The quick service restaurant business is entering a cyclical slowdown amid cutback in discretionary spending by customers and that will hurt Jubilant Foodworks , according to Credit Suisse. The brokerage began coverage of the stock with an "underperform" rating.
The company operates the Domino's Pizza delivery chain in India and last year started rolling out the Dunkin Donuts chain. Credit Suisse analysts Arnab Mitra and Akshay Saxena feel Jubilant has a large head start over its competition, having perfected the delivery model in a tough operating environment.
"However, we believe the business is at the start of a cyclical slowdown as growth will likely decelerate for discretionary consumption in urban India as the pace of salary hikes comes off while consumer inflation remains high," the analysts said.
Jubilant's EBITDA (earnings before interest, taxes, depreciation and amortization) margins jumped to 18.7 percent in FY2012 from 12 percent in Fy2009. However, now the upside is also limited as they point out that with slowing same-store sales (accelerated by higher cannibalisation of existing stores in big cities), operating leverage will be "adversely impacted" and promotion and marketing costs will also rise.
Further more, the Dunkin Donuts chain is also not expected to breakeven in the next 3-4 years.
"Jubilant broke even only after it had over 100 Domino's stores, which are more profitable than Dunkin Donut stores given their high delivery share, larger ticket sizes and higher operating leverage," Mitra and Saxena said.
There is also increasing competition from other QSRs like Pizza Hut and KFC, owned Yum Foods, McDonalds and Subway and several other Indian firms, which will put pressure on pricing, they feel.
Jubilant trades at 40 times FY2014 expected earnings, a 40 percent premium to its peers in the consumer discretionary space, and valuations are looking stretched.
"There is a risk of a multiple de-rating for the company if growth rates remain week," the Credit Suisse analysts feel. They have a Rs 1,000 target price on the stock.
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