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We are enthused by JFL’s margin story helped by improving store vintage, cost saving initiatives and dip in Dunkin’s losses. Possible double-digit SSSG could be an additional earnings driver given high operating leverage. Despite the recent re-rating we initiate coverage on JFL with Buy and PT of Rs 2,200 as we envisage strong earnings growth (26.7%/36.7% Ebitda/ EPS CAGR over FY18-20e) being 20% ahead of consensus.

Improved value proposition to drive SSSG revival

New customer acquisition and increasing purchase frequency are key SSSG drivers. With the recent product upgrade, no significant price hikes since November 2015 and Everyday Value offers, we believe the price value equation has improved significantly in the last 12 months helping drive SSSG. Ergo, we believe that SSSG has bottomed out from the 2.4% dip in FY17 and build 7% SSSG going forward. Low double-digit SSSG is a possibility in the event of an uptick in urban consumption.

Improving store vintage is the biggest lever for margin

Increasing proportion of higher margin mature stores (>4 years old) in total store mix can help blended Ebitda margins (by 300bps as per our working) even if individual store margins just remain stable (we see scope for improvement in LTL store margins as well if SSSG trends above 6-7%). Mature store proportion has increased to ~50% in FY18 and given gradual store expansion now, will rise to 69% by FY20e. Margins in mature stores are typically 500-1000bps higher than ramping up stores (1-3 years old) as per our estimates.

Cost savings come to center plate

Cost saving is not yet completely reflected in numbers. Employee costs (employee per store down 13% in 2 years), rental costs (rentals per store down 6% in one-year) and other costs (per store costs down 7% in 1 year) are already witnessing improvement.

Dunkin’ Donuts losses to shrink

Focus on core (donuts and beverages) and shutting down of loss-making stores (35 stores closed since FY16) and opening of smaller formats will help reduce the drag (225bps impact in FY17)—management is targeting breakeven in FY19, we are building it in FY20.


Post recent re-rating, JFL is trading at 39x FY20e EPS based on our estimates, which are 20% ahead of consensus. We believe JFL’s margin story has just begun and leaves significant upside to earnings. Our PT values the stock at 45x Mar 20e EPS (in line with 1-year average multiple). Key risks: (i) Discretionary slowdown; (ii) sharp rise in raw material and competitive intensity.

Executive summary

JFL, the largest pizza player in India with more than 70% market share, has gone through tough times in terms of SSSG especially during FY14-17, when it hovered around lower single digits. We believe now, with renewed focus on driving growth and margin, JFL is on the cusp of witnessing a strong earnings growth trajectory (EPS is down by ~12% CAGR over FY13-17). Improvement in the store mix towards higher margin mature stores, cost saving initiatives, the improving profitability of Dunkin’s Donuts and an improving price value equation will help maintain mid-single digit SSSG and drive sharp margin expansion, in our view. We expect JFL to deliver 11.9% revenue, 26.7% Ebitda and 36.7% EPS CAGR over FY18-20e led by 377bps Ebitda margin expansion. We initiate coverage on JFL with a Buy rating and PT of `2,200.

Margin, long way to go

We expect JFL to see 377bps improvement in margins over FY18-20E, helped by an increase in the overall share of mature stores (>4 years old) in total stores as they are higher margin (500-1000bps higher than a typical ramping-up of 1-3-year-old stores), cost saving initiatives (savings across line items ranging from rentals, employees, advertisements, delivery costs, etc) and decline in losses for Dunkin’ Donuts. Ebitda margins for the company are down by 900bps over FY12-17. The company can also take cues from global franchisees in Australia and its US parent.


JFL’s stock has re-rated from 37x one year forward rolling price-to-earnings ratio six months ago, to 56x now. Despite this re-rating, that stock still has upside left, which in our view will be led by further improvement in margins. Considering management is now more focused on reviving SSSG by giving better value to the customer instead of merely luring them with discounts, and the likely sharp improvement in margins, we initiate coverage on JFL with a Buy rating and PT of `2,200. Our PT is premised on 45x Mar 20E EPS, in line with the last one year average forward earning multiple. However, it is at a discount of 35% vs. the last five-year average forward earning multiple