Why Jubilant FoodWorks Share Price is Falling

Editor's note: A recent headline read that consumption might slow down in the coming months as India's central bank continues to hike lending rates.

The Reserve Bank of India (RBI) might hike repo rates to 6.75% in 2023 as it continues to fight inflation.

Since May 2022, the RBI has already raised rates by 2.25% and the repo rate currently stands at 6.25%.

When the central bank raises lending rates, it means that it costs more for businesses and people to borrow money. This means they might not want to buy as many things or invest as much in their businesses.

So, the overall demand for goods and services decreases, which means that people are buying less.

Now, expectations of more hikes in the coming months have affected FMCG stocks as well as QSR stocks.

One fundamentally strong stock from the lot - Jubilant FoodWorks - has fallen 13% in the past two months.

Back in November 2022, the company was experiencing similar downtrend and we wrote to you about the reasons why it was falling.

Along with slowdown in consumption, there are other reasons too why the stock is under pressure of late.

Continue reading to know more...

Why is Jubilant FoodWorks Share Price Going Down

Do you remember this famous tagline - 'Ta na na na ri O pizza aaye free'.

This line is from Dominos India's famous ad campaign in which it promised to deliver pizza within 30 minutes. If it can't deliver hot pizza within 30 minutes, the buyer gets his order free of cost. This was a strong marketing move.

The master franchise of Dominos India is owned by listed Indian company Jubilant FoodWorks.

Jubilant FoodWorks is part of the Jubilant Bhartia Group and is one of the India's largest QSR companies.

The stock is a market darling. The company ticks all the boxes right from business model to branding.

For the famous brands and grade-one quality food, foodies love Jubilant FoodWorks. However, as of late, investors won't be satisfied even if the company continues to deliver hot pizzas because the company's share price has seen a sharp decline.

In the year gone by, Jubilant FoodWorks share price is down by 27%.

Despite posting increasing revenue over time, why did Jubilant share price fall?

Let's find out...

#1 Weak financial performance

On Wednesday this week, Jubilant FoodWorks posted its quarterly results, after which the share price took a sharp fall. In the last two trading sessions, it lost around 8% of its marketcap.

The company's net sales for the quarter ended 30 September 2022 stood at Rs 12.9 billion (Rs 1,290 crore) which was 4% higher on a sequential basis and 17% higher on a year on year (YoY) basis.

The net profit of the company for the said quarter came in at Rs 1.2 bn. The profit is 18% higher on a sequential basis and 2% lower on a YoY basis.

The rise in revenues was wiped off by the rise in expenses. On a YoY basis, the expenses during the said period rose by 20% while revenue rose by only 17%.

The expenses were high on account of rising inflation. The rising prices of cooking gas, cheese, and vegetables has hurt the margins of Jubilant.

The company posted EBIDTA margin growth at 24%, which is down from 25.8% posted in September 2021. The margins were down sequentially too, from 24.2% in June 2022 quarter.

Margins have remained a drag for the company this quarter which has forced brokerages to turn cautious.

#2 Change in Guard

Pratik Pota was appointed as the CEO of the company in 2016, to make the company more efficient and profitable. Under his leadership, the margins saw a good improvement, even during the Covid-19 period.

During the Covid-19 period when most restaurants were incurring losses, Jubilant FoodWorks was making good money because of its delivery chain. While other restaurants had to remain shut, Dominos had an edge because of its strong delivery network.

However, in January 2022, when Pota resigned, the company's share price took a sharp fall. It fell 12% again in March 2022 when the company accepted his resignation.

The company thrived under his leadership. Hence any investor would be concerned over his resignation.

His successor, Sameer Khetarpal has to deal with rising inflation and price cuts which no previous CEO has faced so far. Rising inflation has resulted in a weak first quarter under his leadership. This might have added to investors' concerns.

#3 FII Selling

Interest rates are rising in developed markets like the USA. This makes the emerging markets less attractive for FIIs because of the higher risk-free rate of return in the US.

Hence FIIs sell their holdings in companies operating in emerging markets like India to return to the safety of dollars. The same has happened with Jubilant FoodWorks.

FIIs have been divesting their stake in Jubilant FoodWorks since June 2021. FII's stake stood at 41.7% in the quarter ending June 2021. The stake was reduced to 28.7% by the end of the September 2022 quarter.

This is a huge change in shareholding pattern. FIIs have now sold stake in Jubilant for five consecutive quarters.

For more details, check out Jubilant FoodWorks's latest shareholding pattern.

#4 Valuation concerns

Jubilant Foodworks is one such stock which is not available at reasonable valuations. Like other bluechip stocks Asian Paints, Pidilite, etc.

The stock is currently trading at PE ratio of more than 68 times. This means you are paying more that Rs 68 for every Re 1 earned by the company to buy the stock.

Let that sink in.

Any earnings disappointment would mean the stock getting hammered. And that is exactly what happened. The margin for error in such expensive stocks is wafer thin.

Investment Takeaway

The whole world sighed a cumulative sigh of relief as the coronavirus finally took leave. But all food tech companies and quick service restaurants (QSRs) were left unhappy.

Why you might ask...As Covid-19 wave finally subsided, people are preferring restaurants that offer better dine-in atmosphere.

The rise in revenue for the current quarter was driven by the healthy performance of new stores as well as strong like-for-like growth.

Jubilant opened 76 new domino's stores during the quarter and entered 22 new cities. The net store addition and city expansion was the highest ever for the company over the last 12 months.

Overall, Jubilant now has 1,701 stores of Domino's across India and is present across 371 cities. It also opened two new Popeyes stores and one new store for Dunkin' Donuts.

Popeyes is an international brand with less competition in the segment. It can standardise the taste and flavour of its food.

The company also has its own Hong's Kitchen and Ekdum! brands but many firms are competing for business with these brands. This is why they can't standardise and grow as they are very popular in smaller markets.

Jubilant Foodworks has been under pressure because of rising prices. However, because of its long history, size, and efficiency it has a competitive advantage.

If market experts are to be believed, if Domino's prices go up, it will be able to charge the lowest fee for standard-quality pizza than any other company.

But market experts don't highlight the huge investments needed to scale up in new ventures like Chinese and Biryani dine in restaurants.

Also, there's Dunkin Donuts which was a colossal failure for Jubilant Foodworks.

Overall, Jubilant FoodWorks is in a unique position where its pros and cons are almost equal. It will be interesting to watch who wins in the end.

Jubilant FoodWorks can be good for people who love eating pizza (exciting returns), have a strong heart (risk-bearing capacity), and don't mind a few extra calories (little losses).

Evaluating the downside risks is crucial. Understand the risk reward ratio before investing in Jubilant Foodworks.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...