Analysis

Kiran Dhavale

Revenues from operations surged on the back of robust same store growth (SSG) in Domino's Pizza, higher delivery sales via online ordering and strong momentum in order growth led by all-round product upgrades.

Jubilant Foodworks 

ENHANCE THE FLAVOUR OF YOUR PORTFOLIO WITH JUBILANT FOODWORKS


JFL has to its advantage an improved profitability trend and an innovative product portfolio. As a result, it has demonstrated substantial business development. 

Jubilant Foodworks Limited (JFL) is part of the Jubilant Bhartia Group and is a prominent food service company. With an extensive national footprint and expanding businesses overseas, it enjoys substantial market share in the organised pizza segment and the home delivery take-away segment. The company and its subsidiary own the exclusive rights to develop and operate the Domino’s Pizza brand in India, Sri Lanka, Bangladesh and Nepal. Similarly, JFL also enjoys exclusive rights for developing and operating Dunkin’ Donuts restaurants across India.

Industry Overview 

The economic environment was strained due to headwinds in the form of rising crude prices, dwindling private investments, limited job opportunities, rural distress and fiscal slippages on account of meagre GST collections. The restaurant industry is undergoing revolutionary changes. Ordering-in has become commonplace, largely on the back of technology and the presence of food aggregators which aid in replicating the restaurant experience at home. The convenience of digital payments and the facilities of cashback and discount have aided this trend and bolstered the online ordering and food delivery market. There is tremendous headroom for growth in India as Indians do not eat out half as much as people abroad do; although that is rapidly changing on account of busier lifestyles. Thus, the per capita expenditure on meals outside homes in India is much lower in comparison to other countries. Urbanisation, demanding lifestyles and larger disposable incomes are growth drivers. Furthermore, Indians are much more curious about exploring the cuisines of their western counterparts. Accordingly, consumption has transitioned from being occasion-oriented to habitoriented. Reduced GST rates, growth in the FSI space and greater regulation pertaining to safety and hygiene are sure to propel organised players to the forefront. Digital and social media are saturated with abundant information through food blogs and food channels – all of which are shaping peoples’ food choices and consumption patterns. 

Financial Performance 

On the standalone quarterly front, the revenue from operations stood at Rs 881.3605 crore in Q2FY19 versus Rs 726.6382 in Q2FY18, posting a growth of 21.29 per cent. EBITDA increased to Rs 147.5344 crore in Q2FY19 from Rs 102.1865 crore in Q2FY18, registering a growth of 44.37 per cent. EBITDA margin of 16.7 per cent was up by 260 bps. Net profit surged to Rs 77.6717 crore in Q2FY19 from Rs 48.4707 crore in Q2FY18, thereby rising 60.24 per cent. PAT margin of 8.8 per cent was up by 210 bps. EPS improved to Rs 5.89 in Q2FY19 from Rs 3.69 in Q2FY18. The company opened 24 new Domino’s stores during the quarter. Despite the pressure on manpower and fuel costs, the company managed to report stout operating profit growth of 44 per cent as these higher costs were moderated by deflation in key raw material costs like cheese. Productivity programmes across the value chain and other savings were also chief contributors. With regards to Dunkin’ Donuts (DD), the donuts and beverage portfolio registered strong growth - enough for the company to achieve operational breakeven by the end of FY19. During the quarter, the company closed 5 DD stores, thereby reducing the total store count to 32. However, this will not have any material impact on Indian operations due to efficient global repositioning of the DD brand. 

On the consolidated annual front, the revenue from operations reached Rs 3,018.4001 crore in FY18 from Rs 2,583.3889 crore in FY17, thereby rising 16.83 per cent. EBITDA rose to Rs 440.0898 crore in FY18 from Rs 241.1312 crore in FY17, posting a growth of 82.51 per cent. Profit for the year stood at Rs 196.2270 crore in FY18 as against Rs 57.7746 crore in FY17, registering a remarkable improvement of 239.64 per cent. EPS climbed to Rs 29.74 in FY18 from Rs 8.77 in FY17 Furthermore, on the valuation front, the return on equity (RoE) climbed to 20.27 per cent in FY18 from 7.17 per cent in FY17. Return on capital employed (RoCE) surged to 29.61 per cent in FY18 from 11.47 per cent in FY17. Return on assets (RoA) rose to 13.11 per cent in FY18 from 4.47 per cent in FY17. The current ratio improved to 1.07x in FY18 from 0.57x in FY17. EV/EBITDA multiple surged to 32.87x in FY18 from 28.37x in FY17. Enterprise value stood at Rs 15,223.26 crore in FY18 as against Rs 7,259.57 crore in FY17, posting a growth of 109.69 per cent. 

The net cash generated from operating activities climbed to Rs 409.0066 crore in FY18 as against Rs 203. 5858 crore in FY17, thereby registering an impressive growth of 100.90 per cent. Overall, the cash in hand surged to Rs 12.4256 crore in FY18 from Rs 8.9384 crore in FY17, thereby rising 39.01 per cent. On June 26, 2018, the company allotted 6,59,84,520 equity shares of Rs 10 each as fully paid up bonus shares. On October 1, 2018, the company distributed dividend of Rs 2.5 per share, amounting to a total sum of Rs 3,299.23 lakh, excluding dividend distribution tax of Rs 678.17 lakh. 

