Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
47% CAGR FY11-13E; maintaining Buy with a target price of INR880
The key highlights of JFL's FY11 annual results were average store revenue of
INR20m (with the best store contributing 2.5x the average), negative working
capital and a 200bps improvement in operating margins. Cash of INR500m (25%
of its balance sheet size), zero debt and capex of INR730m (for 72 stores and
increasing commissary sizes) were the highlights of its annual balance sheet. With
FCF sufficient to fund its future capex plans, JFL is in a position to deliver a 47%
earnings CAGR FY11-13E. We maintain Buy with an INR880 target price
40% of revenue from three cities, national average of INR20m per store
JFL has executed its store openings aggressively (and generated similar revenue
per store in Tier 2/3 cities as at its top tier stores). Its stores in New Delhi, Mumbai
and Bangalore continue to generate 40% of its revenues. While on average each
of its stores generated INR20m, its best store generates revenues 2.5x the
national average.
Negative working capital and high gross margins
The effects of the company’s efficient supply chain are reflected in its relatively
high gross margins and negative working capital. We had estimated 69% gross
margins for FY11 while JFL has delivered ~71% during the year. We have factored
in gross margins of 69% for FY12E and FY13E.
Maintaining Buy with a target price of INR880
Our DCF-based target price of INR880 is based on a cost of equity of 14.8% and
4.5% terminal growth. We are 9% ahead of consensus on FY12 earnings and 12%
ahead of consensus on FY13 earnings, even though our revenue assumptions are
in line with consensus, due to the operating leverage that we believe JFL should
generate following a 37% revenue CAGR in FY11-13E. At our target price of
INR880 per share, the stock would trade at 36x FY13. The stock is currently
trading at 43x FY12. Downside risks include an increase in the royalty charge to
Domino’s International and execution risk on the opening of new stores.
Key investment concerns
Significant dependence on the master franchise agreement with Domino’s
International
At present, JFL relies to a large extent on its agreement with Domino’s International with
respect to its business operations. The master franchise agreement was renewed in
September 2009 for another term of 15 years, which will continue until 31 December 2024
and is further extendable for a period of ten years (subject to the fulfilment of certain
conditions). Should JFL default on the provisions of the agreement, then Domino’s
International has the right to terminate the agreement.
Royalty to Domino’s may increase
JFL paid a royalty of 3% on its revenues in FY10 and a sum of $5,000 for each new store
opened. While the agreement with Domino’s is valid until 2024, it is possible that the royalty
may increase going forward. However, management clarified that the terms of the
agreement are valid until 2024. The company also collects royalties from its sub-franchisee in
Sri Lanka, DP Lanka, which it shares with Domino’s. We believe that this amount is not
material given that the Indian operations are far bigger than the current operations in Sri
Lanka.
Execution risks in new store openings
JFL’s store sales depend on same store sales and new store openings. The same store sales
growth refers to year-on-year growth in sales for stores in operation for the whole of the year
in both the years. Same store sales account for a smaller portion of the company’s store
sales as compared with sales from new store openings. The opening of new stores reduces
the delivery area for the existing stores, resulting in a reduction in sales of the existing store
and overall same store sales growth. In order to expand JFL’s business operations
successfully, new stores need to be opened on schedule and operated in a profitable
manner
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
47% CAGR FY11-13E; maintaining Buy with a target price of INR880
The key highlights of JFL's FY11 annual results were average store revenue of
INR20m (with the best store contributing 2.5x the average), negative working
capital and a 200bps improvement in operating margins. Cash of INR500m (25%
of its balance sheet size), zero debt and capex of INR730m (for 72 stores and
increasing commissary sizes) were the highlights of its annual balance sheet. With
FCF sufficient to fund its future capex plans, JFL is in a position to deliver a 47%
earnings CAGR FY11-13E. We maintain Buy with an INR880 target price
40% of revenue from three cities, national average of INR20m per store
JFL has executed its store openings aggressively (and generated similar revenue
per store in Tier 2/3 cities as at its top tier stores). Its stores in New Delhi, Mumbai
and Bangalore continue to generate 40% of its revenues. While on average each
of its stores generated INR20m, its best store generates revenues 2.5x the
national average.
Negative working capital and high gross margins
The effects of the company’s efficient supply chain are reflected in its relatively
high gross margins and negative working capital. We had estimated 69% gross
margins for FY11 while JFL has delivered ~71% during the year. We have factored
in gross margins of 69% for FY12E and FY13E.
Maintaining Buy with a target price of INR880
Our DCF-based target price of INR880 is based on a cost of equity of 14.8% and
4.5% terminal growth. We are 9% ahead of consensus on FY12 earnings and 12%
ahead of consensus on FY13 earnings, even though our revenue assumptions are
in line with consensus, due to the operating leverage that we believe JFL should
generate following a 37% revenue CAGR in FY11-13E. At our target price of
INR880 per share, the stock would trade at 36x FY13. The stock is currently
trading at 43x FY12. Downside risks include an increase in the royalty charge to
Domino’s International and execution risk on the opening of new stores.
Key investment concerns
Significant dependence on the master franchise agreement with Domino’s
International
At present, JFL relies to a large extent on its agreement with Domino’s International with
respect to its business operations. The master franchise agreement was renewed in
September 2009 for another term of 15 years, which will continue until 31 December 2024
and is further extendable for a period of ten years (subject to the fulfilment of certain
conditions). Should JFL default on the provisions of the agreement, then Domino’s
International has the right to terminate the agreement.
Royalty to Domino’s may increase
JFL paid a royalty of 3% on its revenues in FY10 and a sum of $5,000 for each new store
opened. While the agreement with Domino’s is valid until 2024, it is possible that the royalty
may increase going forward. However, management clarified that the terms of the
agreement are valid until 2024. The company also collects royalties from its sub-franchisee in
Sri Lanka, DP Lanka, which it shares with Domino’s. We believe that this amount is not
material given that the Indian operations are far bigger than the current operations in Sri
Lanka.
Execution risks in new store openings
JFL’s store sales depend on same store sales and new store openings. The same store sales
growth refers to year-on-year growth in sales for stores in operation for the whole of the year
in both the years. Same store sales account for a smaller portion of the company’s store
sales as compared with sales from new store openings. The opening of new stores reduces
the delivery area for the existing stores, resulting in a reduction in sales of the existing store
and overall same store sales growth. In order to expand JFL’s business operations
successfully, new stores need to be opened on schedule and operated in a profitable
manner
No comments:
Post a Comment