Stay neutral on Jubilant Foodworks, target Rs 1,200

We maintain our ?neutral? rating on Jubilant Foodworks with a price target of R1,200, given the company?s below par Q2 results. Our current EPS estimates stand at R22.6 for FY13 and R33.6 for FY14 and we believe the stock is fairly valued at 60.4x FY13e and 40.8x FY14e EPS.

Jubilant Foodworks posted lower-than-expected numbers for Q2FY13, with net sales growing 42.3% y-o-y to R342 crore (versus our estimate of R345 crore) and adjusted net profit growing 36.5% y-o-y to R3.23 crore (versus our estimate of R3.44 crore).

Same store sales (SSS) growth was 19.8% y-o-y (versus our estimate of 25% y-o-y), the lowest in 13 quarters. The management indicated softening on both fronts ? consumption and customer acquisition. Gross margin expanded 40 basis points y-o-y and 60 basis points q-o-q to 74%, driven by price hikes. However, Ebitda margin contracted 100 basis points y-o-y and q-o-q to 17.2% (against our estimate of 18.2%).

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From a conference call with the company, we learn that Jubilant Foodworks has entered two new cities ? Vijayawada and Bharuch ? taking its presence to 112 cities. The company has also made an upward revision in store opening guidance, driven by opportunities visible in the market and response to stores across regions. The company now plans to open 110 Domino’s stores (from 100 earlier) and 10 Dunkin’ Donuts stores (unchanged) in FY13.

Jubilant Foodworks opened 26 Domino?s stores in Q2, taking the total number of stores to 514.

The company also said that online and mobile platforms were gaining traction (mobile contributes to 10% of total online sales, online 13% of the total delivery sales).

The company is planning another 3-3.5% price increase in November after increasing the prices by 3% in June.

We are positive on the sector. We expect the sector to clock revenue growth of 30-35% CAGR over the next five years. We believe quick service restaurants (QSR) as a segment holds immense potential due to the unfolding demographic dividend (income distribution, age mix, working women) and swift lifestyle changes among the middle income class in the metros, tier-I and tier-II cities.

Motilal Oswal