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Jubilant Foodworks (JUBI)
Consumer products
Tie-up with Dunkin Donuts – limited opportunity in the near term. JUBI
announced an exclusive tie-up with Dunkin Donuts (DD) to develop and operate the
brand in India. The tie-up provides visibility on JUBI’s cash flow utilization and will likely
help address the cyclicality in its business model (pizza business is cyclical due to high
average bill value, in our view). However, leveraging benefits will likely be restricted to
management bandwidth and utilization of commissaries and there will likely be no
benefits at store-level operations. In fact, DD operations could be long-gestation, in our
view. Moreover, market development will also be a key challenge (the concept of
donut). As per media reports, JUBI plans to open 25-30 DD outlets over the next 2-3
years.
JUBI ties up with Dunkin Donuts
Jubilant Foodworks announced an exclusive tie-up with Dunkin Donuts to develop and operate the
brand in India. Dunkin Donuts is a US-based coffee and baked foods chain. Key menu offerings
include coffee, doughnuts, bagels and muffins. It has more than 9,700 restaurants globally in 31
countries. Global system-wide sales are US$6 bn.
We believe JUBI is following the model of Alsea which is a Mexico-based company engaged in the
food service sector. Its activities include the operation of Domino’s Pizza, Burger King, Chili’s Grill
& Bar, California Pizza Kitchen, PF Chang and Starbucks Coffee.
Long-term positive; however, limited opportunity in near term
Details of the agreement (royalty, tenure etc.) are not yet disclosed, our views, based on the
available information, are:
The agreement potentially addresses a huge business risk in JUBI’s current model – linkage to
economic cycle and consumer sentiments in key metros of Mumbai and Delhi (despite the
under-penetrated nature of business, Domino’s had just 6% same store growth in FY2009 due
to its high bill value).
Visibility on utilization of cash (the company has recently turned FCF positive).
In terms of operating leverage, we believe that while the company will have benefits in terms of
(1) management bandwidth, (2) utilization of commissaries, and (3) adspends, there will be no
benefits with respect to the bulk of the cost of operations which includes store running costs –
rent, and employee cost (employee cost is ~20% of sales of which ~80% is store level costs). In
fact, DD operations could be long-gestation, in our view (as it will most likely be a dine-in
model on a high street and hence high rentals and fixed costs).
Given the price-sensitive nature of the Indian market, we believe that the company will
design its menu offerings at price points that will be guided by the benchmark set by
Café Coffee Day, Barista and Mad Over Donuts – a cup of coffee at ~Rs50 and a
doughnut at ~Rs40.
Capex for setting up a store under Dunkin Donuts will likely be higher than Domino’s
(average cost of setting up a store is Rs7 mn for a Domino’s outlet) since it will likely be a
dine-in model as compared to the delivery and takeaway model of Dominos.
The tie-up will likely be EPS dilutive in the initial years.
Good growth, but it’s all in the price. 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 37X FY2012E). Our EPS
estimates are Rs11.5 and Rs14.5 for FY2011E and FY2012E, respectively. We value JUBI on
DCF and have a target price of Rs450. Maintain SELL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jubilant Foodworks (JUBI)
Consumer products
Tie-up with Dunkin Donuts – limited opportunity in the near term. JUBI
announced an exclusive tie-up with Dunkin Donuts (DD) to develop and operate the
brand in India. The tie-up provides visibility on JUBI’s cash flow utilization and will likely
help address the cyclicality in its business model (pizza business is cyclical due to high
average bill value, in our view). However, leveraging benefits will likely be restricted to
management bandwidth and utilization of commissaries and there will likely be no
benefits at store-level operations. In fact, DD operations could be long-gestation, in our
view. Moreover, market development will also be a key challenge (the concept of
donut). As per media reports, JUBI plans to open 25-30 DD outlets over the next 2-3
years.
JUBI ties up with Dunkin Donuts
Jubilant Foodworks announced an exclusive tie-up with Dunkin Donuts to develop and operate the
brand in India. Dunkin Donuts is a US-based coffee and baked foods chain. Key menu offerings
include coffee, doughnuts, bagels and muffins. It has more than 9,700 restaurants globally in 31
countries. Global system-wide sales are US$6 bn.
We believe JUBI is following the model of Alsea which is a Mexico-based company engaged in the
food service sector. Its activities include the operation of Domino’s Pizza, Burger King, Chili’s Grill
& Bar, California Pizza Kitchen, PF Chang and Starbucks Coffee.
Long-term positive; however, limited opportunity in near term
Details of the agreement (royalty, tenure etc.) are not yet disclosed, our views, based on the
available information, are:
The agreement potentially addresses a huge business risk in JUBI’s current model – linkage to
economic cycle and consumer sentiments in key metros of Mumbai and Delhi (despite the
under-penetrated nature of business, Domino’s had just 6% same store growth in FY2009 due
to its high bill value).
Visibility on utilization of cash (the company has recently turned FCF positive).
In terms of operating leverage, we believe that while the company will have benefits in terms of
(1) management bandwidth, (2) utilization of commissaries, and (3) adspends, there will be no
benefits with respect to the bulk of the cost of operations which includes store running costs –
rent, and employee cost (employee cost is ~20% of sales of which ~80% is store level costs). In
fact, DD operations could be long-gestation, in our view (as it will most likely be a dine-in
model on a high street and hence high rentals and fixed costs).
Given the price-sensitive nature of the Indian market, we believe that the company will
design its menu offerings at price points that will be guided by the benchmark set by
Café Coffee Day, Barista and Mad Over Donuts – a cup of coffee at ~Rs50 and a
doughnut at ~Rs40.
Capex for setting up a store under Dunkin Donuts will likely be higher than Domino’s
(average cost of setting up a store is Rs7 mn for a Domino’s outlet) since it will likely be a
dine-in model as compared to the delivery and takeaway model of Dominos.
The tie-up will likely be EPS dilutive in the initial years.
Good growth, but it’s all in the price. 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 37X FY2012E). Our EPS
estimates are Rs11.5 and Rs14.5 for FY2011E and FY2012E, respectively. We value JUBI on
DCF and have a target price of Rs450. Maintain SELL.
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