lume growth to spice up ins for Jubilant.Westlife

Expectations ofhigh same-store sales growth and improving margins led to higher investor appetite

RAM PRASAD SAHU Mumbai, 30 November

S'. tocks of quick service r.estau­

, rants Westlife Development, Jubilant FoodWorks and Speciality Restaurants have

been hitting their 52-week highs this week on expectations that improving demand and new offerings will sus­tain volume growth going ahead. This, coupled withthe recent trigger of revi­sions in the goods and services tax (GST) rate to five per cent from the earlier 18 per cent should help bring down overall prices.

Given that the new rates are without the benefit of input tax credit; compa­nies such as Jubilant (Domino's) have raised prices (before taXes) to negate 'the impact. While thiswill be neutral as fii as profitability is concerned, it will help bring down the final cost for the consumer. Analysts at Anand Rathi Research say with the pricing actions from June to November 2017, the con­sumer may benefit from a five-seven per cent lower tax burden.

However, the key trigger is higher sales growth, driven by improved demand. Both companies reported bet­ter-than-expected September quarter results with same-store sales growth (SSSG) trending up while rationalisa­tion and cost-cutting efforts have helped boost operating profit margins.

Westlife Development (McDonald's), for example, reported SSSG growth of 8.4 per cent which was its ninth consec­utive quarter of positive SSSG growth. Thiswas on the back of increased foot­,falls driven by value offerings, higher

contribution from brandextensions and price rationalisation. Analysts at Axis Capital expect the company to report a 17 per cent revenue growth over FY17-22. This will be led by high single-digit SSSG, which is expected to increase from four per cent in FY17 to the eight-nine per cent band in FY18 and FY19. This growth will rub off on operating leverage and efficiencies, Which, coupled with distribution synergies (after implemen­tation of the GST), are also expected to boost operating profit by over 31 pel cent during this period.

For Jubilant, SSSG growth at 5.5 per cent in Q2FY18 was the second highest in the past 10 quarters. Analysts at Nomura believe the company's grow" ing focus on increasing con~umer val­. ue by improving the quality of its piz­zas, and yet extending the everyday

value offer has enabled it to up-trade consumers from mania to medium piz­zas. This, coupled with cost reduction and measured expansion (cutting down on unprofitable units), should help boost operating profit margins, which, after hittIng its all-time low lev­els (mid-single digits) last year has increased to 14.1 per cent in Q2.

While both companies have report­ed improvement in recent quarters, maintaining volumes will be impor­tant given the price hikes. Analysts at Ambit Capital say with the cushion pro­vided by input tax credit taken away, near-term SSSG will be a function of the price hikes taken by Jubilant and discounts withdrawn to protect absolute operating profit. This uptick is temporary and volume growth in the longer term remains essential to sus~

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tain these margins. At the current price, Jubilant,

whose price has doubled over the past one year, is trading at an expensive 62 times its FY19 estimates. Westlife's stock price has increased 70 percent over the past year and the manage­ment is hoping to post a profit at the end of FY18_ Investors could take exposure to the stocks on dips.

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