Street may be ignoring potential headwinds for Jubilant due to lockdown

Some analysts point at likely risks from an extended lockdown that aren’t priced in

In the current uncertain times, the stock of Jubilant FoodWorks (Jubilant) — the Indian franchise for Domino’s Pizza — is among the top outperformers in the discretionary retail space. While Jubilant’s stock has shed about 16 per cent over the last month, those of Titan, Trent, Bata, and Westlife Development, among others, have fallen 20-34 per cent during the same period.

Some analysts now believe the recent correction adequately factors in the near-term pain for Jubilant. And, fast recovery in top line post the lockdown, with support from online delivery and raw material tailwinds, will support the stock. However, there are factors that could play spoilsport, which investors should be cognizant of.

To start with, there is still no clarity on the lifting of the lockdown. If the lockdown gets extended, it will severely hurt the wallet of households and their spending power, and consequently, Jubilant’s earnings.

Besides the closure of mall stores, higher chances of cancellation of key events, such as the Indian Premier League, will pull down Jubilant’s top line, say analysts. This, along with the higher share of fixed-cost (approximately 60 per cent of the overall cost structure), will directly take a toll on its earnings.

With just 14 days of the lockdown falling in the June quarter, analysts at PhillipCapital estimate around 25 per cent decline in Jubilant’s same-store-sales growth (SSSG, a key performance indicator for retailers) in Q1, and 21-35 per cent earnings cut for FY21-FY22. This sufficiently indicates potential damage to Jubilant’s performance in the event of a prolonged lockdown.

Nonetheless, even after the lockdown, how the demand for discretionary food like pizza and burger pans out is still a question. Pay cuts, job losses, and preference towards home-made food could eat into the overall demand for such non-essential food items. Even now, the company has witnessed pressure on delivery in recent times, according to HDFC Securities.

Further, promoter stake sale and exuberance among online delivery players to grab market share are some other risk factors for Jubilant, say analysts at PhillipCapital, which believes the near-term pressures are priced in.

What though offers comfort is Jubilant’s debt-free balance sheet, good cash position, and strong brand equity.

For now, investors may be better off waiting for clarity to emerge on the lockdown and a revival in delivery demand, as the stock’s current valuation of 46x its FY21 estimated earnings is still not attractive, given the current scenario.