Bright prospects, resilient business but valuations of Jubilant FoodWorks are expensive
Highlights
-Results above expectations
-July and August saw much better recovery
-Reduced cost across all verticals
-Investors should buy on
dips
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Jubilant FoodWorks (JFL), one of the largest foodservice
companies and a master franchisee of Domino’s Pizza, posted June 2020 quarter
results that were above Street expectations. JFL saw overall like-for-like
sales recovery of 52.7 percent in the June quarter, 77.8 percent for July, and
nearly 89.3 percent in August.
Source: Company presentation
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Nearly 83 percent of the Domino’s store network was
open in August. JFL has undertaken various cost optimization initiatives such
as variabalization of store manpower and renegotiation of rent. The company
saved Rs 29 crore in the June quarter on rental expenses.
Performance of the June 2020 quarter
Revenues were down by 60 percent year on year on
the back of temporary store closures following the nation-wide lockdown and
reduced operational hours due to local restrictions. Dine-in and takeaway
remained closed for most of the quarter.
Gross margins increased on the back of lower
commodity prices, reduced discounting and levy of delivery charges on orders
from the month of June 2020.
Employee cost was reduced by 19 percent and other
expenses were lower by 60 percent year on year. Despite reduced cost, lower
sales and lower absorption of fixed cost impacted EBIDTA (earnings before
interest, depreciation and taxes), which was down by 89 percent, while EBIDTA
margin remained at 6 percent.
On the back of lower EBIDTA and lower other income,
JFL reported a net loss of Rs 73 crore during the June 2020 quarter.
Other key highlights
Levying of delivery charges to
customers: JFL began charging for delivery from the month of June 2020 for
the first time. Initially, Rs 20 per order was charged, which later rose to Rs
30. The management believes that delivery charges have become a norm in the
current times, and are here to stay. The imposition of delivery charges does
not seem to have had any negative impact on the company, which in fact saw a
growth in sales.
Guidance regarding stores opening: JFL plans to open
nearly 100 stores in FY21, but also plans to shut nearly 105
which are unviable currently. JFL has already closed 5 stores in the June
quarter itself. These stores were largely dine-in with almost 2/3rd of
the revenues coming from that end and the balance were through delivery. Almost
half of these stores were located in malls while the other half was in tech
parks. JFL plans to open stores with more capabilities related to deliveries
and takeaway and these stores are likely to be smaller in size.
International operations turning
around: JFL has a presence in Sri Lanka and Bangladesh with 22 stores and
4 stores respectively. JFL was able to re-open its 100 percent store network
since May 2020. Overall sales recovery in the June 2020 quarter was 80 percent,
led by 155 percent sales recovery in delivery channel. Sri Lanka turned EBIDTA
positive during the June quarter on the back of higher revenues growth and
focused cost control measures.
Despite the lockdown, Bangladesh witnessed
uninterrupted operations and JFL opened one store in the country during the
quarter. Overall sales recovery in June quarter was 58 percent led by 143
percent sales recovery in delivery channel.
Rent waivers on stores: JFL has received
rent waiver of Rs 29.4 crore during the quarter, which is almost one month of
waiver. The company continues to negotiate for further rent reductions with
various landlords and some of this rent reduction is likely to
be permanent in nature.
Shifting of employee to flexi-hour
timing: JFL has moved to a “flexi timing” system for store employees where pay
is dependent on the time of attendance at work. This has helped the company
reduce employee cost by 19 percent year on year and 24 percent quarter on
quarter. This is also now more structural in nature.
Foray into the FMCG category: JFL ventured into
the Rs 500 crore ready-to-cook segment with the launch of a new brand
“ChefBoss”. The 'ChefBoss' range of sauces and pastes includes eight different
products across two types of cuisines (Indian and Chinese) and will initially
be exclusively available for consumers across e-commerce portals.
Outlook and Valuations
We like the QSR industry (quick service restaurant)
and JFL in particular, based on the agility it has shown in terms of cost
optimization, levying of delivery charges to customers and a strong balance
sheet with cash and cash equivalent of Rs 640 crore. With a tough economic
environment, consumers are likely to turn more value conscious and hygiene is
likely to be at the forefront across all verticals. With contact-less dining
and zero-contact delivery, and a trusted brand like Domino, JFL is likely to
benefit. Also, consumer preferences would shift to delivery or takeaways, and
JFL is in a vantage position given its strong IT platform and last-mile
delivery through its own personnel.
JFL expects that around 20-30 percent of
restaurants are likely to shut given the current situation and the impact is
likely to be higher on casual dining restaurants - which can
help JFL increase market share. The management expects normalcy to return by
March 2021. We expect revenue de-growth of 10 percent in FY21 and demand pickup
in FY22 by 18 percent. Based on FY22E earnings, JFL is trading at P/E multiple
of 55x, which is expensive. Investors with a long term view should buy JFL on
correction.
In terms of share price performance, JFL has
recovered by nearly 98 percent from its 52-week low and by nearly 47 percent
from its March quarter result date, almost broadly outperforming the broader
indices.
Risks: Down-trading by consumers
or shifting to the unorganized segment can affect JFL’s growth potential.
Source - Moneycontrol.com
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