Buy Jubilant Foodworks; target Rs 1,845: Phillip Capital (India)

Phillip Capital (India) has a buy call on Jubilant Foodworks with a target price of Rs 1,845.

The current market price of Jubilant Foodworks is Rs 1,359.35.

Time period given by the brokerage is one year when Jubilant Foodworks price can reach the defined target.

Investment rationale by Phillip CapitalRailway journey has just started: Dominos Pizza has a tie-up with IRCTC for 206 stations as of FY18; we believe this would have increased further in YTDFY19. Our channel checks with 25 stores (located near railway stations) across cities revealed that on an average JUBI was making 10-15 daily deliveries to stations; this segment has the potential to contribute 1.5-2.0 per cent to SSSG in 3QFY19 (see Fig 3). In our view, the management needs to address the following challenges in order to ensure sharp uptick in railway deliveries: (1) increase payment options (only COD allowed presently) and (2) imbibe confidence in customers minds that pizza will be 100 per cent delivered; if it is not able to deliver, communication about why it wasnt able to do so should be prompt.

New product launches have started pouring in after a lull: Pork pepperoni pizza pepperoni which was withdrawn a year ago due to supply-chain related issues has been re-introduced in new form i.e Chicken Pepperoni pizza one month back and is seeing good uptick. Dominos has also introduced multi-grain crust (to target health-conscious customers) at an additional cost of Rs 60 (only medium sized pizzas). It has also launched five new side dishes (See Fig 4) at an affordable price point of Rs 59; among these, potato cheese shots is seeing solid traction. We believe that introducing Pepsi as a beverage partner has the potential to boost EBITDA margins by 50bps (See Fig 5 – currently, not factored into our estimates) due to favourable terms and improved product range.

Competitive Landscape intensifying: Apart from online-food-aggregators related competition, our earlier prognosis of Pizza Hut promotions (50 per cent off on takeaways) not hurting Dominos sales may not hold true. Most Pizza Huts store managers have started offering 50 per cent discounts even on fine-dining orders (by marking them as takeaways) in order to meet aggressive monthly targets. Domino pizza has significantly increased promotions (see Fig.6) in past one week to drive sales.

Is Domino moving to Flexi/ Lean model on employee front?: Our checks revealed that Dominos has significantly increased appointment of relatively high-cost floaters (riders are paid Rs 51 (gross) and Rs 39 (net) on per order basis) or probably changed the structure to variable pay atleast in metro cities to combat the challenge from online food aggregators, with staff on payroll being restricted doing store related internal work. Internal staff will act as back-up option to serve incremental demand, which could not be meet by floaters at times. Late deliveries, where JUBI has to give free/concessional food to customers, constitute 3 per cent of delivery sales and c.50 per cent of overall sales. The managements internal target to reduce this to 1.0-1.5 per cent of delivery sales via better routing and increased efficiency thorough appointment of floaters has started bearing fruits. We believe benefits of reduction in late deliveries will be partially offset by relatively high cost floaters.

Poised to deliver: After a 20 per cent stock-price correction from its recent peak, we believe JUBI offers favourable risk-rewards to long-term investors; given 36 per cent EPS CAGR over FY18-21 and sharp improvement in ROIC (expected to move up to 59 per cent in FY21 from 24 per cent in FY18). We reiterate our high-conviction BUY call within the consumer discretionary and retail space and increase our target to Rs 1,845 (25x FY21 EV/ EBITDA) vs. Rs 1,760 (25x December 2020 EV/ EBITDA) earlier.

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