Victim of great expectations: Jubilant Food is risky bet now

Jubilant Foodworks, the operator of Domino's Pizza and Dunkin' Donuts outlets in India, was once an investor darling. But now the stock has hit its 52-week low after the company missed its earnings estimates.

Its net profit for January-March rose just 14 percent on year to Rs 33 crore and net sales rose 29 percent to Rs 366 crore.

A CNBC-TV18 poll had seen net profit at Rs 37 crore and revenue Rs 384 crore. Reacting to the dismal earnings, the stock had declined 9 percent.

Its earnings before interest, taxes, depreciation and amortization, which was up 17 percent to Rs 61 crore, was also below estimates.

 Victim of great expectations: Jubilant Food is risky bet now


Operating profit margin, meanwhile, was 16.7 percent, again lower than the expectation of 18.3 percent. A year ago, it was 18.5 percent.

"Jubilant Foodworks Ltd results were lower than estimates on revenue/ EBITDA/ PAT fronts led by lower than expected SSG (same store sales growth), input cost pressures and weak operating leverage," said IDBI Capital in a post-earnings research note.

According to the company's press release, Domino's same-store sales (which considers sales at stores that were open a year and more back) were up just 7.7 percent. The corresponding figure a year ago was 26.3 percent.

IDBI Capital has a positive outlook for the company as its aggressive expansion plans will help strong revenue growth. However, it sees the increasing number of Domino's outlets being opened by the company restricting its same store sales growth.

Jubilant Foodworks opened 24 new Domino's Pizza outlets during the quarter taking the total number of stores to 576. It is now present in 123 cities, with the network extending to new cities like Satara in Maharashtra, Warangal in Andhra Pradesh, Hubli in Karnataka and Phagwara in Punjab. The company plans to open 125 new Domino's Pizza outlets and 18 Dunkin' Donuts restaurants in the current financial year.

According to the brokerage, January-March was the fifth consecutive quarter of same stores decline. It is also worried about the subdued guidance of 10 percent same store sales growth for FY14.

EBITDA margin of 16.7 percent was down 180bps on year and 110bps on quarter. The weak operating leverage (due to lower same store sales) resulted in higher employee costs at 19.4 percent of sales.

The company sees FY14 EBITDA margin at 16.5 percent as pressures from input cost inflation and an incremental 10-20 bps negative impact from Dunkin Donuts stores are likely to impact adversely.

It also expects overall demand environment to remain subdued in the coming months, which in turn will increase the need for higher expenditure on promotions.

"We believe that JUBI's ability to manage costs efficiently (as demonstrated in the past) will be put to real test in the coming quarters," the brokerage said.

Expert SP Tulsian has a sell call on the stock. He told CNBC-TV18 that the stock had too much of momentum and witnessed irrational exuberance.

"If you are not able to post a growth of 40 percent or 35 percent hereon which is impossible to come, now market should reasonably accept a growth of 15 percent to 20 percent, so you cannot justify a PE multiple of 35-40 times," he said.

Echoing his views, Ambareesh Baliga of Edelweiss Financial Services said he would not buy Jubilant Foodworks now, as the risk-reward ratio is unfavourable.

He said he is uncomfortable with the valuation of Jubilant Foodworks. According to him, the stock has been a darling of the market in the last two years and this has built up higher expectations from the stock.

"Meeting those expectations quarter on quarter seems to be a bit difficult looking at the way the performance has been in the last two quarters. So the risk reward ratio is not favourable at this point of time and therefore, I wouldn't buy it at this point of time," Baliga told CNBC-TV18.

Updated Date: Dec 21, 2014 02:21:49 IST