Jubilant offers additional value and recovers in the form of a pizza slice | Stock market today

June 30, 2024

Jubilant FoodWorks, India’s largest listed quick service restaurant (QSR) chain by market capitalization, is expected to maintain its outperformance over peers, with resilient performance in the January-March quarter (Q4) of 2023-24 (FY24), faster recovery in the pizza category, strong value propositions and continued expansion.

The stock has returned 14 percent since the beginning of June, three times the QSR average and double the S&P BSE Sensex during that period.

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A key reason for Street’s optimism about Jubilant, the Indian franchisee of Domino’s Pizza, is the expected turnaround in the pizza category. While pizza sales lagged behind burgers in the first half of the year (H1), they showed stronger performance in the second half of FY2024.

According to analysts at Prabhudas Lilladher led by Amnish Aggarwal, “burger makers started feeling demand pressure from the second half of FY2024 due to economic slowdown, geopolitical factors and possibly competition (other cuisines and new players).”

While pizza chains are nearing the end of their crisis, the effects of increasing competitive pressures are yet to be fully felt by burger chains. Analysts predict a faster return to mid-single-digit sales growth for pizza chains compared to burger chains.

Jubilant benefited from a delivery fee waiver that diverted dine-in demand to the delivery channel. This move helped it deliver positive growth of 0.1 percent in SSSG after four quarters of decline. Delivery revenue grew a robust 12 percent year-on-year, accounting for 68 percent of total revenue, while dine-in revenue declined 6 percent.

The waiver also enabled Domino’s to outperform competitors sequentially through the end of fiscal 2024. Emkay Research notes that Domino’s delivery revenue grew 2 percent quarter-on-quarter, while Zomato declined 0.6 percent in the fourth quarter. It is expected to perform similarly or even better in the future when the full benefit of the delivery waiver is realized in the first half of 2024-25 (FY 2025).

Analysts Devanshu Bansal and Vishal Panjwani of Emkay Research believe that Jubilant’s near-term investments, faster deliveries, improved product offerings and loyalty programs could spur a positive consumption cycle and mitigate price-driven competition in the pizza category. Emkay Research maintains an ‘Add’ rating with a target price of Rs 525.

Despite increases in delivery and improved gross margins due to lower raw material costs, operating margins declined 100 basis points (bps) to 19.1 percent year-over-year. This pressure on profitability resulted from increased investments in technology, supply chain improvements and operational deleveraging. In addition, the value proposition of waiving delivery fees weighed on profitability.

Looking ahead, Jubilant aims to increase its market share through volume growth while focusing on value-added offerings and expanding its customer base.

In the fourth quarter of fiscal 2024, Domino’s opened 67 new stores and entered 14 new cities, bringing the total number of stores across all brands to 2,096, of which 1,995 are Domino’s.

For the 2025 financial year, Domino’s plans to open 180 stores in India, 50 in Turkey and 20 in Bangladesh. In the medium term, there is potential for 4,000 stores in India alone.

HDFC Securities highlights Jubilant’s efforts to strengthen its price-to-earnings proposition and recover earlier losses to local and regional peers amid increasing competitive pressures and hyperinflation-led consumer price declines.

Despite the price hike in dairy products, the company has refrained from increasing prices over the last two years and introduced value-for-money offers like the Rs 99 menu and innovations like the cheese volcano. In addition, a 15 per cent reduction in capital expenditure per store has helped in cost efficiency.

Analyst Vishal Gutka of HDFC Securities upgraded the stock to Add from Reduce, with a price target of Rs 685, including a 40 percent stake in the DP Eurasia business.

The brokerage has also raised the enterprise value to operating profit ratio for its India business from 30 to 35 as it expects improved transparency in sales at its branches.

However, some brokerages, such as Motilal Oswal, maintain their ‘neutral’ rating on the stock with a target price of Rs 480, citing ongoing demand issues in the QSR industry and the need to closely monitor near-term growth numbers.