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UBS Investment Research
Jubilant FoodWorks
Expensive pizza [EXTRACT]
„ Dominant pizza and food services company
Jubilant FoodWorks (JUBI) has the exclusive franchise for Domino’s Pizza in
India. It is the market leader in the formal pizza market with a 50% share and a
70% share in the pizza home delivery segment in India. We believe JUBI is well
positioned to benefit from its strong presence in this high-growth market. We
forecast a 25% CAGR for the formal food services industry over FY11-16, with an
implied 45% CAGR for the pizza market over the same period.
„ Strong earnings growth and ROE
JUBI’s FY06-11 EBITDA CAGR was 61%, driven by a 48% revenue CAGR. We
forecast a FY11-13 earnings CAGR of 44%, based on our assumptions of a 43%
revenue CAGR, a 170bp improvement in the EBITDA margin over the same
period, and an FY12 ROE of 411%.
„ Increasing competition
JUBI will likely face increasing competition (Yum! Brands plans to open 300
Pizza Hut Delivery [PHD] outlets in India by 2015, up from 27 currently). While
this might not impact JUBI’s FY12-13 earnings, the long-term growth outlook has
a significant impact on the valuation for a company with high earnings growth.
„ Valuation: initiate coverage with a Sell rating and a PT of Rs800.00
JUBI is trading at 41x FY13E PE, a significant premium to UBS’s India consumer
universe, implying that either its growth rates are sustainable beyond the next three
years, or that the company will beat consensus estimates by a wide margin.
However, our analysis suggests a change in consumer preference beyond what we
think is reasonable at this stage would be required for JUBI’s growth rates to beat
forecasts for the next five to seven years. We base our price target on 35x FY13E
PE.
Investment Thesis
We initiate coverage of Jubilant FoodWorks (JUBI) with a Sell rating and a price
target of Rs800.00 (15% below the current share price). JUBI is the market leader
in the formal pizza market with a 50% share and a 70% share in the pizza home
delivery segment in India. It has the exclusive franchise for Domino’s Pizza in
India and recently entered into an agreement with Dunkin’ Donuts for the
exclusive franchise to operate outlets in India.
While we believe JUBI is well positioned to benefit from its strong presence in a
high-growth market, the growth story appears to be fully reflected in its share
price (41x FY13E PE). We believe the share price implies that either the
company will continue to beat consensus estimates (consensus and we forecast a
44% EPS CAGR for FY11-13) by a wide margin, or that the current high
growth levels can be sustained beyond the next three years. However, our
analysis suggests a change in consumer preference beyond what we think is
reasonable at this stage would be required for JUBI’s growth rates to beat
forecasts for next five to seven years (see Table 7).
We think maintaining high growth rates will be challenging because of increasing
competition (Yum! Brands plans to open 300 Pizza Hut Delivery [PHD] outlets in
India by 2015, up from 27 currently). While this might not impact our FY11-13
growth estimates, we think the long-term growth outlook has a significant impact
on the valuation for a company in a high-growth market.
Food services companies in developed markets tend to de-rate once they have
passed the high growth phase, especially in economic downturns.
At 41x FY13E PE, JUBI is trading at a 75% premium to the UBS India
consumer universe. We believe the stock will de-rate from the current level.
Key catalysts
Negative catalysts
Q Slower-than-expected same-store-sales growth (SSSG) due to economic
downturns: The consumption of JUBI’s products is discretionary and
therefore affected by economic downturns (as in FY09 when its SSSG was
6%). We expect SSSG of 20% and 18% in FY12 and FY13, respectively
Q Increasing competition: We expect competition to intensify significantly in
the formal and informal food services markets and in the pizza delivery
segment. Yum! Brands plans to increase PHD outlets from 27 to 300 by
2015. Om Pizza & Eats, the franchisee for Papa Johns, has raised funds of
Rs500m from TVS Capital for expansion.
Q Slowdown in outlet expansion: Outlet expansion can pose execution
challenges, especially as newer outlets tend to be more dispersed and in tier-
2 cities.
