Is it time to be contra & buy Jubilant FoodWorks?

” As far as fundamentals are concerned, there is no change in the demand pattern as of now. The demand, first of all, has not revived. The expenses of the company will, you can say, continue to remain slightly high because of the new commissary which they have started or the kind of store opening which they had undertaken,” says Amnish Aggarwal, Prabhudas Lilladher.



Let us start off then by getting in your take as to what the expectation now is from the IT companies as the results season is fast approaching.

You see in IT companies, as far as the current indications are, there is not likely to be much change in the overall delivery or the commentary in the near term. Maybe I think for next one or two quarters the overall commentary is likely to remain soft and that there is no change in that trend which is visible.

Meantime, you have got something like a Jubilant FoodWorks that we were discussing earlier this morning and the Bank of America view is that now there is a strong outlook on when it comes to revival and growth for the long term and that they are upgrading the stock post the kind of pullback that we have seen. Given the kind of competitive intensity that we have in this space, the way the stock has performed, what is your sense of stocks like a Jubilant FoodWorks within consumption space?

As far as fundamentals are concerned, there is no change in the demand pattern as of now. The demand, first of all, has not revived. The expenses of the company will, you can say, continue to remain slightly high because of the new commissary which they have started or the kind of store opening which they had undertaken.

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Plus, as of now, they have not achieved the scale for Popeyes so that it starts making any money for them even for the next couple of years. So, as far as the standalone business is concerned, I do not see any significant change in the trend as of now. But having said that, as the price has corrected from close to say 575-580 levels to the current, I think from the price, it gives a trade, but in terms of fundamentals, I think that there is no clear visibility as of now in any of the leading QSR companies on the demand revival or change in the profit growth scenario.

The other thing I wanted to talk about also was the latest development that is with ABFRL, which is now happening. Of course, we have seen that the Birla Group has been pretty active in trying to modify each of the group’s companies. Many are pegging this to be Tatas of 10 years back or call it what you may. I just wanted to understand how is it that you are reading into the recent developments from the Aditya Birla Group?

I think if you look at the entire the parallel space, particularly the big companies, ABFRL has been the gross underperformer from the last two-three years and the company, if you look at say last 5 or 10 years of strategy, their strategy was to get into more and more segment and grow big in size.

But having said that, somehow, somewhere, the profit growth has lagged the overall growth of the company and that is why the stock has been big underperformer. So, the current move by the company to demerge Madura, Reebok and Forever 21 into a separate company, I think that it is a positive move and a lot of concerns of the investors will get addressed by this, that is one.

Secondly, Madura is, I would say, they are leaders in men’s apparel, particularly formal wear. I think the way this entire Madura brand’s architecture is there, once this company gets demerged and the numbers start flowing in, there is a lot of value unlocking which is going to happen for the shareholders from this move.

The other space of late which has been doing very well has been the entire metals pack. I mean both ferrous and non-ferrous have all been holding out well. Any trend that you are picking up and do you see that as cyclical as the sector may be, this rally is sustainable?

The uptick in metal sector or the stocks has happened mainly because on hopes that the recovery in the China or the growth rates there will pick up. And once the growth rates there pick up, the global metal prices will remain firm and it will have some percolating impact on the consequences, the prices and the profit outlook of the metal companies.

So, as of now, I think a lot of rally has already happened and if the metal prices unless and until there is a big jump in the metal prices coming from here on, I see the stocks giving, I would say, moderate returns from here. So, it is nothing to do with what is going to happen say in the domestic market or the domestic demand.

So, everything is getting linked to how the Chinese demand pans out and how the steel prices. And if the global steel prices rally from here, then these stocks can even give returns on the current levels.

Share your outlook in light of where crude oil prices are trending and what the implication will be on some of the OMCs. How are you reading into these stocks, stocks within the oil and gas space as well?

If you look at the crude prices, they have been range-bound for quite some time, I think hovering between say $78-80 on the lower side and they are crossing $85-90 on the other. Now for the next two to three months as the elections are there, there is not likely to be much action on that front. But having said that, if the crude prices continue to move up from the current levels and given the fact that there might not be much price changes during the election, then definitely on the marketing side the companies might suffer in the near term.

Now, as far as stocks are concerned, the stocks have rallied very sharply in the last six to eight months given the fact that there was huge underperformance of the last 10 years on one hand and on the other hand, there is a renewed thinking that even though EVs might pick up, the pickup in the EVs might not totally de-accelerate the oil marketing companies because market was earlier just like you can say negative or near terminal value to these companies. But having said that, I think in the current scenario, we might see that the incremental gains in OMCs will come at a very low pace than what we have seen over the last 6 to 12 months.

