JUBILANT FOODWORKS LIMITED: IT's BUYING TIME AGAIN !!!

Scrip Code: 534804 / JUBLFOOD

CMP:  Rs. 1517.20; Market Cap: Rs. 9,958.25 Cr; 52 Week High/Low: Rs. 1959.50 / Rs. 1271.05

Total Shares: 6,56,35,702 shares; Promoters : 3,20,22,954 shares – 48.79 %; Total Public holding : 3,36,12,748 shares – 51.21 %; Book Value: Rs. 102.13; Face Value: Rs. 10.00; EPS: Rs. 18.24; Dividend: 25.00 %; P/E: 83.17 times; Ind P/E: 48.30; EV/EBITDA: 34.98.

Total Debt: ZERO; Enterprise Value: Rs. 9,927.88 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 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 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 December, 2015, Jubilant FoodWorks Ltd operates 911 Domino’s Pizza restaurants in approximately 209 cities; and 59 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 is the sole master franchisee for both Domino’s Pizza Brand since 1996 as well as Dunkin’ Donuts Brand since 2011 in India. The master franchise agreement with Dominos International is till 2024 and is renewable for another 10 years. The company is part of the Bhartia group, which owns a 48.9 % stake in Jubilant FoodWorks ltds and is India’s largest food service company, with a network of 921 Domino’s Pizza restaurants across 209 cities. The Company & its subsidiary have the exclusive rights to develop and operate Domino’s Pizza brand in India, Sri Lanka, Bangladesh and Nepal. At present it operates in India and Sri Lanka. The Company is the market leader in the chained pizza market with 72 % market share in India. The Company also has exclusive rights for developing and operating Dunkin’ Donuts restaurants for India and has launched 61 Dunkin’ Donuts restaurants across 21 cities in India. Domino’s Pizza India has won the Customer Service Excellence Award at The Annual Indian Retail Awards, also it has won the prestigious “Golden Peacock National Training Award” by the “Institute of Directors (IOD) - India at the”25th World Congress on Leadership for Business Excellence & Innovation’ and the Golden Peacock Awards Presentation Ceremony. Domino’s Pizza India has been awarded as one among Top 4 winners of coveted BML Munjal Awards (2015) for Business Excellence through Learning & Development. Domino’s Pizza also crossed the landmark with the launch of its 900th restaurant in the country. India is now becoming a consumption driven country. With increasing disposable income this set of consumers is more inclined to spend luxuries and fine dines & foods services these demands are mainly driven by the youth population and India accounts for the largest young age group of 15-34 years of age population which amounts to 43.5 Cr people, for Jubilant this is the most important factor, this 43.5 Cr of population 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 on their highs in students and professionals. And these are the factors which are creating a strong potential market for QSR business to flourish in India. The Indian Food Services Industry (FSI) is worth Rs 6,27,245 Crore. It offers promising opportunities for both the chained and independent sectors, with the market projected to grow to Rs 10,10,416 Crore by Calender Year (CY) 2019. Domino’s Pizza comes under Quick Service Restaurants. The India’s Quick Service segment is the clear winner in the eating out market with a growth rate of 21 %. The QSR industry has an OPM of close to 15 % to 25 %. The QSR organized segment is expected to reach Rs. 22,000 Cr by 2017 driven by rising disposable income, nuclear family structure, increasing working population, rapid urbanization and consumerism, increased private equity interest. Indian on an average eats out lesser than 2 times a month as compared to 40 times in Singapore. Even a small increase in this number provides a huge market opportunity for restaurants in India. Driven by an improving economy, and with inflation being under control, the Food Service Industry is expected to return to a reasonable growth momentum in the near term. The Indian Quick Service Restaurant (QSR) markets are affordable and competitive in pricing, have innovative food products with strong focus on quality and hygiene, and provide a higher level of consumer confidence and this has led to the rapid rise of the QSR segment in India. In fact, QSRs have become the fastest growing segment in the eating out market, along with the casual dining segment. The QSR growth is further fuelled by customisation efforts, with most QSRs tailoring their offerings in terms of flavours, pricing, services, etc. to meet Indian consumers’ evolving preferences. By tapping the digital medium, the QSRs are continuously expanding their consumer base. QSRs are also investing significantly in strengthening their back-end, which facilitates expansion. Domino’s Pizza was the largest QSR brand by revenue figures and also as per market share in CY 2014. 

The Indian consumer is driven by special occasions to indulge in dining out or ordering in. Further “Eating Out” has become an occasion-behaviour driver in itself. Multiple factors spur the “Eating Out” culture and correspondingly, it thrusts the growth of the organised Food Sector Industry in India. Within the QSR segment, the size of the organized café market in which Dunkin operates, is estimated to be worth Rs. 6,700 in 2014 and is projected to record a CAGR of 15 % to Rs. 15,100 Cr by 2020. Since its launch of Dunkin in 2011, in FY13 in the café segment, Dunkin has expanded its reach to 61 stores as of now, occupying a similar share with Starbucks Coffee, Costa Coffee and Coffee Bean and Tea Leaf in terms of number of stores. Around 70 % of Dunkin stores are in the top 8 cities like Delhi, Gurgaon, Greater Mumbai, Bangalore, Chennai, Hyderabad, Kolkata and Pune and they contribute around 40 % to 45 % of the chained café market. When compared to its competitors, Dunkin has managed to record high average sales per day (ASPD) of Rs. 45,000 to Rs. 50,000 despite having one of the lowest price points on the menu. The Food businesses usually have a long gestation period (around 10 years for Domino’s) and, therefore, it would be better to wait for now and would take a call when the company starts providing data on the Dunkin Donuts business. Currently it is estimated that Dunkin could have revenue CAGR of around 75 % till FY18F, driven by the company’s expansion plans. Jubilants Same Stores Sales Growth for Q2FY16 was 3.2 % and 3.9 % for H1FY16. For Dominos, the company increased its restaurant count to 950 restaurants and is present in 216 cities, from 797 and 167 cities last year; it opened 39 stores last quarter in areas of Bhuj, Bokara, Kadapa, Ratnagiri, Mughalsari, Sirsa , Palwal and Agra. The company managed to deepen its online presence from 27 % a year ago to 36 % at present. Its presence on the mobile platform also increased during the quarter. Its share of online now accounts of 30 % and its app downloads increased to 35 lakh as compared to 2 lakh last year. It launched a new range of pizzas in partnership with the famous chef Vikas Khanna under the theme Exotic Italian Pizza. For Dunkin Donuts, the company opened seven new restaurants this quarter; the total store count is now stands at 66 stores as compared to 37 stores a year ago. Dunkin has now presence across 23 cities from 13 cities a year ago including new cities like Vadodara and Bhopal. It launched wraps and donut cakes during the quarter. It also has tied up with online grocery delivery platform Grofers for home delivery. The company has seen successful in its new launches in Donuts and burgers among consumers. The company retained its target of 150 new Domino’s outlets in FY16 and 30 new Dunkin outlets. They have completed the setting up of 74 and 12 restaurants to date. Online ordering will remain a key focus area along with Innovation. Looking at such plans along with the new launches Jubilant Foodworks ltd looks great business to buy. 

Outlook and Valuation:

Jubilant FoodWorks Limited is India’s largest food service company. 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 one 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. 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 and to tackel that company has adopted Asset-light business model which 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. Domino’s predominantly delivery-based model in these cities has proportion of delivery to dine-in is of 50:50. Consequently, the store size required is much smaller at around 900 sq ft to 1,500 sq ft compared to dine-in restaurants and other QSR which requires space of around 2,500 sq ft to 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. It also notable here that the gap between the stores of Domino’s and the rest of its peers is huge like Domino’s has 950 stores including 66 stores of Dunkin Donuts versus 307 of Pizza Hut, 350 McDonalds and 360 stores of KFC. Within the pizza market, Domino’s has a share of more than 67 %. Domino’s has consistently gained its market share from its pizza peers as well as other QSRs in the past few years. Jubilant 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 resumes on same-store sales, cash flow improvement will be significant. It is remarkable that Jubilant FoodWorks, which runs a high-growth business like Domino’s, including 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. Jubilant has expanded rapidly in the past few years, with Domino’s having 921 outlets and presence in 201 cities as of August 2015. The company plans to establish 115 more stores in the rest of the year. As India’s economy is picking up along with discretionary demand, growth for Domino’s is bound to pick up given its leadership position in its segment and the lower base of FY15. According to management, it believes that high single-digit SSSG can be achieved by mid-FY17F. It could be expected that there could be growth of 7 % in Same Store Sales (SSS) by end of FY16F, and thereby expect EBITDA margins recovery for Jubilant Foodworks Ltd also. There could be a 0.60 % improvement in FY16F EBITDA margins for the Domino’s business, and margins to reach around 15.8 % levels by FY18F before stabilizing at around that level, which would be similar to QSR players around the world. These margins are at risk due to rising rental and personnel costs. The Indian pizza space has two dominant players, Pizza Hut and Dominos, and this competition has moderated slightly in the past few months with aggressive Buy One Get One (BOGO) free offers which now has been replaced with 20 % to 25 % off on bill value and launch of value meals. Dominos, which earlier offered BOGO on a selected weekdays, is now using 20 % off as a Promotional offer. This reflects some sanity in promotions in the thick competitive pizza space. These big players are trying to rope in new customers with value-for-money offerings. Dominos, on the other hand, has initiated a value fest promoting family meals, kid’s combo packs and pan-pizza combos. Dominos has launched a new offering—Veg Parcel at Rs. 35 and Non-Veg Parcel at Rs. 40. Also the prices of key raw materials, primarily like cheese and chicken, too have been benign (gentle), which goes well for pizza players’  for their margins; some improvement herein could be routed to heightened promotional activity to revive SSG which was gentle due to consumer sentiments. Jubilant Foodworks has already opened 74 Dominos and 12 Dunkin Donuts stores in H1FY16 and expects to meet its target of adding 150 & 30 stores in FY16. Jubilant Foodworks took a price hike of 3.8 % YoY on 1 Sep’15 as against its usual practice of taking hikes in the month of August each year. This delay in taking a price hike was attributed by management to product experiments. Management expects pricing to contribute around 7 % YoY to the top-line in Q3FY16 which should largely nullify the impact of higher employee costs on margins. Employee costs were up 31 % YoY due to higher personnel costs which are linked to network growth, annual increase in compensation and enhanced pay-scales for team members due to adjustments in minimum wages. The employee count increased to 29,168 in Q2FY16 from 26,818 in Q2FY15. On Line Orders (OLO) continues to drive growth for delivery sales, with its contribution improving to 36 % of delivery sales in Q2FY16 from 33 % in Q1FY16. Also, mobile ordering contributed 30 % to overall OLO in Q2FY16 as against 28 % in Q1FY16. Management has revised the margin impact of Dunkin Donuts on Dominos to 2.00 % on an annualised basis from 1.80 % earlier. Management maintained its capex guidance of Rs. Rs 250 Cr for FY16. Company’s ad spend have increased to 5.5 % from 5 % and Rentals have surge 15 % every 3 years (5 % YOY) as per the agreement. Rental cost in the industry is increasing 7 % to 8 % on long term. Therefore, rental cost increment is lower for the company. Dunkin stores are almost PAT positive at the store level. However, at the brand level, the company is still burning cash due to high marketing expenses and S&G expenses. Once Dunkin reaches a store count of 120-130, Jubilant Foodworks expects to breakeven at the brand level and this may take less than 3 years. Capital employed in Dunkin store is Rs. 120 Cr so far and management expects capex to around Rs. 300 Cr for FY16. Jubilant currently pays 14 % VAT and 5 % service tax, which is passed on to the consumer. Another 2 % tax impact is absorbed by the company. Therefore, Jubilant Foodworks Ltd will be GST neutral at 21 %. The tie up with IRCTC has not contributed much in revenue till now, but the company believes this space will be more exciting in 5 years. Looking forward the medium-term earnings growth and improvement of return ratios gives immense opportunity to this company and will help the company's share prices to sustain high valuation metrics. Also its Earnings growth potential is far superior when compared with its peers. It is expected that with the company’s surplus scenario beeng created due to its asset light and its net working capital continues to be in excess along with its fixed asset turnover which continues to be in excess of 3 times, its growth story is likely to be intact for the coming quarters also. At the current market price of Rs. 1,517.20, the stock is trading at a PE of 81.65 x FY16E and 20.39 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 18.58 in FY16E and Rs. 58.15 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	1,736.00	2,092.40	2,555.50	3,991.40
NET PROFIT (₹ Cr)	118.60	112.60	121.80	171.10
EPS (₹)	18.07	16.94	18.58	26.09
PE (x)	76.30	80.50	74.40	53.00
P/BV (x)	16.40	14.00	11.80	10.40
EV/EBITDA (x)	36.30	35.30	30.30	23.00
ROE (%)	24.10	18.60	17.20	20.80
ROCE (%)	23.50	16.60	14.30	17.20

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