Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jubilant Foodworks (JUBI)
Consumer products
Good growth, but it’s in the price. JUBI reported 35% same-store growth in 3Q.
EBITDA margin expanded a modest ~70 bps on the back of operating leverage in rent
and G&A negated by higher employee costs (up 78%) and lower gross margins. This is
in line with our view that JUBI's business model is not like a typical restaurant as of
now; employee costs are mostly variable due to the delivery-based business model. It
had 12,462 employees as of December 31, 2010 (8,304 in base)—managing growth,
particularly challenges in human resources, will be a key monitorable.
Same-store growth trajectory and margins likely at peak
Jubilant Foodworks reported net sales of Rs1.9 bn (+58%), EBITDA of Rs322 mn (+65%) and PAT
of Rs190 mn (+67%).
Sales growth of 58% is led by same-store growth (SSG) of 35% (44% in 2Q). SSG in 9MFY11
of ~40% is significantly higher than the average of 20% in the last six years.
EBITDA margin expanded 70 bps—operating leverage benefit in G&A (260 bps) and rent costs
(110 bps) was negated due to significantly higher staff costs (230 bps) and decline in gross
margins (80 bps).
As of December 30, 2010 the company had 364 stores across 87 cities with 25 new stores
being opened in 3QFY11.
Key monitorable
Limited operating leverage in employee costs
We reiterate that JUBI’s business model is not like a typical restaurant as of now; employee costs
are mostly variable due to the delivery-based model (which could potentially change over next 5-
10 years as the mix of tier II towns increases where Domino’s is a destination restaurant).
We highlight that while during ‘good times’ (like now, when consumer spending and sentiment is
high), the employee cost grow mostly in line with sales (with limited operating leverage benefit).
However, during times of stress on consumer spending, it could potentially face issues of
mismatch between aligning employee cost and sales (ala faced by Jet Airways during the economic
downturn in FY2009).
Employee cost for the quarter was up 78% (much ahead of sales growth of 58%) due to (1)
strong same-store growth, (2) opening of 25 new stores, (3) creation of bench-strength, and (4)
mid-year increments and implementation of special incentives.
Gross margin decline was a surprise
We note that despite implementing two price increases (totaling ~6%) during the year,
gross margins for JUBI declined 80 bps in 3QFY11. We note that food inflation will be a key
challenge for JUBI as effecting significant price increases can potentially hurt demand.
Establishing presence in tier II and III towns
The company has more than 50% single store cities. In 3QFY11 it entered new cities such as
Patna, Bhubaneswar, Bilaspur, Saharanpur, Zirakpur, Salem etc. 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.
Other takeaways from the concall
Potential tie-ups with new brands
Management commented that it is in discussions with two food brands (potentially QSR, in
our view) for a possible launch in India in 1HCY11E.
Quiznos (a sandwich chain), Burger King etc. could be potential candidates, in our
view.
Effective tax rate of 23% in FY2011E and full tax in FY2012E
JUBI had 12,462 employees as of December 31, 2010 (8,304 in base)
The company has repaid debt (from IPO proceeds as well as internal accruals) and had net
cash of Rs450 mn as of December 31, 2010
Capex of Rs550 mn incurred in 9MFY11
It plans to open its first store in Sri Lanka by March 2011
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). Building in
better-than-expected performance, our new EPS estimates are Rs11.5 (Rs10 previously) and
Rs14.5 (Rs13.1 previously) for FY2011E and FY2012E, respectively. We value JUBI on DCF
with a revised target price of Rs450 (Rs400 previously). Maintain SELL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jubilant Foodworks (JUBI)
Consumer products
Good growth, but it’s in the price. JUBI reported 35% same-store growth in 3Q.
EBITDA margin expanded a modest ~70 bps on the back of operating leverage in rent
and G&A negated by higher employee costs (up 78%) and lower gross margins. This is
in line with our view that JUBI's business model is not like a typical restaurant as of
now; employee costs are mostly variable due to the delivery-based business model. It
had 12,462 employees as of December 31, 2010 (8,304 in base)—managing growth,
particularly challenges in human resources, will be a key monitorable.
Same-store growth trajectory and margins likely at peak
Jubilant Foodworks reported net sales of Rs1.9 bn (+58%), EBITDA of Rs322 mn (+65%) and PAT
of Rs190 mn (+67%).
Sales growth of 58% is led by same-store growth (SSG) of 35% (44% in 2Q). SSG in 9MFY11
of ~40% is significantly higher than the average of 20% in the last six years.
EBITDA margin expanded 70 bps—operating leverage benefit in G&A (260 bps) and rent costs
(110 bps) was negated due to significantly higher staff costs (230 bps) and decline in gross
margins (80 bps).
As of December 30, 2010 the company had 364 stores across 87 cities with 25 new stores
being opened in 3QFY11.
Key monitorable
Limited operating leverage in employee costs
We reiterate that JUBI’s business model is not like a typical restaurant as of now; employee costs
are mostly variable due to the delivery-based model (which could potentially change over next 5-
10 years as the mix of tier II towns increases where Domino’s is a destination restaurant).
We highlight that while during ‘good times’ (like now, when consumer spending and sentiment is
high), the employee cost grow mostly in line with sales (with limited operating leverage benefit).
However, during times of stress on consumer spending, it could potentially face issues of
mismatch between aligning employee cost and sales (ala faced by Jet Airways during the economic
downturn in FY2009).
Employee cost for the quarter was up 78% (much ahead of sales growth of 58%) due to (1)
strong same-store growth, (2) opening of 25 new stores, (3) creation of bench-strength, and (4)
mid-year increments and implementation of special incentives.
Gross margin decline was a surprise
We note that despite implementing two price increases (totaling ~6%) during the year,
gross margins for JUBI declined 80 bps in 3QFY11. We note that food inflation will be a key
challenge for JUBI as effecting significant price increases can potentially hurt demand.
Establishing presence in tier II and III towns
The company has more than 50% single store cities. In 3QFY11 it entered new cities such as
Patna, Bhubaneswar, Bilaspur, Saharanpur, Zirakpur, Salem etc. 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.
Other takeaways from the concall
Potential tie-ups with new brands
Management commented that it is in discussions with two food brands (potentially QSR, in
our view) for a possible launch in India in 1HCY11E.
Quiznos (a sandwich chain), Burger King etc. could be potential candidates, in our
view.
Effective tax rate of 23% in FY2011E and full tax in FY2012E
JUBI had 12,462 employees as of December 31, 2010 (8,304 in base)
The company has repaid debt (from IPO proceeds as well as internal accruals) and had net
cash of Rs450 mn as of December 31, 2010
Capex of Rs550 mn incurred in 9MFY11
It plans to open its first store in Sri Lanka by March 2011
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). Building in
better-than-expected performance, our new EPS estimates are Rs11.5 (Rs10 previously) and
Rs14.5 (Rs13.1 previously) for FY2011E and FY2012E, respectively. We value JUBI on DCF
with a revised target price of Rs450 (Rs400 previously). Maintain SELL.
When their target was Rs.400 ,it was trading above Rs.650/- .Now they raised their target to Rs.450 /- then it will trade between Rs.700 -800.Kotak is saying " everything is good for the company but we are recommending a sell" .What an irony .Do they really planning to Buy it after putting a sell reco. ?
ReplyDelete