Positive catalysts
Q Faster rollout of Dunkin’ Donuts: We have not built in potential revenue
from the Dunkin’ Donuts rollout. JUBI targets to open around 80 outlets in
the next five years, with the first opening planned for Q4 FY12. We do not
expect Dunkin’ Donuts to have a material impact on earnings over our
forecast period.
Q Margin expansion ahead of estimates: JUBI’s EBITDA margin increased
more than 200bp YoY in FY11 to 17.6%. It expanded further to 19.1% in Q1
FY12, due mainly to strong SSSG. Management noted that the Q1 FY12
margin was not sustainable; however, its FY12 margin might be higher than
in FY11.
Risks
Q Economic slowdown: An economic slowdown or slower growth in
disposable income would limit discretionary spending and negatively impact
pizza sales. In FY09, JUBI’s SSSG fell to 6% and earnings declined 6% on
account of the economic downturn.
Q Competition: We expect competition to intensify significantly in the formal
food services market as well as the pizza delivery segment. Rising
investments from private equity investors in formal food service businesses,
and especially in the pizza home delivery format, suggest a more competitive
market for JUBI.
Q Cost pressure leading to lower margins: The cost of cheese, which
constitutes 30% of the total raw material cost, has increased substantially in
FY11 causing a 40bp decline in the gross margin. The staff cost (20% of
sales) CAGR was 53% over FY06-11 compared with a 48% revenue CAGR
for the same period. Although JUBI increases its prices twice a year by 4-5%,
it also needs to maintain its product competitiveness to sustain high growth
rates and market share.
Q Changing tastes of customers: We believe the initial phase of penetration
by the pizza market in India was easier (there are many vegetarian options
and the pizzas are hot on delivery—key culinary parameters for Indian
consumers). However, we think penetration will become more difficult as
pizza is not an indigenous food.
Q Termination of master franchise agreement or higher franchise fee.
JUBI has exclusive rights to the Domino’s brand in India, Sri Lanka,
Bangladesh and Nepal until 31 December 2024 and is renewable for a period
of 10 years. Termination of the master agreement by Domino’s International
presents significant risk, although we think this is unlikely. In addition,
franchise fees have been constant at around 3% of sales; any increase in the
fee could affect margins.
Valuation and basis for our price target
We base our price target on 35x FY13E PE (the average mean multiple is 38x).
JUBI’s share price has rerated significantly since listing in February 2010, as it
continued to beat consensus estimates for outlet additions and earnings growth.
The re-rating is also reflected in the increase in FII ownership, from 17% in June
2010 to 33% in June 2011. It now trades at a standard deviation of almost + 2 to
its historical (albeit limited) trading range. At FY12E/FY13E PE of 60x/41x,
JUBI is trading at a 75% premium to the UBS India consumer universe.
We believe the current share price implies that either the company will continue
to beat estimates (consensus and we forecast a 44% EPS CAGR for FY11-13)
by a wide margin or that it can sustain the current high growth levels beyond the
next two to three years. We undertook a sensitivities analysis of different growth
scenarios for JUBI where we tried to reconcile JUBI’s high growth rates with
the implied market size of the pizza segment and the formal food services
segment. However, our analysis suggests a change in consumer preference
beyond what we think is reasonable at this stage would be required for JUBI’s
growth rates to continue to beat forecasts for next five to seven years. Our price
target is based on 35x FY13E PE.
We think the higher multiples for JUBI, compared with global food services
companies, are justified, given the early stage of the growth cycle of the formal
food services market in India and JUBI’s position to benefit from this.
Q Jubilant FoodWorks
Jubilant FoodWorks (JUBI) is largest food service company in India, with a
network of 392 outlets (as of 30 June 2011). JUBI has the exclusive franchise
for Domino's Pizza in India, Nepal, Bangladesh and Sri Lanka. It is the market
leader in the formal pizza market with a 50% market share and a 70% share in
the pizza home delivery segment in India. It has expanded its portfolio by
entering into an alliance with Dunkin' Donuts to develop Dunkin' Donuts'
operations in India, and by operating restaurants in India.
