Reiterate ‘underweight’ on Jubilant Foodworks with target price of R1,220 per share. Our recently interaction with the management of Jubilant Foodworks suggest that overall demand recovery may take longer than expected and will likely be contingent on a combination of faster job creation in urban India and further improvement in consumer sentiment.
Increased competition is a major factor that will continue to impede near-term growth, we believe. On FY16 earnings, we are 23% below consensus estimates. We assume 8% same store sales growth (SSSG) versus 1.9% in Q3FY15 with near flat margins for Dominos y-o-y and 20 bps incremental margin dilution on expansion of the Dunkin franchisee in FY16.
There is no indication of an improvement in consumer demand yet. The 2%-SSSG reported in Q3FY15 is driven only by benign base.
Management view that SSSG can recover to high single digit growth is based on the recent trend of falling consumer inflation, better consumer sentiment and general perception of an improving macro economic environment.
Near term, with SSSG lower than cost inflation, operating margins may continue to trend lower. Dunkin franchisee expansion into new geographies will further dilute consolidated operating margins for the company in F16e. Jubilant may need some debt to fund its store and commissary expansion in FY16 in the event that SSSG is not sufficient to drive cashflow from operations.
Morgan Stanley
