JUBILANT FOODWORKS LTD : PARTY HAS JUST BEGUN !!!

Scrip Code: 534804 / JUBLFOOD

CMP:  Rs. 1405.00; Market Cap: Rs. 9,200.40 Cr; 52 Week High/Low: Rs. 1497.40 / Rs. 937.70

Total Shares: 6,54,83,310 shares; Promoters : 3,24,47,474 shares – 49.55 %; Total Public holding : 3,30,35,836 shares – 50.45 %; Book Value: Rs. 79.87; Face Value: Rs. 10.00; EPS: Rs. 17.59; Dividend: 0.00 %; P/E: 80.07 times; Ind P/E: 48.71; EV/EBITDA: 36.47.

Total Debt: ZERO; Enterprise Value: Rs. 9,177.22 Cr.

JUBILANT FOODWORKS LTD: The Company was founded on 16th March, 1995 and is based in Noida, India. The company was formerly known as Dominos’s Pizza India Limited and changed its name to Jubilant FoodWorks Limited in 2009. Jubilant FoodWorks Limited operates as a food services company. The company holds the rights to develop and operate Domino's pizza brand in India, Sri Lanka, Bangladesh, and Nepal and Dunkin’ Donuts brands & restaurants in India. Its Dunkin’ Donuts restaurants offer donuts, drip coffee, cappuccino and latte, milkshakes, smoothies, and iced teas, as well as a range of burgers, wraps, sandwiches, and side-bites. In addition, the company also sells its products online. The company came with an IPO of 2,26,70,447 equity shares of Rs. 10 each at Rs. 145.00 per share to the general public in January, 2010. The purpose of the issue was to achieve the benefits of listing on the exchanges and for the pre-payment of loans & other general corporate purposes. It got listed at Rs. 160.00 per share making a high of Rs. 240.90 on listing day. Domino's Pizza India has grown into a countrywide network of stores, with a team of over 6,000 people. Jubilant FoodWorks has the sole master franchisee for Domino’s Pizza & Dunkin Donuts in India. It also has, the wide range of product profile which are complementary to Domino’s and are run separately from Domino’s outlets. Dunkin’ Donuts is owned globally by Dunkin’ brands, which also owns Baskin Robbins worldwide. Dunkin’ Donuts has over 11,000 outlets worldwide in over 30 countries. As of August 6, 2014, Jubilant FoodWorks Ltd operated 772 Domino’s Pizza restaurants in approximately 158 cities; and 34 Dunkin’ Donuts restaurants in 11 cities in India. Jubilant Foodworks Ltd is locally compared with Westlife Development Ltd (who runs McDonalds in India), Speciality Restaurants, Tata Global Beverages (which runs StarBucks in India) and Globally with Sato Restaurant Systems Co., Ltd of Japan, Hiday Hidaka Corp of Japan, Faurwood Holdings Ltd of Hong Kong, Ajisen (China) Holdings Ltd of Hong Kong, Cafe` de Coral Holdings Ltd of Hong Kong, Jollibee Foods Corporation of Philippiness, Matsuya Foods Co., ltd of Japan, MOS Food Services Inc of Japan, BJ’s Restaurants Inc of California, Bob Evans Farms Inc of Ohio, Carnival Corporation Ltd of Florida, Dunkin’ Brands Group Inc of Massachusetts, The Wendy’s Company of Ohio, Domino’s Pizza Group of UK, McDonald’s Corporation of Illinios, Compass Group PLC of UK, Lowe’s Companies Inc of North Carolina, Starbucks Corporation of Washington, YUM! Brands Inc of Kentucky, Zoe’s Kitchen Inc of Texas.                                                                    

Investment Rationale:

