Stock Recommendation | Jubilant Foodworks - BUY - Target price : 1,370

JUBI management indicated heightened competitive intensity on the delivery manpower front. Food-tech players, armed with fresh funds, and e-commerce players have driven the cost of delivery manpower up substantially in recent times and JUBI is feeling some pressure. Even as the company has managed the situation well thus far and should be able to manage in the medium term, we do see the risk of higher manpower costs hurting margins for a few quarters in the interim. Interestingly, JUBI has stopped the use of third-party delivery completely for Domino's. Management cited the need for complete control on delivery experience (JUBI's USP) as the reason behind this move.

SSG remains the single-most important variable that will determine the broad shape of JUBI's financials. Cost push can take the margin-neutral-SSG level up a tad (say by 200 bps to 7-8% from 5-6%); however, SSG beyond this level would still drive leverage-led margin expansion as long as gross margins remain in a tight band. We have moderated our margin assumptions to reflect the revised SSG-margin equation and this results in a 4-6% cut in our FY2019-21E EPS forecasts. We stay positive; fair value target stands revised down to ₹1,370 (from ₹1,430).

▶ Store expansion. JUBI opened a gross of 24 new Domino's stores and shut 1 store taking total count to 1,167. About 22 of these 24 stores are in the top 10 cities. One store was opened in a new city, Ambaji. The management expects the store expansion pace to sustain.
▶ Commentary on pricing. The management indicated that it would use pricing as a tactical lever if required. While it is witnessing inflation in fuel and manpower costs, RM costs environment (especially dairy products) is favorable. Additionally, it expects cost savings from ongoing productivity improvement program.
▶ Dunkin' Donuts. DD's drag on margins reduced to 50 bps for 2Q from 55 bps in 1QFY19. The company reiterated it is on track for DD breakeven by 4QFY19E. We note that JUBI shut down 5 DD stores during the quarter taking down the total count to 32. The management indicated that it does not expect too many DD store closures going forward. Separately, it also indicated that ongoing re-branding of Dunkin Donuts in the US would not impact India.
▶ Updates on anti-profiteering investigation. JUBI management informed that the case is being heard by National Anti-Profiteering Authority (NAA). JUBI has presented its arguments and the decision is pending. The management expressed confidence that its arguments would be accepted.
▶Other data points -(1) online sales accounted for 68% of delivery sales, up from 65% in 1QFY19 and 57% in 2QFY18, (2) rental cost declined sequentially due to a small onetime reversal, (3) JUBI is evaluating beverage partner and no decision has been taken yet.

Definitions of ratings

BUY	-	We expect this stock to deliver more than 15% returns over the next 12 months.
ADD	-	We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE	-	We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL	-	We expect this stock to deliver

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR	=	Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
CS	=	Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC	=	Not Covered. Kotak Securities does not cover this company.
RS	=	Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
NA	=	Not Available or Not Applicable. The information is not available for display or is not applicable.
NM	=	Not Meaningful. The information is not meaningful and is therefore excluded.

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