Jubilant Foodworks CMP INR4,113 Target: INR4,830 (+17%) JUBI

 Building on strengths, growth prospects buoyant

JUBI’s FY21 annual report highlights the management’s efforts to stay ahead of its peers and reap the tremendous opportunities in the Indian QSR space

Boosting its technological capabilities: In addition to its delivery and value moat, Jubilant Foodworks is boosting its technological moat to enhance its lead over its QSR peers and aggregators. Improving its pre-order experience, usage of Hindi and regional languages, and setting up of its analytics and insights division are some of the efforts on this front. 

 Macro factors favoring delivery are extremely strong: Robust growth in urban and rural internet penetration is likely to be boosted further by the launch of 5G technology. Online ordering is growing strongly, even in smaller centers. As a result, delivery and takeaway (a clear focus area going forward) will be the key drivers of SSSG in the next few years, even when dine-in recovers. 

 Sustainable sourcing and food safety is increasingly becoming a vital focus area to boost its long-term growth potential. 

 We maintain our Buy rating on the stock with a TP of INR4,830 per share.

Growing its technological moat

Huge app downloads: The company recorded its highest-ever app downloads at 57.2m in FY21. 

 A large part of total orders are from its own app: Despite aggregators doing well, the majority of Domino’s online sales are generated on its own platform. This is important as it reduces commissions and builds loyalty. 

 Other benefits of its own app: Besides driving sales, usage of its own app gives it access to granular consumer behavior, which helps in better decision making via menu curation, marketing enhancements, and store opening choices. 

 App in other languages: In FY21, the company launched a Hindi version of its app. It is focused on adding support for other languages in its app to personalize the customer experience. The more JUBI expands its store network, the greater would be the additional edge. 

 Improving the pre-order experience further: JUBI introduced a machine learning-based model of personalized ranking to substantially enhance the preorder experience through personalized ranking.

 Improving efficiency: Several other improvements were made to Jubilant Foodworks’s digital assets to further minimize the time taken to order, enhance the user experience, reduce friction, and target higher conversion. 

 Launch of analytics and insights division in FY21: Jubilant Foodworks continued its efforts to further strengthening the capabilities of its digital team. In addition to growing its product and engineering teams, it launched another vertical under digital: analytics and insights. Together these three functions form the backbone of JUBI’s digital prowess and lead the organization’s digital-first agenda.

Digital technology leading to strong traction for QSRs.

Factors boosting online sales: The rise of digital technologies, with increased penetration of the internet and smartphone use, is driving major changes in the online delivery market in India. 

 Rapid growth in internet penetration in rural and urban India: The penetration of the internet in rural/urban areas clocked 22.4%/17.3% CAGR from FY16 to 3QFY21 (Source: CARE Ratings).

 5G technology to provide a further boost: The government’s initiatives such as the launch of 5G technology and fiber access across the length and breadth of India is expected to result in robust growth in wireless internet usage. 
 Delivery proliferation increasing in smaller centers: After penetrating Tier I cities, online food ordering and delivery is gradually gaining acceptance in Tier II, III, and IV cities across India. This is particularly led by an increase in the percentage of the working population in these cities. These cities have already started to see increased traction in the adoption of online food ordering apps

 The Platform-to-Consumer/Aggregators segment has clocked 100% CAGR over FY16-20 (Source: Technopak). 
 Even when dine-in returns, delivery will be the biggest incremental SSSG driver: Even when diners return to Restaurants, the convenience channel – deliveries and takeaways – is expected to be the biggest growth driver for same-store sales growth going forward. 

Financial highlights

In FY21, the average staff cost per employee fell 16.9% YoY to ~221k, despite the total number of employees increasing. This is due to variablization of employee expenses undertaken by the company during the pandemic in FY21. 

 Rent, as a percentage of sales, corrected sharply (170bp YoY). The company was able to negotiate several rent concessions and was able to move to a variable rent model with landlords in FY21.

 While absolute spending increased by 11.4% YoY to INR2.8b, the decline in sales resulted in advertising spends at 8.4% of sales in FY21, a 200bp increase YoY. 

 Jubilant Foodworks did well to keep miscellaneous/other expenses in check during FY21. 

 NWC days improved by 10 days YoY on an average in FY21 to come in at -40 days. This was primarily led by a 14 day increase in creditor days to 54.

Annual report takeaways

FY21 was a year of strategic initiatives Key initiatives and strategies implemented during FY21 include: 
 Investment in BNHL: JUBI announced a strategic investment of INR920m in Barbeque Nation Hospitality (BNHL). It acquired an equity stake of 10.76%, which fell to 9.72% after the IPO of BNHL.

 Investment in DP Eurasia N.V.: JUBI made another strategic investment of GBP24.8m (~INR2.5b) by acquiring 32.81% stake in DP Eurasia N.V. – a public company with the exclusive master franchisee for the Domino’s Pizza brand in Turkey, Russia, Azerbaijan, and Georgia.

 Zero contact delivery: Jubilant Foodworks was the first QSR brand to introduce zero contact delivery, which was subsequently extended to zero contact takeaway and zero contact dine-in. ‘Drive-N-Pick’ was also launched to enhance customer safety. Customers could now avail takeaway orders from the safety of their vehicles, without the need of stepping into a Domino’s Restaurant. 

 No minimum order value: It introduced the no minimum order value proposition to enable consumers to place a delivery order with Domino without any minimum order value. 

 Expansion of the brand portfolio:

a) In Dec’20, JUBI entered the Indian cuisine space, with a foray into the biryani category. Its newest brand, Ekdum! offers a wide variety of biryanis from across India.

 b) In Aug’20, JUBI forayed into the FMCG segment, with the launch of a ready-to-cook product range under the brand name – ChefBoss. Currently, its offerings are centered on Indian and Chinese dishes. New products will be added over time.

c) In Mar’21, it announced a multi-country master franchisee agreement with Popeyes. It is one of the largest chicken QSRs, with a presence in more than 25 countries. 

 International business: Sri Lanka and Bangladesh are both delivering a strong performance, with a positive EBITDA in FY21. JUBI opened five new Restaurants in Sri Lanka and two in Bangladesh in FY21, taking its total store count to 26 and five Restaurants, respectively.

Credit: Motilal Oswal

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