Credit Suisse downgrades Jubilant FoodWorks to underperform

Foreign brokerage firm Credit Suisse downgraded shares of Jubilant FoodWorks to 'underperform' from 'neutral' and cut target price to Rs 1,200 from Rs 1,350, saying that the quick-service restaurant chain is vulnerable to a weak demand environment and aggressiveness of online aggregators.

Shares of Jubilant FoodWorks were down over 3 per cent at Rs 1,400.45 in the afternoon trade on Thursday.

Quick service restaurant industry-which has the strongest correlation of its growth with the macroeconomic conditions in India, is likely to see same-store-sales growth further decelerate in the second half of the current financial year, said Credit Suisse.

Consumption growth remains weak and the large cut in corporate tax rates does not address the current consumption slowdown, said Credit Suisse.

The brokerage has cut earnings estimates for Jubilant FoodWorks by 8-11 per cent given that high operating leverage and earnings cycles that tend to be extreme in the company.

"In the past cycles, Jubilant’s EBITDA margins have seen a wide range of 9-18 per cent, with a direct correlation to the SSSG (same-store sales growth) of the business. As SSSG now slows down again, we expect EBITDA margins to correct from cyclical highs," said Credit Suisse.

Moreover, food aggregators are helping brands like McDonalds and other local food brands the most. The strongest gainers for aggregators are large brands like McDonalds which do not have their own delivery infrastructure and strong city-level food brands which can expand using dark kitchens being set up by aggregators, said Credit Suisse.

Dominos, which already has its own delivery infrastructure, does not gain as much from food aggregators, the brokerage said.

"While valuations are in line with their historical average, what is more important is that the earnings downgrade cycle has just begun," said Credit Suisse.

Source:- https://retail.economictimes.indiatimes.com/news/food-entertainment/food-services/credit-suisse-downgrades-jubilant-foodworks-to-underperform/71311726