UBS: Sell Jubilant FoodWorks - Expensive pizza

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UBS Investment Research
Jubilant FoodWorks
Expensive pizza
�� 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 an 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.

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