the stock will trade at 46x P/E multiple Sep-20e. Key downside risk includes pressure on margins from aggressive new store expansion.

 

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