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HDFC Securities Institutional Equities
The Pizza category has a tumultuous history. It has faced significant challenges over the past few quarters (compared to other mainstream quick service restaurant categories such as burgers and chicken) due to three reasons:
its price-sensitive nature— deals and discounts have driven a decent amount of growth for mainstream players in the past in this category;
hyper-competition from regional and local players, as the mainstream pizza brands earn gross margins of 75%+, which enables these players to play the pricing game, or at least provide better quality than national players at a similar price;
increased downgrading to other QSR offerings/value pizza in the context of hyperinflation since this category has a higher average order value of Rs 450-500; and
lack of tangible breakthrough innovation (e.g. cheese burst pizza) which can uplift the same-store sales growth.
We believe the latter issues (specifically points 3 and 4) shall fade away in the medium term, as Jubilant FoodWorks Ltd. has made substantial efforts to tackle these challenges.
We upgrade Jubilant FoodWorks to Add from Reduce with a target price of Rs 685 (SOTP-based), as we assign a value of Rs 40/share for the DP Eurasia business.
Notably, we have also increased our target enterprise value/Ebitda multiple for India business from 30 times to 35 times, as we foresee better visibility of uptick in SSSG.
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