Jubilant FoodWorks was incorporated in 1995 but started its operations in 1996. It is the sole master franchisee for both Domino’s Pizza Brand since 1996 as well as Dunkin’ Donuts Brand since 2011 in India. The company is part of the Bhartia group, which owns a 48.9 % stake in Jubilant FoodWorks Ltd. With 772 Domino’s restaurants in India, starting from the first outlet opened in 1996, Jubilant FoodWorks is in charge of the second-largest chain of restaurants for Domino’s worldwide, overtaking UK in the current year but it’s still behind the US which is Domino’s home country, headquartered in Michigan, US. In terms of number of stores as well as sales, Jubilant FoodWorks is the largest player in the Quick Service Restaurants market, which is still in nascent stage in India with about 17 % market share whereas there’s more than 60 % market share is of pizza and in excess of 70 % in pizza delivery. According to Euromonitor report, QSR in India accounts for slightly 2 % of the overall food service market in India and this is expected to grow much faster at 20 % compared to 10 % food service industry’s growth. The Indian Food Services Industry (FSI) continues to expand rapidly. The size of the Indian FSI, has scaled from Rs. 53,000 Cr in 2010 to Rs. 75,000 Cr in 2012 and is expected to reach Rs. 1,37,000 Cr by 2016, growing at a healthy Compounded Annual Growth Rate of 17 %. The Indian FSI's growth is driven by the strong consumer side drivers, the innovations and expansion from the industry players. The organised sector is continually innovating and introducing smart and new formats. The organised sector has also penetrated into Tier II and Tier III cities, with the large brands targeting several smaller cities, while the local brands are looking to increase their presence in the Tier I cities. Looking at the various emerging trends, the organised sector in FSI, which currently accounts for 30 % of the business, is expected to account for nearly 45 % of the total food service sector by 2016. Also there are many Business factors such as high turnover, low area occupied; reasonable ticket size helps the QSR sectors. In India, the biggest barrier to profitability in the restaurant as well as retail businesses in urban areas, particularly in metros, is high lease rentals. Domino’s predominantly delivery-based model in these cities enables it to circumvent this problem. While the overall proportion of delivery to dine-in is 50:50. Consequently, the store size required is much smaller at around 900-1,500sq ft compared to predominantly dine-in restaurants and other QSR (at 2,500-3,000 sq ft). In addition, the average bill size for pizza outlets like Domino’s is also higher than other QSRs like McDonalds, KFC and coffee shops like Café Coffee Day (CCD), Barista and Costa Coffee. Jubilants core business comes from Dominos Pizzas, and Pizzas are consumed during lunch and dinner and are not snacks like in the case of other outlets. A combination of delivery-based model and healthy bill size enables high sales per square feet and aids profitability. Company’s Asset-light business model boosts its high-growth story the business is remarkably asset-light as a result lease rentals are much lower which helps profitability of the store. Net working capital continues to be in excess of negative 25 days and fixed asset turnover continues to be in excess of 3 times. Even in a subdued economic environment of the past two years, there was no worsening of working capital metrics. When the growth trajectory will resume on same-store sales, its cash flow will also improve significant. It is remarkable that Jubilant FoodWorks, which runs a high-growth business like Domino’s, which expanded from 180 stores in FY08 to around 800 stores currently including 38 Dunkin’ Donuts outlets did not have the need to raise fresh equity capital or avail significant amount of debt. This is a testament to strong business model and a kind of proof about the abilities and expertise of management which also shows their understandings about their business in India. Jubilant FoodWorks Ltd. is a strong market leader in the organized pizza market with a 67 % market share in India and is focused on creating brand value, innovation, cost productivity, product quality, consumer value and loyalty for both Domino’s Pizza and Dunkin’ Donuts. Recently, on 22 oct 2014, Jubilant FoodWorks Limited announced the launch of its new Oven-baked Subwich. The new product offering has been conceptualized with the aim of making the boring lunch options more interesting and enjoyable. Domino's latest offering, the Oven-baked Subwich, is made with a Chilli Jalapeno three Bean Patty (Veg) and on the juicy American herbed Chicken patty (Non-Veg) stuffed between the soft & freshly baked buttery crusts, which is priced at just Rs. 89.00 only. The consumers have the option of buying a medium/large pizza with a Coke and get the new Oven-baked Subwich - Veg or Chicken – just for Rs. 45.00. It is available for the consumers in both dine-in and delivery. For Jubilant the most important factor is the fact that India accounts for the largest 15-34 age population cluster of 43.5 Cr people. This is equivalent to the entire population of Singapore, Hong Kong, Australia, South Africa, Nigeria, Ghana, Angola Kenya and Zambia combined. That age group tends to have willingness to try out new cuisines and especially its seen high in students and professionals. Domino’s is the market leader in the QSR space in India with around 17 % market shares. While Jubilant FoodWorks’ sales were around Rs. 1,740 Cr in YE March FY14, the room to grow is immense given the low penetration of the QSR space.

Outlook and Valuation: 

