Despite significant underperformance witnessed by JUBI YTD (-15% returns),
we don't find the valuations (at 40x FY14E P/E) still pricing in downside risks to
earnings in backdrop of challenging macro. Uncertainty on discretionary demand
remains and we believe signs of more sustainable improvement here would be key
catalyst for stocks to reverse the underperformance. We pare our EPS estimates of
FY14/15E by 10-12% led by assumptions of moderate SSSG and lower margins.
Our earnings are 8-10% below consensus estimates. Promoter shareholding has
come down by 330bps since Jan’12 in the company.
Lower SSS growth likely in FY14. Given the weakness in discretionary
spends (esp in urban areas), we expect SSSG to moderate from ~17% in FY13
to 12% in FY14 with more severe moderation in 1H. Recent bill value increase
by ~4-5% to pass on service tax incidence may further weigh on frequency/mix
of consumption. We note that Yum India (operates Pizza Hut and KFC)
recently reported -3% SSSG during Q113. More aggression by competition also
does not bode well for comps, in our view. Yum Brands’ Pizza Hut added 58
stores since Jan’12 (with higher focus on delivery format) and its network has
now expanded to ~60 cities (vs 118 for JUBI).
Margin weakness remains a valid concern. Slowing SSSG, higher
promotions, lower initial profitability of new stores and losses related to Dunkin
format pose key downside risks to margin growth, in our view. We build in
30bps decline in EBITDA margins for FY14E.
Aggressive store expansion – limited benefits likely given higher incidence
of cannibalisation and likely drag on profitability. While higher store
additions could be a positive surprise in FY14, it could also pose downside risk
to SSSG/margins, in our view. We believe JUBI will likely keep 110-120 stores
as a minimum threshold for new store addition over the next 2-3 years. However
such aggressive store addition (~50% of new stores being in top 10 cities) could
weigh on SSSG comps (in cities where the incidence of store split is higher
SSSG has suffered more) and margins (lower profitability of new stores in initial
years), in our view.
Reducing earnings estimates and target price. We reduce FY14/15E EPS
estimates by 10/12% driven by lower SSSG assumptions and decline in margins
in FY14 (vs expansion built in earlier). We also roll forward our TP timeframe
to Mar’14 but reduce our target P/E multiple to 28x (vs 30x earlier) to account
for moderating earnings growth. As a result our new Mar’14 TP is Rs1025
��
-->
we don't find the valuations (at 40x FY14E P/E) still pricing in downside risks to
earnings in backdrop of challenging macro. Uncertainty on discretionary demand
remains and we believe signs of more sustainable improvement here would be key
catalyst for stocks to reverse the underperformance. We pare our EPS estimates of
FY14/15E by 10-12% led by assumptions of moderate SSSG and lower margins.
Our earnings are 8-10% below consensus estimates. Promoter shareholding has
come down by 330bps since Jan’12 in the company.
Lower SSS growth likely in FY14. Given the weakness in discretionary
spends (esp in urban areas), we expect SSSG to moderate from ~17% in FY13
to 12% in FY14 with more severe moderation in 1H. Recent bill value increase
by ~4-5% to pass on service tax incidence may further weigh on frequency/mix
of consumption. We note that Yum India (operates Pizza Hut and KFC)
recently reported -3% SSSG during Q113. More aggression by competition also
does not bode well for comps, in our view. Yum Brands’ Pizza Hut added 58
stores since Jan’12 (with higher focus on delivery format) and its network has
now expanded to ~60 cities (vs 118 for JUBI).
Margin weakness remains a valid concern. Slowing SSSG, higher
promotions, lower initial profitability of new stores and losses related to Dunkin
format pose key downside risks to margin growth, in our view. We build in
30bps decline in EBITDA margins for FY14E.
Aggressive store expansion – limited benefits likely given higher incidence
of cannibalisation and likely drag on profitability. While higher store
additions could be a positive surprise in FY14, it could also pose downside risk
to SSSG/margins, in our view. We believe JUBI will likely keep 110-120 stores
as a minimum threshold for new store addition over the next 2-3 years. However
such aggressive store addition (~50% of new stores being in top 10 cities) could
weigh on SSSG comps (in cities where the incidence of store split is higher
SSSG has suffered more) and margins (lower profitability of new stores in initial
years), in our view.
Reducing earnings estimates and target price. We reduce FY14/15E EPS
estimates by 10/12% driven by lower SSSG assumptions and decline in margins
in FY14 (vs expansion built in earlier). We also roll forward our TP timeframe
to Mar’14 but reduce our target P/E multiple to 28x (vs 30x earlier) to account
for moderating earnings growth. As a result our new Mar’14 TP is Rs1025
No comments:
Post a Comment