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Why shares of Jubilant Food, the firm that runs Domino’s and Dunkin Donuts, slumped 14% today, Retail News, ET Retail


Why shares of Jubilant Food, the firm that runs Domino's and Dunkin Donuts, slumped 14% todayNEW DELHI: Shares of Jubilant FoodWorks fell 14 percent on Monday morning, the most in two years, after analysts said the sudden exit of its chief executive officer and wholetime director Pratik Pota will be a short-term risk for the company.

Brokerages view his departure as a setback for the foodservice company’s expansion plans, even though Pota will continue in his current role till June 15, 2022. The Board has also initiated the process of identifying his successor.

Jubilant holds the exclusive franchise rights for Domino’s Pizza and Dunkin Donuts in India, Sri Lanka, Bangladesh, and Nepal.

Pota had joined Jubilant FoodWorks in 2017 when the company was struggling with a sluggish performance and is credited with the company’s turnaround. During Pota’s five-year tenure, the company’s net sales and net profit grew at a CAGR of 6.4% and 41.5%, respectively, with the Ebitda margin climbing from 9.4% in FY17 to 25.5% to FY21, according to data analysed by ET Intelligence. Even the company’s stock price has surged five-fold during the same period.

At 10: 30 am, the stock was down 13.6% at Rs 2,487.50 on the National Stock Exchange.

Analysts termed Pota’s departure as a risk in the near term and “raises concerns around execution and earnings growth”.

” We are seeing the knee-jerk reaction and various downgrades on the stock price because the stock has seen rerating in the last few years because of Mr. Pota who brought lots of changes in the business model where the stock went to 60PE from 40PE of its one year forward earnings. However, the stock has already corrected significantly from its 52-week high and the outlook of the company is still very strong whereas IPL is going to start soon therefore we may see buying interest at lower levels. The market will watch for the new name of the CEO before any meaningful recovery,” said Parth Nyati, Founder, Tradingo.

Technically, it is trading near the critical demand zone of 2500-2400 where we can expect some buying while if it slips below 2400 then 2100 will be the next important support level. On the upside, the 2900-3000 area will act as an immediate resistance zone at any pullback, added Nyati.

JP Morgan downgraded its rating on the company due to increasing demand and margin risks. Besides, unexpected resignation from the CEO reflects uncertainty in the company, noted the brokerage.

Brokerage Motilal Oswal Financial Services said Pota’s resignation is a “negative” surprise since the Board had approved his re-appointment last year for three years from April 2022 until March 2025.

“We believe the exit of Pratik Pota could have an adverse short-term impact on the stock, considering the phenomenal efforts during his tenure. While he has developed a good second rung, we will have to watch out for his successor and the strategic outlook ahead,” it said.

” The resignation of Mr Pota adds to risk on all fronts, as the outgoing CEO addressed key challenges and boosted confidence in growth longevity, during his tenure. There were many key measures that were taken under his tenure which helped the franchise pivot to the top of the industry. It will be very important for the company to find a strong CEO to replace him,” said Prem Prakash, CEO at CapitalVia Global Research.

He added that despite this risk, the business model of Jubilant food is still strong and that the post-Covid environment is likely to offer an enhanced opportunity for QSRs in India, driven by delivery, value and technology which will provide the company further opportunities to strengthen its grip in the market. “The exit of the CEO will hurt its valuation in the short term but with the opportunities in the market and strong hold we still believe that Jubilant foodworks is well poised to do well in the long run,” said Prakash.

“Pota’s exit comes at a crucial time as the company has embarked on a transformation journey (multi-QSR platform from a single-brand QSR) and is on the verge of accelerating store additions for new brands. Dependency on CEO is high even as Jubilant Food augmented its management team in the recent past. A leadership change at this juncture would likely slow down the growth engine due to some inevitable execution slippage,” noted Kotak Institutional Equities.

Morgan Stanley too downgraded the stock to ‘underweight’ from ‘overweight’, citing the CEO’s sudden exit.

“The company is still well positioned to play long-term growth story in organised food but sudden leadership change threatens near-term outlook,” it said.

The near-term concerns is that the company’s operating margin could come under pressure due to rising food, fuel and employee inflation.

“Since Pizza delivery business has high operating leverage any reduction in net sales realization could disproportionately impact earnings. Notably, Jubilant FoodWorks might also have to increase its salary for store level employees, if current inflation persists, as state governments are likely to increase minimum wages across various slabs in order to combat food and fuel inflation,” noted Phillip Capital in a report.





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