Jubilant FoodWorks – No More Toppings
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Investors like growth and if they see that happening in a company they would be more than happy to assign it a higher premium over others. This exactly seems to be the case with Jubilant FoodWorks (JFL) which has pleasantly surprised its investors a lot of times since its IPO in January 2010. Everything about this company has been interesting. Its unique business model (a pizza company), its market leadership in the segment, strong and brisk financial performance quarter after quarter and the announcement of launching Dunkin Donuts in India has had everything good on offer for investors.
In fact this scrip, since its listing in February 2010, has yielded an overall appreciation of 422 per cent while the Sensex during the same period has been up by a mere 6 per cent. But all said and done, does the scrip still have enough steam left considering the fact that its volatility has increased sharply? It has come off almost 35 per cent since its September 2011 peak and is also seen recovering equally sharply with the scrip now down only by 18 per cent. Though it may be tempting for many, does it make sense and moreover, are the valuations justified? Here we have taken a closer look at these factors in our analysis of the company.
A part of the Bhartia Group, Jubilant FoodWorks (JFL) is a leading food services company, which operates the Domino’s Pizza brand with exclusive rights for India, Nepal, Bangladesh and Sri Lanka. As of June 2011 the company operates through a total network of 392 stores. Nearly 80 per cent of its revenues come from pizza sales while the balance comes from beverages and other products such as pastas, choco lava cake, etc. That apart, in February 2011 the company decided to extend its portfolio further by entering into an alliance with Dunkin Donuts for opening its restaurants in India. The first of the Dunkin Donuts’ stores is expected to open in Q4FY12 in the NCR region.
JFL has been a unique company from the stock market point of view. It is the only pizza company in the listed space and hence enjoys a novelty premium. Secondly, it is a market leader commanding a massive 50 per cent market share and has been able to create a very strong brand recall for itself over the years. No wonder it has been growing at three-year CAGR of 47.55 per cent and 110 per cent in topline and bottomline respectively.
To fuel growth JFL has been undertaking continuous capex. In FY11 it spent around Rs 70 crore for adding about 70 stores, while another 80 stores are expected by FY12 with a total capex of more than Rs 100 crore. The capex, which is expected to be funded through internal accruals, would also be utilised for the relocation of two commissaries in Mumbai and Kolkata with a new one in Chandigarh. It also includes capex on maintenance and IT requirements, besides store expansion of Dunkin Donuts and Dominos. In fact the current expansion would be more focused towards Tier II and III cities, where the management believes there is a lot of pent-up demand. But what is also interesting is that JFL’s revenues are growing more from the same stores which contribute to around 80 per cent of JFL’s topline. These have been growing at a brisk pace of 37 per cent and have been helping JFL build stronger numbers on a YoY basis. JFL was expecting a 20 per cent sales growth this fiscal but with the start that they have got the company is confident of posting same stores’ growth of more than 20 per cent.[PAGE BREAK]
While all this has been happening, the game-changer for JFL came in with its announcement of a tie-up with Dunkin Donuts in February 2011. This transformed its image from being just a pizza manufacturer to an international food brands’ launching company. This again was something unique in the Indian listed space with JFL acquiring the status of a concept stock. Ever since that announcement the stock has witnessed a strong upward movement in a weak and volatile stock market and appreciated by over 94 per cent, scaling a new peak of Rs 1,022, thus making it clear that this event was a major trigger for the scrip.
While all this has kept the stock buzzing, we believe that the best is already priced into the scrip. First, the novelty factor of this business model that the stock carried will slowly fade and though the scrip may react positively to any new announcement, investors would continue to track its financial performance. The latest news is that JFL is in talks with more international brands. According to Ravi Gupta, the company’s CFO, “As a business model we are an international food brand launching company. We are in talks with a few international brands but we cannot comment on the same due to policy constraints.”
Besides, it is too early to talk about the Dunkin Donuts’ deal as it is still at a nascent stage with the various workings still in progress as regards issues such as the menu, store locations, etc. And while its first store is expected in Q4FY12, it is only after the initial response that JFL would actually decide on how aggressive it wants to get about Dunkin Donuts’ expansion. However, we don’t expect any aggressive launching of Dunkin Donuts’ stores and its contribution to JFL would remain minimal in the coming fiscal.
In fact we believe there is clear euphoria and hype that has been built around the JFL scrip when we compare it with the US pizza giant Dominos Pizza Inc. It should be noted that JFL’s current market cap is around Rs 5,137 crore or USD 1.05 billion. This we believe is quite steep for a Rs 678 crore company, even as the US pizza giant itself, which is ten times’ JFL’s revenue size, is available at a market cap of USD 1.6 billion. In terms of other parameters like the trailing 12-month earnings, where Dominos US is available at a PE and EV/EBIDTA of 18.5x and 11x respectively, JFL is available at a huge premium of 64x and 38x respectively despite the fact that the scrip is down by 21 per cent from its peak just a month back.
The truth is that the scrip has turned quite volatile and just a week back it was almost down by about 35 per cent and though it has recovered, further profit booking cannot be ruled out in such a shaky scenario. Further, while JFL is currently seeing good growth from its same stores, it is worth noting that the economic slowdown does have an impact on the business. This can be seen from a sharp drop in its same store growth to just 6 per cent in FY09 from around 20 per cent plus a fiscal earlier. Thus the business is certainly not slowdown proof and considering that the Indian economy is expected to decelerate further with corporates keeping a check on costs as also households, there is a high probability that JFL could feel the heat too.[PAGE BREAK]
In a situation like this it is difficult to pass on the costs to consumers as it may affect its volumes. Customers can easily opt for relatively cheaper substitutes, many of whom also provide home delivery services. If that wasn’t enough, inflation - especially that of food - will create further problems for a company like JFL, whose major raw materials include milk-based products and vegetables. Vegetable inflation has increased by 54 per cent in the period March – September 2011 over an already high base of 49 per cent in the same period last year, while milk prices have increased by almost 13 per cent during the same period.
While JFL has managed two price hikes in April 2011 (5 per cent) and August 2011 (2.5 per cent) (JFL takes two price hikes annually), will they be able to take a similar hike in the coming time is what remains to be seen. “We usually take two price hikes during the fiscal and we have already taken them in April and August this fiscal.
Around November we would be able to understand whether a further price hike is necessary,” Gupta informs.
Moreover, being in a service industry, the employee costs are bound to remain high. The more the expansion JFL undertakes, the higher the number of employees it will need. In fact JFL being an industry leader, it is a good poaching ground for its peers. Thus JFL would have to pay comparatively higher salaries to retain talent. This will increase its costs further. In conclusion, while JFL continues to grow briskly with the concerns mentioned above, especially the very steep valuations, we believe that the counter may remain an underperformer.