Q Statement of Risk
We believe key risks for Jubilant FoodWorks are an economic slowdown, and
increasing competition and cost pressures as these would have a negative impact
on growth and margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Jubilant FoodWorks
Expensive pizza [EXTRACT]
„ Dominant pizza and food services company
Jubilant FoodWorks (JUBI) has the exclusive franchise for Domino’s Pizza in
India. It is the market leader in the formal pizza market with a 50% share and a
70% share in the pizza home delivery segment in India. We believe JUBI is well
positioned to benefit from its strong presence in this high-growth market. We
forecast a 25% CAGR for the formal food services industry over FY11-16, with an
implied 45% CAGR for the pizza market over the same period.
„ Strong earnings growth and ROE
JUBI’s FY06-11 EBITDA CAGR was 61%, driven by a 48% revenue CAGR. We
forecast a FY11-13 earnings CAGR of 44%, based on our assumptions of a 43%
revenue CAGR, a 170bp improvement in the EBITDA margin over the same
period, and an FY12 ROE of 411%.
„ Increasing competition
JUBI will likely face increasing competition (Yum! Brands plans to open 300
Pizza Hut Delivery [PHD] outlets in India by 2015, up from 27 currently). While
this might not impact JUBI’s FY12-13 earnings, the long-term growth outlook has
a significant impact on the valuation for a company with high earnings growth.
„ Valuation: initiate coverage with a Sell rating and a PT of Rs800.00
JUBI is trading at 41x FY13E PE, a significant premium to UBS’s India consumer
universe, implying that either its growth rates are sustainable beyond the next three
years, or that the company will beat consensus estimates by a wide margin.
However, our analysis suggests a change in consumer preference beyond what we
think is reasonable at this stage would be required for JUBI’s growth rates to beat
forecasts for the next five to seven years. We base our price target on 35x FY13E
PE.
Investment Thesis
We initiate coverage of Jubilant FoodWorks (JUBI) with a Sell rating and a price
target of Rs800.00 (15% below the current share price). JUBI is the market leader
in the formal pizza market with a 50% share and a 70% share in the pizza home
delivery segment in India. It has the exclusive franchise for Domino’s Pizza in
India and recently entered into an agreement with Dunkin’ Donuts for the
exclusive franchise to operate outlets in India.
While we believe JUBI is well positioned to benefit from its strong presence in a
high-growth market, the growth story appears to be fully reflected in its share
price (41x FY13E PE). We believe the share price implies that either the
company will continue to beat consensus estimates (consensus and we forecast a
44% EPS CAGR for FY11-13) by a wide margin, or that the current high
growth levels can be sustained beyond the next three years. However, our
analysis suggests a change in consumer preference beyond what we think is
reasonable at this stage would be required for JUBI’s growth rates to beat
forecasts for next five to seven years (see Table 7).
We think maintaining high growth rates will be challenging because of increasing
competition (Yum! Brands plans to open 300 Pizza Hut Delivery [PHD] outlets in
India by 2015, up from 27 currently). While this might not impact our FY11-13
growth estimates, we think the long-term growth outlook has a significant impact
on the valuation for a company in a high-growth market.
Food services companies in developed markets tend to de-rate once they have
passed the high growth phase, especially in economic downturns.
At 41x FY13E PE, JUBI is trading at a 75% premium to the UBS India
consumer universe. We believe the stock will de-rate from the current level.
Key catalysts
Negative catalysts
Q Slower-than-expected same-store-sales growth (SSSG) due to economic
downturns: The consumption of JUBI’s products is discretionary and
therefore affected by economic downturns (as in FY09 when its SSSG was
6%). We expect SSSG of 20% and 18% in FY12 and FY13, respectively
Q Increasing competition: We expect competition to intensify significantly in
the formal and informal food services markets and in the pizza delivery
segment. Yum! Brands plans to increase PHD outlets from 27 to 300 by
2015. Om Pizza & Eats, the franchisee for Papa Johns, has raised funds of
Rs500m from TVS Capital for expansion.
Q Slowdown in outlet expansion: Outlet expansion can pose execution
challenges, especially as newer outlets tend to be more dispersed and in tier-
2 cities.
