Aggressive Expansion And Fee Waivers Threaten Margins, But Technology Investments And New Products Like Cheesiken Could Boost Growth

Key Takeaways

• Aggressive expansion and waiving delivery fees may increase revenue but pressure margins and impact short-term profitability.
  
• Investments in new products and markets carry high upfront costs, potentially affecting ROI and margins due to macroeconomic challenges.
  
• Jubilant FoodWorks' strategic investments in technology, product innovation, and franchise models are enhancing delivery capabilities, customer engagement, and system sales, potentially boosting revenue and profitability.

Catalysts

Operates as a food service company.

• The company's aggressive expansion strategy, including adding 139 net new stores and entering 50 new cities, is expected to increase operational costs and may not immediately translate into proportional revenue growth, impacting net margins and profitability in the short term.
  
• Jubilant FoodWorks' decision to waive off delivery fees to drive order growth could lead to a significant hit on margins. Although revenue from delivery might increase, the reduction in delivery fees could compress net margins and affect earnings.
  
• Increasing investments in new products and technology, such as the 20-minute delivery initiative and app development, while potentially beneficial for long-term growth, could elevate short-term operational expenses and pressure EBITDA margins.
  
• The company's expansion into new markets and new formats, such as university campuses and airport terminals, requires substantial upfront investment. If these formats take longer to achieve profitability, this could adversely affect net margins and ROI in the medium term.
  
• In Turkey and other markets, macroeconomic challenges, such as inflation and fiscal tightening, could impede revenue growth and profit margins, especially with a high proportion of franchise-led stores in these regions.

Jubilant FoodWorks Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Jubilant FoodWorks's revenue will grow by 16.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 7.0% in 3 years time.
• Analysts expect earnings to reach ₹7.5 billion (and earnings per share of ₹11.43) by about December 2027, up from ₹4.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹10.5 billion in earnings, and the most bearish expecting ₹4.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 82.5x on those 2027 earnings, down from 115.0x today. This future PE is greater than the current PE for the IN Hospitality industry at 24.7x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.72%, as per the Simply Wall St company report.

Jubilant FoodWorks Future Earnings Per Share Growth

Risks

• Jubilant FoodWorks has expanded its delivery capabilities and improved operational efficiencies, leading to enhanced customer experiences and potential revenue growth. The company's focus on technology and operational excellence could increase revenue and margins.
  
• Accelerated store expansion into new cities, along with investment in new product launches like the Volcano range and Cheesiken, may continue to capture rising consumer demand, positively impacting revenue growth.
  
• The company's strategy of maintaining price stability, even amidst inflation, through cost optimization initiatives, could bolster its net margins over time.
  
• Jubilant FoodWorks' investments in customer-facing technology, reducing delivery times, and increased brand-building efforts are driving higher app traffic and customer acquisition, which could enhance earnings through higher consumer engagement.
  
• Strong sales momentum in Domino's and other brands, along with strategic use of franchise models, particularly in Turkey, are contributing positively to system sales growth and could continue to improve overall profitability and earnings.

Valuation

• The analysts have a consensus price target of ₹624.97 for Jubilant FoodWorks based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹880.0, and the most bearish reporting a price target of just ₹350.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹107.7 billion, earnings will come to ₹7.5 billion, and it would be trading on a PE ratio of 82.5x, assuming you use a discount rate of 14.7%.
  
• Given the current share price of ₹702.2, the analyst's price target of ₹624.97 is 12.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.