The stock of Jubilant FoodWorks has declined 1.4 per cent since the appointment of new chief executive officer Pratik Pota, on Friday. This is because more than Pota’s impressive background and exposure to multinational corporations, investors are eagerly awaiting clarity on his plans to revive sagging same store sales growth (SSSG) and return fast-food major’s operating profit margin to double-digit levels seen in the earlier years.

“It will take at least a year for things to improve for Jubilant. The positive thing is that Pota is joining when Ajay Kaul has put all the systems in place and the company is managed professionally,” said an analyst who did not wish to be named.

Jubilant Foodworks’ SSSG has been struggling due to the slowdown in the economy hitting discretionary spending, incremental expansion in Tier 2 and 3 cities and demonetisation. In the first half of FY17, SSSG stood at 0.5 per cent compared with 4 per cent in the same period last year.

Dwindling margins

The company’s margins have also taken a hit in the past few years. From a peak of close to 20 per cent about five years back, the operating margin fell to around 10 per cent for the September 2016 quarter. Margins will improve substantially and return to earlier levels only when SSSG crosses 6 per cent again, pointed out an analyst.

Meanwhile, analysts are not very hopeful of SSSG in the short term. In fact, they expect a decline in margins in the December 2016 quarter. According to consensus estimates, the company’s sales are likely to rise 6 per cent, while net profit is seen declining 40 per cent in the December quarter.

“Our channel checks suggest double-digit sales decline for Jubilant in November post-demonetisation. While this has moderated to single-digit levels, we expect the weakness to weigh on SSS growth and build in a 3 per cent SSS decline in Q3. This should result in 5 per cent sales growth and, in turn, 36 per cent earnings decline,” said Avi Mehta, analyst at IIFL, in a note.

Most of the credit for Jubilant’s current position goes to Kaul. Under his tenure (March 2005 to 2016), the company’s sales grew 30 times and net profit ballooned 387 times.

Taking charge from April 1

Pota will take over as CEO on April 1 from Kaul, who resigned in September. Pota has under this belt over 24 years of experience working with companies, such as Hindustan Unilever, Bharti Airtel and PepsiCo India. Though Jubilant’s business is passing through a challenging phase, long-term investors can invest in the stock as analysts see a 20 per cent upside potential given the average target price of ₹1,000 a share.

Sameer Deshmukh, analyst at Reliance Securities, recently initiated a ‘buy’ rating on the stock as he believes the risk-reward ratio is turning favourable despite near-term uncertainties.

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