Positive catalysts
Q Faster rollout of Dunkin’ Donuts: We have not built in potential revenue
from the Dunkin’ Donuts rollout. JUBI targets to open around 80 outlets in
the next five years, with the first opening planned for Q4 FY12. We do not
expect Dunkin’ Donuts to have a material impact on earnings over our
forecast period.
Q Margin expansion ahead of estimates: JUBI’s EBITDA margin increased
more than 200bp YoY in FY11 to 17.6%. It expanded further to 19.1% in Q1
FY12, due mainly to strong SSSG. Management noted that the Q1 FY12
margin was not sustainable; however, its FY12 margin might be higher than
in FY11.
Risks
Q Economic slowdown: An economic slowdown or slower growth in
disposable income would limit discretionary spending and negatively impact
pizza sales. In FY09, JUBI’s SSSG fell to 6% and earnings declined 6% on
account of the economic downturn.
Q Competition: We expect competition to intensify significantly in the formal
food services market as well as the pizza delivery segment. Rising
investments from private equity investors in formal food service businesses,
and especially in the pizza home delivery format, suggest a more competitive
market for JUBI.
Q Cost pressure leading to lower margins: The cost of cheese, which
constitutes 30% of the total raw material cost, has increased substantially in
FY11 causing a 40bp decline in the gross margin. The staff cost (20% of
sales) CAGR was 53% over FY06-11 compared with a 48% revenue CAGR
for the same period. Although JUBI increases its prices twice a year by 4-5%,
it also needs to maintain its product competitiveness to sustain high growth
rates and market share.
Q Changing tastes of customers: We believe the initial phase of penetration
by the pizza market in India was easier (there are many vegetarian options
and the pizzas are hot on delivery—key culinary parameters for Indian
consumers). However, we think penetration will become more difficult as
pizza is not an indigenous food.
Q Termination of master franchise agreement or higher franchise fee.
JUBI has exclusive rights to the Domino’s brand in India, Sri Lanka,
Bangladesh and Nepal until 31 December 2024 and is renewable for a period
of 10 years. Termination of the master agreement by Domino’s International
presents significant risk, although we think this is unlikely. In addition,
franchise fees have been constant at around 3% of sales; any increase in the
fee could affect margins.
Valuation and basis for our price target
We base our price target on 35x FY13E PE (the average mean multiple is 38x).
JUBI’s share price has rerated significantly since listing in February 2010, as it
continued to beat consensus estimates for outlet additions and earnings growth.
The re-rating is also reflected in the increase in FII ownership, from 17% in June
2010 to 33% in June 2011. It now trades at a standard deviation of almost + 2 to
its historical (albeit limited) trading range. At FY12E/FY13E PE of 60x/41x,
JUBI is trading at a 75% premium to the UBS India consumer universe.
We believe the current share price implies that either the company will continue
to beat estimates (consensus and we forecast a 44% EPS CAGR for FY11-13)
by a wide margin or that it can sustain the current high growth levels beyond the
next two to three years. We undertook a sensitivities analysis of different growth
scenarios for JUBI where we tried to reconcile JUBI’s high growth rates with
the implied market size of the pizza segment and the formal food services
segment. However, our analysis suggests a change in consumer preference
beyond what we think is reasonable at this stage would be required for JUBI’s
growth rates to continue to beat forecasts for next five to seven years. Our price
target is based on 35x FY13E PE.
We think the higher multiples for JUBI, compared with global food services
companies, are justified, given the early stage of the growth cycle of the formal
food services market in India and JUBI’s position to benefit from this.
Q Jubilant FoodWorks
Jubilant FoodWorks (JUBI) is largest food service company in India, with a
network of 392 outlets (as of 30 June 2011). JUBI has the exclusive franchise
for Domino's Pizza in India, Nepal, Bangladesh and Sri Lanka. It is the market
leader in the formal pizza market with a 50% market share and a 70% share in
the pizza home delivery segment in India. It has expanded its portfolio by
entering into an alliance with Dunkin' Donuts to develop Dunkin' Donuts'
operations in India, and by operating restaurants in India.
Q Statement of Risk
We believe key risks for Jubilant FoodWorks are an economic slowdown, and
increasing competition and cost pressures as these would have a negative impact
on growth and margins.
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