We initiate coverage on Jubilant Foodworks with an Underweight rating and a price target of R1,250 (potential downside of 15%). While we expect Jubilant to benefit from an improving macro, the recovery is likely to be only gradual as we expect: 1) material same-store sales (SSS) growth recovery to be still 8-10 quarters away due to high competition, evolving customer preferences and a series of recent price hikes; 2) Jubilant has 400 new stores planned over FY14-17, which should dampen near-term returns; and 3) Dunkin’ Donuts to remain margin- dilutive (c150-175bps over FY15E/16E) and make a nominal revenue contribution. As a result, we think Jubilant’s 35% valuation premium to peers is likely to narrow on a muted outlook (reflected in accelerating earnings downgrades, per Bloomberg consensus), and weak returns (ROIC likely to compress by 190bps over FY14-17e).
While we expect SSS growth to have bottomed out, we believe double-digit SSS growth is unlikely before FY17 due to: 1) key competitors having closed the gap in terms of product offerings and brand positioning; 2) increasing number of players in the unorganised segment and multinational companies ; and 3) rising saturation in tier-1 cities in terms of store expansion, meaning incremental new store growth is likely to be derived from tier-2 and -3 cities.
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