Reduce Jubilant FoodWorks - TP: Rs800 Q2FY12 Result Update -- Prabhudas Lilladher

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Jubilant FoodWorks                     Reduce                     CMP: Rs814                        TP: Rs800

Q2FY12 Result Update - In-line quarter

n  Same-store sales (SSS) growth of 26.7%: Jubilant FoodWorks (JUBI) reported Q2FY12 sales, EBITDA and PAT of Rs2.4bn (up 47 %), Rs436m (up 47% YoY) and Rs237m (up 28% YoY) as against our expectations of Rs2.4bn, Rs447m and Rs247m, respectively. SSS growth of 26.7%, on the base of 43.2% in Q2FY11, is commendable. During the quarter, JUBI opened 19 new stores, taking the total store count to 411. Management maintained the guidance of opening 80 new stores during FY12e. First Dunkin store will be rolled out in H1CY12 beginning with the metros. JUBI is doing the groundwork for Dunkin’s rollout, with focus on menu designing and back-end work e.g. vendor and supply chain etc.

n  Key Con-call takeaways: 1) Very small signals of moderation in consumer demand; pre-emptively trying to boost demand through aggressive promotions 2) Will take one more price increase in November (taken 3 in last 12 months totalling ~10%) 3) SSS volume grew 20%+ in 2Q12; SSS grew even QoQ.

n  Operating leverage cushions the gross margin decline: Operating leverage (140bps decline in other expenses) neutralized the impact of higher input costs which adversely impacted the gross margins by 160bps. Higher input costs is primarily attributed to the inflation in Milk and milk products prices. However, rental and employee costs did not show benefits of high SSS growth as both the cost items remained flat as a percent of sales (employee addition of 2850 YoY)

n  Positives in the price, maintain REDUCE:  Strong same store performance on high base reflects the superiority of Jubilant’s capital efficient model. We expect JUBI to continue to benefit from the strong growth dynamics in QSR space, helped by confluence of favourable income and demographic factors. However, valuations have run-up ahead of fundamentals, in our view. At 48x and 32.8x FY12e and FY13e earnings, risk-reward is unfavourable in our view. Maintain REDUCE, with a  TP of Rs800.