Major developments and acquisitions 

On October 30, 2018, JFL declared PepsiCo as the new beverage partner for Domino’s Pizza. As part of the deal, PepsiCo’s portfolio of carbonated beverages like Pepsi, Mountain Dew, 7Up, Mirinda and Lipton Ice Tea will be sold across all Domino’s restaurants in India. On the international front, JFL bettered the performance of the Domino’s Pizza brand in Sri Lanka, which resulted in healthy sales growth of approximately 10 per cent. It entered into a joint venture with Golden Harvest QSR Ltd. to launch Domino’s Pizza in Bangladesh. The emerging economy of Bangladesh and the demographic presence of an affluent young and middle class are well-suited for JFL’s businesses. On December 11, 2018, JFL was allotted 51,00,000 equity shares at a par value of BDT 10 each, in Jubilant Golden Harvest Limited. Consequently, JFL became 51 per cent shareholder in the JV company. 

Owing to swifter new customer acquisitions and enhanced ordering frequency, same-store sales escalated substantially. Domino’s Pizza India (DPI) showcased healthy sequential growth as its Same-Restaurant Sales Growth (SSG) stood at 13.9 per cent for FY18 and 20.5 per cent in Q2FY19. Both operating leverage and greater efficiencies resulted in improved margins. JFL progressed in mitigating losses for Dunkin’ Donuts by offering donuts and coffee at reasonable prices. In a substantial upgradation of pizza quality, JFL launched ‘All New Domino’s’, resulting in significantly improved product satisfaction scores. It also increased the frequency of existing customer purchases, while enhancing the pace of new customer acquisition. Moreover, it employed a creative strategy to improve customer experience called ‘Every Day Value’ for Domino’s Pizza, which offers customers a standard affordable price every day. Revenue from the digital channel increased on the launch of the Domino’s app in Q1FY19. During FY17-18, JFL commissioned its largest facility in the entire Domino’s Pizza worldwide in Greater Noida. Being the first of its kind to be fully-owned and operated by JFL, the facility will provide food and non-food ingredients to nearly 550 DPI and 100 DDI restaurants, thereby reducing the requirement of outsourcing and aiding superior cost and quality control. The close proximity to the markets of JFL’s distribution centres in Ahmedabad and Chennai helped curb logistics costs and improved responsiveness. 

Core competencies 

JFL enjoys remarkable infrastructural distinction as it operates over 1,170 restaurants and has 11 supply chain centres. It also boasts a widespread presence spanning across more than 260 cities in India. With a robust network of over 120 HACCP certified food business partners, the company is capitalising on technology-driven practices across operations. 

Growth drivers 

Enhancing customer experience, delivering greater value for money and developing innovative products together constitute the sure-shot growth strategy for JFL. The company awarded appropriate emphasis on digitisation and technology. The benefits of the same were harnessed in the form of growth of delivery orders, strong response post revamp of mobile app and its rising share as a percentage of total online order placement. Cost optimisation remains an important strategy to ensure consistent profitability even in challenging environments. JFL is also looking to expand its distribution to more locations. Although JFL is optimistic about the pizza segment in India, it endeavours to optimise DPI’s existing network and augment SSG by pursuing all consumer divisions. JFL is certain about prioritising value-for-money over price hikes. Thus, the company has refrained from implementing price hikes for the past several quarters and is saving this strategy for future use should the economy demonstrate an inflationary trend. 

Challenges 

The limited availability of real estate and astronomical rental rates across malls and high street locations are serious concerns for companies operating in the food services space. Consequently, the company renegotiated some of its rent and media/advertising contracts to improve savings on account of GST input credits. Although numerous initiatives to expand FSI space have been set in motion, regulatory policies which necessitate multiple licences and complex filing procedures to operate restaurants have rendered the whole exercise problematic and expensive. The company has to comply with stringent food health and safety standards. JFL addressed the challenge of increasing manpower costs by lowering its dependence on manpower at its supply chain centres by nearly 20 per cent in FY17-18. It did so by embracing automation wherever possible and improved staff deployment. JFL faced challenges in the form of input rate cut to 5 per cent from 18 per cent. Its expenditure on raw materials surged to Rs 751.4 crore in FY18 from Rs 616.0 crore in FY17, thereby escalating 22 per cent. This upsurge is attributable to the rise in manpower demand due to entry of new players in both the restaurant space as well as the delivery-only start-ups. Moreover, wage inflation raised the cost of manpower. Furthermore, there was speculation about dilution of promoter stake in the company. However, the management reaffirmed that promoters have a long-term interest in the company. Moreover, JFL got tangled up in an anti-profiteering case for which the verdict is still pending. Nevertheless, the management is optimistic about a favourable outcome. 

Conclusion 

With an unwavering focus on cost rationalisation, manpower optimisation and liquidation of unviable restaurants, JFL managed to streamline its operations. By upgrading digital assets, driving data analytics, developing technology and strengthening digital marketing, JFL is well on the track of success. The company has made consistent efforts toward product innovation and boosting the value for money. It experienced margin expansion by 530 bps in FY17-18 due to higher traction in revenue and stringent cost control measures. The operating performance of JFL in Q2FY19 was very encouraging due to deflation in cheese prices and improved product mix. The company’s growth was not compromised in spite of intensifying competition in the food service industry driven by the disrupting emergence of food aggregators. In conclusion, we can safely ascertain that there is massive growth potential in the market owing to low penetration, increased frequency of eating out, strong consumption environment and company-led initiatives like geographical expansion. By virtue of these factors, we recommend our reader-investors to HOLD this stock 

Rate this article:
No rating
Comments are only visible to subscribers.

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR