Jubilant Foodworks- Too hot to handle : Kotak Sec

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Jubilant Foodworks (JUBI)
Consumer products
Too hot to handle. JUBI’s 2QFY11 was good—same store growth of 44% and EBITDA
margin of 18.2%; aided by (1) low-base and (2) timely price hikes, in our view. We like
JUBI’s strategy of (1) penetration-led growth, (2) continuous brand-building efforts, (3)
tapping new distribution channels, (4) clear focus on topline growth and (5) ongoing
investment in human resources. However, at 42XFY2012E, stock does not offer buffer
for the inherent cyclicality in its business (as evidenced in FY2009).




Same store growth and margins likely at peak

Jubilant Foodworks reported net sales of Rs1.6 bn (+67%), EBITDA of Rs296 mn (+95%) and PAT
of Rs184 mn (+137%).
􀁠 Sales growth of 67% is likely led by a weak base, high same store growth (44%) and price
growth of 5%. Same store growth of 44% in this quarter and 37% in 1QFY11 is significantly
higher than the average of 20% in the last six years.
􀁠 EBITDA margin expanded 260bps—(1) material cost as % of sales was flat on the back of scale
benefit with vendors which are likely passed on to JUBI, (2) rent as % of sales declined 280 bps
likely benefiting from the high same store growth and (3) employee cost expanded 80 bps
driven by new store addition and salary hike taken at store level.

􀁠 Interest declined to Rs1 mn on account of repayment of term loans. PAT margin increased 330
bps to 11.3%.
􀁠 As of September 30, 2010 the company had 339 stores across 79 cities.
􀁠 During the quarter the company introduced mobile marketing and two new menu offerings—
Pasta Italiano and Mexican Wrap. As per management, the performance of new offerings is
meeting internal expectations.


What do we look out for?
Establishing presence in tier II and III towns. The company has more than 50% single store
cities. In 2QFY11 it entered new cities such as Jalgaon, Jamnagar and Trichy. While we believe that
these regions present huge opportunity for penetration led growth, success of the product in
these cities would be a key factor to watch out for in FY2011E and FY2012E. Currently ~65% of
sales are contributed by top seven cities and ~50% of stores are located in Maharashtra, New
Delhi and Karnataka.


􀁠 Re-entry in Sri Lanka. Post the closure of stores (being operated under the subfranchisee
route) in Sri Lanka, the company has set up a wholly owned subsidiary, Jubilant
Foodworks Lanka (Pvt) Ltd, under which it will set up owned stores. It is targeting to
establish 3 new stores in 2HFY11.
􀁠 Any cannibalization of pizza sales by new launches? The company has launched
Mexican Wrap and Pasta Italiano during 2QFY11 at a price of Rs79 for veg and Rs89 for
non-veg. The introductory price for both the products is at Rs39 and Rs49, respectively.
While it is still early days, we would look for any signs of these new launches
cannibalizing pizza sales, especially given the price points at which they have been
launched—veg single Pizza Mania is available at Rs39 and non-veg is available at Rs65.
􀁠 Peak multiples for peak margins? During 1HFY11, the company reported average
EBITDA margin of 18.4% (18.5% in 1QFY11 and 18.2% in 2QFY11). This is likely one of
the highest, since it began operations, in our view. The stock is trading at 42XFY2012E
EPS—the highest amongst the 13 stocks that we cover implying that the market has
limited concerns about the sustainability of the margins over the next few years. To us,
this looks like a classic case of the market ascribing peak multiples to peak margins, thus
leaving no room for execution risk (in a business which has cyclicality—as evidenced by
economic downturn impact on sales in FY2009).

Maintain SELL
We like JUBI’s business model, have strong conviction in the management and see huge
growth opportunities for the company driven by changing demographic and socio-economic
factors. Despite the strong near-term earnings forecast and favorable view, we find it
difficult to justify the current valuation of the company (PE of 42X FY2012E). Our EPS
estimates are Rs10 and Rs13.1 for FY2011E and FY2012E. We value JUBI on DCF, and our
assumptions are (1) 27% CAGR free cash flow growth in the explicit forecast period of 10
years (FY2011E-FY2020E), (2) WACC of 13% and (3) terminal growth rate of 6%. Maintain
SELL.