At the same time though this is going to spell positive news for oil explorers and especially I want to talk about in the light of ONGC and how the stock has already been panning out well.

You see, the reason being that, for example, it all boils down to, if the crude oil prices move up and if the realisation of the OMCs is not capped and their realisations go up, then there is a case and also, there is, for example, particularly in Oil India, there is some increase in the production also which is coming up.

So, to that extent, increasing the oil prices sentimentally could be positive for some of these oil explorers because in the current scenario the negativity which used to be there around these oil marketing or exploration companies that is no more there.

So, depending upon how the crude moves, the oil marketing as well as exploration companies, they can chart their trend.

I am sure you heard the interaction that Kunal just had, mapping all the charts from the Dow to the Nifty to the Nifty Bank. But tell me, are you also pegging hopes on the Nifty Bank and as to how that is going to lead the next lap of the bull market for our markets?

If you look at last year or so, the market has not got support practically from two fronts. One is IT stocks and second is Bank Nifty. Now, if you look at, say, particularly IT, there is not much visibility as of now, at least for the last one or two quarters. And as far as banks are concerned, I think all the leading banks are doing well.

There are no NPA issues as of now. The interest rate reversal cycle may be, say, maybe three or six months away at best and maybe next year profit growth is not likely to be that much. But if you look at all the leading banks, HDFC is having its own LDR issues.

But if you look at ICICI Bank or you can say IndusInd or Axis, so these are not trading at the lifetime high kind of price to book values.

So, if the market next year, if we are expecting markets to do well from here on at some point of time or the other, you can say the banking stocks, particularly the large private banks they have to start participating because in the last 12 months it is the banking rally what has happened is, has been led mainly by the PSU banks.

So, I think this could be the year of private banks. Maybe, I do not know when, maybe a couple of months down the line, but over the next 12 months leading private sector banks should make a strong comeback.

Why are they not making a comeback? I mean, are markets waiting for the turn from liquidity? If a hint comes in this MPC that Reserve Bank of India feels that the liquidity needs to be eased, could that be the turn for the banks?

You see that could be the one and I think the reason as I explained earlier, has been that market always tend to look for alpha and when you had most of your PSU banks trading at 0.4, 0.5 times price to book, it was a very easy trade relative to where the private banks were trading at.

Most of them were, say, upwards of 2-2.5 sort of a range. Now, if you look at say what has happened in the last 12 months, most of these stocks, they have underperformed.

Their price to book values have softened relative to where they used to be a couple of years back and the PSU banks they have seen a significant catch up. Most of them are now maybe in the range of 1-1.2, SBI maybe 1.4 times FY26. So, now I think from incrementally here on, maybe RBI action could be a trigger.

But as we move along, given the fact that the relative gap in the price to book of private banks and PSU banks has narrowed down, the private banks will start catching up over a period of time.

A report this morning from the house of BofA ML where they are talking about Jubilant FoodWorks, upgrade to buy post stock pullback, taking steps to revive growth for the long term, competition intensity seems to be reducing and both Yum and Pizza Hut have decided to take their expansion easy. This is like a solid franchise. The name Domino’s pizza is actually more like a household name. The stock has done nothing in last two years. We have seen a 15-20% correction from the top. Is it time to be slightly contra and go and buy Jubilant FoodWorks now?

From the price, the stock looks good. As far as fundamentals are concerned, I think maybe it might be one or two quarters away when we will start witnessing the recovery. As far as Pizza Hut is concerned, I think from the last at least couple of quarters the intensity at which they were growing earlier, that intensity already has slowed down. But I think the challenge in the entire QSR space is not from the large players because if you look at the last five-six years in particular, if you look at top five or six players, the number of pizza outlets has more than doubled. And today, if you go to tier II, tier III cities, there are lot of small or mid-sized brands which have come up.

Many of them may be having today a 50 store, 100 store, 150 store kind of a chain. But they are actually expanding and they are now looking at even entering the metros or the tier I cities. So, the competitive intensity might come down as far as your top two-three are concerned, but overall in the industry, the competitive intensity is unlikely to come down more or less, however, the company is continuing to expand their focus on the product, their focus on distribution, all those things are intact.

And I think once the demand revival happens, the company should see change in fortunes. Practically, I would say the numbers in terms of earning growth, etc, they might see a little bit more cut in the near term, but they seem to be near the bottom. So, from the price viewpoint, the stock might have bottomed out. From the performance viewpoint, I think we might be one or two quarters still away.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

Harry Byrne

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