Recent data indicate sharp increase in Jubilant Foodworks Ltd’s raw materials costs like onion and tomato (up over 100%). Raw materials are only 25% of revenues. Chicken and cheese are approximately 50% of the raw material costs and onion/tomato/vegetable costs do not appear to be that significant. Past history shows some short-term impact on gross margins in case of a sharp spike in the quarter.
But pricing power means they have been able to recoup it ultimately. The increase this time appears much sharper versus historically though. Q2 results yet may be a negative surprise ? we forecast Q2 PAT of R 36,400 crore (up 13% y/y).
We believe that recent earning cuts by the Street, while anticipated, are still generous on margins despite apparent negative operating leverage from changed growth mix (now more new stores driven vs SSSG earlier). With rich valuations (49x FY14E PE) and slowing earnings trajectory (FY13-15E EPS CAGR of 23% vs FY10-13 CAGR of 55%), we expect further de-rating ahead.
New competition and unreasonable implied pizza market size at current growth rates are additional medium-term concerns. We have sell rating for the counter. Our target price is R900.
UBS
