Any positive narrative on stock based on cost cuts alone lacks credibility; sharp cut in estimates
JUBI’s Q4FY17 SSG print of -7.5% was a shocker even in the backdrop of generally muted expectations. Overall earnings print was weak despite some extreme cost rationalisation measures and had an important message, in our view, for the bulls – JUBI’s focus on costs is a response to its revenue struggles and not an independent event. Any positive narrative on the stock based on cost cuts alone is a very weak one. We remain SELLers; target price stands reduced to Rs 750/share.
Q4FY17 earnings print – weak on all fronts despite cost control JUBI’s Q4FY17 results were materially below expectations — SSG hit a new low of -7.5%, revenues declined y-o-y for the first time ever, Ebitda was down 15% y-o-y and recurring PAT declined 47% y-o-y. All these numbers missed our estimates by a mile. The company attributed the weak SSG print to continued impact of demonetisation on its delivery business; we are a tad surprised with this commentary on two counts – (i) the company had itself indicated in the Q3FY17 earnings call that it had seen a return to normalcy in December 2016, and (ii) we doubt if the pizza-eating households in the 260-odd cities that Domino’s is present in, had any challenges of empty ATMs in Q4FY17.
Other highlights for the quarter – (i) gross margin expanded 191 bps q-o-q to 76.8% as the company rolled back deep discount promotions like BOGO, (ii) Ebitda margin of 9.9% (down 164 bps y-o-y) was actually higher than Q3FY17’s 9.7% print as the company’s cost rationalisation measures kicked in, (iii) the company shut down another eight Domino’s stores in Q4FY17, and (iv) there was a one-time charge of Rs 122m taken as extraordinary on account of manpower rationalisation.
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FY2017 roundup – consolidated EPS down 37% y-o-y, RoCE down to sub-10% levels; SELL
FY2017 marked the fourth consecutive year of EPS decline for JUBI; we are not sure if one should conveniently term the business weakness a ‘cyclical blip’ anymore. While the bulls focus on such nomenclature nuances to build a case for the cycle to turn, we continue to see this simply as the challenged underlying western QSR economics (in India) catching up with JUBI. Consolidated EPS of Rs 10 (down 50% from FY2013 peak of Rs 19.9) pegs the trailing PE at 94X, a multiple that clearly bakes in strong probability of a quick, sharp turnaround. We believe the string of negative surprises JUBI has delivered in the past few years (and the underlying business challenges they depict) warrants a much higher margin of safety than the near-zero level that the stock offers at CMP. Our estimates see sharp cuts and we reiterate our Sell rating with a revised TP of Rs 750/share.