- Slowest SSS growth in last seven quarters; risk of further slowdown: JFL reported system sales growth of 47% y‐o‐y, one of the slowest in its listing history, driven by SSS growth of 27% (versus avg ~37% in last 6 qtrs). This was aided by nearly 10% price hike undertaken by JFL over last one year, again highest in its history, to counter food inflation. JFL has added 33 stores in H1 versus target of 80 store additions in the year.
- EBIDTA margin may peak on inflation, higher ad spend: EBIDTA margins remained flat at 18% in Q2, driven by highfood inflation and a rise in staff costs. We believe margins could be peaking with food inflation not showing any signs of cooling off. Moreover, the management plans to increase advertising expenses to tide over any slowdown in demand. Also, pre operative expenses (INR 9 mn in 2Q) on Dunkin Donut could further put pressure on near term profitability.
Outlook and valuations: Expensive; maintain ‘REDUCE’
With negative working capital, positive free cash flows, high growth and operating leverage, we continue to like JFL’s business model. However, at CMP of Rs815, it is trading at FY12E and FY13E PE of 52.4x and Rs37.1x respectively. JFL’s current premium valuation to leading consumer discretionary names like Nestle and Titan is unjustified given their strong parentage, ownership of industry leading brands and superior return ratios.
Valuations remain expensive, maintain reduce for a price target of Rs626
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