Jubilant Foodworks Rating: Buy

According to a press release by Jubilant FoodWorks (JUBI), Pratik Pota tendered his resignation from the post of CEO of JUBI, which was accepted by the Board on 11th Mar’22. The move comes as a surprise since the Board of Directors, in Jun’21, had approved Pota’s re-appointment as the CEO for three years from Apr’22 until Mar’25. According to Pota’s Twitter account, he is leaving the company to pursue a quasi-entrepreneurial opportunity.

During his tenure, some of the initiatives taken by Pota included pricing discipline, focus on ‘Everyday Value’, entry into new categories (Indo-Chinese with Hong’s Kitchen, Biryani with Ek dum!, and fried chicken with Popeyes), and investing ahead of the curve in technology. Since Apr’17, JUBI’s stock has returned a 40.1?GR v/s 12.3%/10% for the NIFTY50/NIFTY India Consumption indices, respectively.

Structural opportunity remains intact

Changes to our model have led to a 5.4%/6.5% cut in our FY23E/FY24E EPS, respectively, as we factor in the effects of slowing delivery sales growth, increased commodity costs, and higher fuel inflation. The resignation of the CEO could have an adverse short-term impact on the stock, considering the phenomenal efforts during his tenure. We will have to watch out for his successor and the strategic outlook ahead.

Notwithstanding the near-term headwinds, the structural opportunity for JUBI remains intact unless there is a material shift in the future strategy outlined by the new CEO. As highlighted earlier, the post-COVID environment offers an enhanced opportunity for QSRs in India, and JUBI is well placed to capture the opportunity. It remains among our top picks in the discretionary space.

While RM costs have been on the rise, the increase in agri-commodity prices has remained manageable barring palm oil and SMP costs. Moreover, JUBI (as well as other QSRs) has a fairly large degree of pricing power and its 75-77% gross margin gives it the ability to absorb higher RM costs better than peers with lower GMs. The Russia-Ukraine crisis has adversely impacted JUBI’s investment in DP Eurasia and the company may have to write-off part of its ~`2 bn investment in the coming quarters. This is, however, something JUBI will be able to absorb given its healthy balance sheet.

The stock has corrected nearly 40% from its peak and now trades at 27.2x/ 22.9x EV/Ebitda and 68.5x/55.3x P/E for FY23E/FY24E, respectively. While still not inexpensive, we believe the company deserves premium multiples for the aforementioned reasons. We maintain Buy and value the stock at 30x FY24E EV/Ebitda arriving at our TP of `3,680.