Jubilant Foodworks: Management discussion takeaways - Challenging demand environment : JPMorgan

Our recent discussions with mgmt indicate that weak macro environment is
challenging discretionary spending and the company has to resort to higher
promotions to drive growth. SSS growth trends remain fairly subdued for now,
though mgmt is hopeful of 2H recovery. Margins face downside risk from slowing
SSSG, higher promotions, lower profitability of new stores and costs related to
Dunkin’ Donuts format. Promoter shareholding has come down by 330 bps since
Jan’13 in the company. Valuations at 43x FY14E and 33x FY15E P/E appear
demanding against the backdrop of earnings downside risk. Stay UW.

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 SSS growth rate for FY14 likely at 8-10% and continues to be challenged
by overall weak economic growth. While 1H will likely fare poorly (also
aggravated by high base), mgmt is hopeful of better growth rates in 2H. Pace of
new customer addition has moderated, frequency of ordering by existing
customers has come off and value options (e.g. Pizza Mania) are finding more
favor. Cannibalisation from existing stores and increased competitive activity is
further weighing on SSS growth. JUBI has resorted to more consumer
activations/promotions. It has recently introduced a new promotional scheme –
‘Buy One Get One’ free pizza on Wednesdays and this is the first time a
promotional offer is being advertised on television by the company (earlier
promotional offers were restricted to online channel and/or coupon based).
JUBI has undertaken ~2.5-3% price hike in June’13 and another similar hike is
likely in 2H. This price hike is over and above ~5% increase in bill value for
customers on account of recent levy of service tax.
 Store openings on track. Company remains confident of adding minimum 125
Dominos stores and 18 Dunkin’ stores in FY14. Half of the new stores will be
opened in top 10 cities while the other half will be opened in Tier 2/Tier 3 cities
including a mix of current and new cities.
 Margins to soften this fiscal (mgmt guidance at ~16.5% in FY14 vs 17.3% in
FY13) on slowing SSSG, higher promotions, lower profitability for new stores
and costs from Dunkin’ operations (10-20bps impact). GM could be adversely
impacted by higher promotions and pick up in RM cost inflation (cheese). Wage
inflation remains high (15-18%) and with additional manpower required for
aggressive new store additions, it will be difficult to get efficiencies on
employee cost front. Lower SSS growth would also weigh on rental cost front.
 Capex for FY14 expected at Rs2.5bn (vs Rs1.8bn in FY13) of which Rs1.5bn
will be for new store additions and remaining for investment in four new
commissaries. New commissaries are planned in Noida (relocation), Hyderabad,
Guwahati and Central India. Capex per store has risen to over Rs10mn.