JUBILANT FOODWORKS Above average growth; expensive valuations: Edelweiss

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􀂄 Strong economy, new product launches drive 43.8% SSS growth
Strong economy, along with the introduction of two products (Mexican Wrap and
Pasta Italiano) during the quarter, helped Jubilant Foodworks (JFL) record its
highest ever same store sales (SSS) growth of 43.8%. The company reported
38.8% volume growth, along with 5% price growth. Sales increased to INR 1.63
bn, up 67.1% Y-o-Y and 20.5% Q-o-Q. JFL opened 18 new stores this quarter,
taking the total to 33 stores during H1FY11 and ended the quarter with 339 stores
(including two sub-franchises). We are increasing our SSS estimates to 30% and
20% for FY11 and FY12 due to the 40% SSS growth delivered by the company in
H1FY11. The company has maintained its 70 new stores opening target for FY11.


􀂄 Increasing staff costs dent strong EBIDTA margins
JFL recorded INR 297 mn or 18.2% EBIDTA margins in Q2FY11 against 18.5% in
Q1FY11 and 15.7% in Q2FY10. Owing to the operating leverage of the model,
margins improved Y-o-Y. Q-o-Q, as the company increased wages and salaries
across the board for all its employees, staff costs rose 140bps to 19.9% in
Q2FY11 against 18.5% in Q1FY11. We believe EBIDTA margins are close to its
peak and we should not see much improvement from the current levels. JFL
reported PAT of INR 184 mn, 11.3% against 7.9% in Q2FY10 and 11.3% in
Q1FY11. Tax rate will return to normal 33% in FY12 after the accumulated losses
exhaust in FY11.

􀂄 Outlook and valuations: Expensive valuations; maintain ‘REDUCE’
With introduction of new products, low base, new stores opening and strong
broad-based economic growth, JFL is on the roll. We, however, believe the current
buoyant environment doesn’t factor in the cyclicality of the business model (6%
SSS growth in FY09 against ~20% SSS during FY06-10). We are raising our EPS
estimates to INR 12 and INR 15 for FY11 and FY12, respectively. At INR 622, JFL
is trading at FY12 3.9x EV/Sales, 21.6x EV/EBIDTA and 41.5x PE. We believe
current valuations offer little comfort at the peak margins. We are increasing our
DCF-driven price target to INR 434 and maintain ‘REDUCE’ on the stock.