Jubilant FoodWorks Limited is India’s largest food service company. JFL & its subsidiary operate Domino’s Pizza brand with the exclusive rights for India, Sri Lanka, Bangladesh and Nepal. The company have recently launched three new products in the quarter - Spicy Baked Chicken, Lebanese rolls and Calzone Pockets; positive response received by all the three products. It has launched its Online Mobile ordering site in July, 2013 and it is seen as important platform to reach a wider audience base. Till present there are over 9 lakh downloads of the Domino’s Pizza mobile ordering app across various smart phones & the Average Online ordering contributes to 18 % of delivery sales in Q2 FY14 and Mobile Ordering sales contributes to 12 % during the quarter. There are total 22 Dunkin’ Donuts Restaurants as on 31 October, 2014 and offers a wide variety of western menu including donuts, coffee, burgers, sandwiches, snacks, and more. It is notable here that the gap between the stores of Domino’s and the rest of its peers is huge. Domino’s has 806 stores versus 307 of Pizza Hut, 350 McDonalds and 360 stores of KFC. Within the pizza market, Domino’s has a share of more than 60 %. Domino’s has consistently gained its market share from its pizza peers as well as other QSRs in the past few years. Jubilant FoodWorks’ also has plans to expand its networks adding around 150 Domino’s outlet every year and looking at the scale at which its peers plans their expansion, Jubilant looks faster and better positioned. Domino’s in India has traditionally added new stores particularly in the past five years which are anywhere between 19 %-22 % of existing stores. New stores take time to break-even and the burden on overall profitability goes on reducing as time goes forward. Innovations also are essential for any consumer business and particularly during an early stage of operations compared to overall growth potential. The average bill size of Domino’s Pizza is healthy across stores which range from Rs. 350 to Rs. 450 per head. And most of the stores also have delivery facility except stores that are located next to food courts situated at higher levels in malls and the ones that are newly set up. Delivery proportion in other stores is 20 %, which is healthy and adds another avenue of growth. Delivery portion has minimum bill size of Rs. 150 and has on an average 7 bikes to facilitate that delivery. Looking at these factors it can be easily believed that the break-even of its store could be achieved in two-three years. Jubilant FoodWorks Ltd has recently renewed their contract with master franchise controller Dominos International. The new contract is for 15 years, which gives them exclusive rights for operations in India, Nepal, Sri Lanka and Bangladesh. The growth shown by Jubilant FoodWorks Ltd is consistently based on the robust operational foundation on which it stands. In the current economic environment and slowdown in consumer spending, especially in discretionary expenditure, the company continues to pursue excellence in key areas such as cost management, restaurant selection processes, and continual re-investment in strengthening the supply chain, connecting deeply with consumers, and investing in innovations. This approach is complemented by a robust training apparatus and high operational efficiency standards that allow growing the business in line with the potential. Domino’s Pizza has made rapid strides in restaurant expansion and has 772 Domino’s Pizza restaurants. The company launched three new products in the quarter - Spicy Baked Chicken, Lebanese rolls and Calzone Pockets; in Domino’s Pizza and burgers in Dunkin’ Donuts received positive response by all the three products and Domino’s Pizza mobile ordering (Online Ordering (OLO)) remains an important platform to reach a wider audience base serving around 8 million pizzas every month. This enables to drive higher levels of optimization and supply chain systems into the hinterland, to serve tier 2 and 3 cities. On Financials Jubilant FoodWorks Ltd’s Net sales were up 14.8 % YoY at Rs. 501.2 Cr. Its Same-Store Sales Growth (SSG) declined 5.3 % YoY. 2QFY14 was the last quarter of positive SSG at 6.6 % because of a Buy One Get One’ scheme and the base going forward are not challenging. Its EBITDA declined and fell to Rs. 61.1 Cr down by 6.5 % YoY. Gross margin was up 1.50 % YoY, aided by lower proportion of special schemes in 2QFY15, EBITDA margin was down 2.80 % YoY owing to SSG decline. Ongoing expansion (including Dunkin’ Donuts) meant that staff costs and rent cost increase as a percentage of sales were unabated. Jubilant pays Domino’s around 3.2 % of sales as royalty. The management stated that in FY15, there will be a 1.50 % to 1.60 % impact on margins because of Dunkin’ Donuts rollout. Number of Dominos outlets (including Dunkin Donuts outlets) touched 797 which are spread across 167 cities at the end of September 2014 quarter and 806 at the end of October 2014. The company added 80 Domino’s stores in 1HFY15, and are on target to add 150 stores by the end of the year. Company had its new commissaries at Guwahati, Nagpur and Hyderabad these are expected to commence operations in 2HFY15. The pace at which the Jubilant FoodWorks Ltd is setting up its stores it can be easily assumed that it can easily set up 2,000 Domino’s stores in India. The management stated that it is confident of industry growth potential and the company’s own brands. Market share in the organised QSR space actually increased from 6 % to 7 % five years ago to 14 % to 15 % in FY13 and 16 % & 17 % in FY14. Jubilant FoodWorks business model, scale and ability to innovate are creating significant barriers to entry to competitors. Most important is the learning from its experience of being at the forefront of expansion in unchartered territories. As demonstrated by the improvement in Dunkin’ Donuts business after the menu makeover, the management has demonstrated its ability to innovate and think out of the box and use the learning that it has developed in the food business in India. A learning organisation will find new levers of growth. Looking forward the medium-term earnings growth and improvement of return ratios gives immense opportunity to this company will help to sustain high valuation metrics. Also its Earnings growth potential is far superior compared to peers. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. 

KEY FINANCIALS	FY14	FY15E	FY16E	FY17E
SALES (₹ Crs)	1,736.30	2,043.60	2,548.40	3,323.10
NET PROFIT (₹ Cr)	118.20	119.30	161.10	254.70
EPS (₹)	18.10	18.20	24.50	38.60
PE (x)	66.00	73.70	54.70	34.70
P/BV (x)	16.00	13.40	10.80	9.40
EV/EBITDA (x)	34.70	32.30	23.40	15.70
ROE (%)	24.10	19.80	21.90	29.10
ROCE (%)	24.10	19.80	21.90	29.10

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