Here's why Jefferies upgraded its worst performing stock to 'buy'

Jubilant FoodWorks, which has been the worst performing stock for Jefferies, has been upgraded to a 'buy' rating from 'hold' by the brokerage firm. Jefferies has, however, maintained its target price at Rs 580, indicating an over 24 percent potential return on the stock.

The stock rallied after Jefferies' upgrade, settling 5 percent higher at Rs 486.95 per share on the BSE on Thursday.

The upgrade comes after the stock corrected 50 percent from its peak on concerns of opening-up of the economy, posing threat to delivery, CEO exit, pullback in global valuations and earning miss, as mentioned in the report by Jefferies.

The sharp correction came after a strong rally in the share price over the past few years.

"The share price correction is in part due to the rise in interest rates which has caused de-rating in the expensive consumer and tech stocks. However, there have also been other factors including the announcement of the exit of their CEO, who played a pivotal role in the turnaround of JUBI in the past five years and there remains uncertainty on his successor. Concerns, however, have been running on JUBI's slowing growth as the economy re-opens which may reduce food delivery attractiveness," the brokerage firm said.

It added that reduction in quarterly “same-store” sales growth and non-core investments has also added to worries.

"Following the earnings miss in 3QFY22, the consensus has cut EPS estimates by 10-12% for FY23-24. In fact, our estimates continue to be 4-6% lower than consensus even now," said Jefferies, adding that it doesn't see material downside risks to its earnings estimates.

The brokerage firm also draws comfort from Zomato’s management commentary saying that the re-adjustment due to the opening up of the economy is already behind us and there would not be a further impact due to this in

coming quarter.

“Zomato and Jubilant Food’s (delivery) trends are fairly contrasting in the past few quarters, although it's a short history. Some comments from Zomato in its 4Q earnings are still quite interesting and relevant from Jubilant Food’s standpoint,” Jefferies said.

"Notwithstanding some concerns and uncertainty (opening up, new CEO & high input cost inflation), we find valuations palatable at 50x FY23E, which is at a discount to 5-year average," it added.