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Jubilant Foodworks (JUBI)
Consumer products
Early warning signals visible. While JUBI reported 47% sales growth, same-store
growth (SSG) of 27% was below estimates. Most important, the SSG volumes are
<20%, in our view (possibly due to ~10% price increase yoy for an already expensive
product—average price of a pizza is ~Rs200 and average bill value is >Rs300, in our
view). It is likely deviating from its policy of limiting price increases to ~6% p.a. as it
looks to protect gross margins (GM). Despite price hikes, GM declined 160 bps yoy.
Growth in rent in line with sales growth likely indicates slower-than-expected ramp-up
of newer stores, in our view. JUBI is planning to increase marketing spends to address
any potential impact of demand slowdown. SELL. Our DCF-based TP remains Rs750.
Base effect + food inflation = lower sales growth and gross margin
Jubilant Foodworks reported net sales of Rs2,403 mn (+47%, KIE estimate Rs2,560 mn), EBITDA
of Rs436 mn (+47%, KIE estimate Rs489 mn) and PAT of Rs246 mn (+33%, KIE estimate Rs282
mn).
�� Sales growth of 47% is driven by 27% same-store growth (SSG) of which pricing growth is
~10%. In FY2011 and 1QFY12, SSG was 37%, significantly higher than the average of the six
years prior to that of 20%. 27% SSG this quarter is on the back of 44% SSG in 2QFY11. Most
important, the SSG volumes are <20%, in our view (possibly due to ~10% price increase yoy
for an already expensive product—average price of a pizza is ~Rs200 and average bill value is
>Rs300, in our view). It is likely deviating from its policy of limiting price increases to ~6% p.a.
as it looks to protect gross margins (GM).
�� Despite price hikes, GM declined 162 bps to 73.6% due to higher raw material cost
(inflationary milk price - cheese is an important ingredient for the company’s key products). This
is the lowest gross margin reported by the company in the past 12 quarters. Staff cost and rent
cost were flat as % of sales on yoy basis. Benefits of operating leverage were seen in other
expenditure (138 bps) which helped the company maintain flat EBITDA margin at 18%. Growth
in rent in line with sales growth likely indicates slower-than-budgeted ramp-up of newer stores,
in our view.
�� As of September 30, 2011, the company had investments of Rs480 mn across fixed deposits,
liquid mutual funds and Rs68 mn towards wholly owned subsidiary (Jubilant Foodworks Lanka
Pvt. Ltd). Higher other income of Rs15 mn is likely on account of income from its liquid
investments as well as interest income from the inter-corporate debt (ICD) of Rs300 mn given in
September 2010. According to the company, the ICD will be repaid in 3QFY12E. The entity to
which the loan has been granted has not been disclosed by the company.
�� JUBI is treating the expenses incurred (Rs9 mn or ~4% of 2QFY12 PAT) to ‘operationalise’
Dunkin Donuts as an ‘exceptional’ item. The expenses include staff costs of Rs3.9 mn,
other expenditure of Rs5 mn and depreciation of Rs0.4 mn. As these expenses are in the
nature of normal incubation expense for any new venture within an organization, in our
view this does not necessarily need to be treated as exceptional item.
�� 19 new Domino’s stores were opened in 2QFY12 and total number of stores as of
September 30, 2011 was 411. The company plans to open 80 new stores in FY2012E – it
has launched 33 new stores in 1HFY12 and has signed an additional 29 stores for
opening this fiscal. Number of employees as of September 30, 2011 was 13,539 (an
increase of 2,850 employees yoy).
Key takeaways from the concall with the management
�� The management highlighted that there are early signs of slowdown in discretionary
spending categories. This was manifested in Titan and Asian Paints results and is in line
with our note dated August 30, 2011 where we had highlighted that impact of food
inflation on consumer demand is underestimated and consumer demand is not parabolic.
In order to tackle such slowdown, JUBI plans to increase its market development activities
and adspends in 2HFY12E.
�� The company is planning another price hike of ~3% in November 2011. It has already
taken price hike of 2.5% in November 2010, 5% in April 2011 and 3% in mid-August
2011. The company typically takes ~6% price hike annually and in our view, gross margin
pressure has likely forced it to take series of price hikes this year.
Our view: It is surprising that even with very healthy margins of ~18% and operating in a
highly competitive and growing market, the company chose to risk volume growth by
implementing price increases to recover input cost inflation (in an environment of likely
decline in consumer confidence).
�� The company has set up its operations in Sri Lanka and plans to open 25-30 Domino’s
stores in the next 5 years.
�� JUBI is in the process of relocating two commissaries (in the West and East) and setting
up a new commissary in Chandigarh for Domino’s operations. A commissary for Dunkin
Donuts is also being set up.
�� Inventory has increased to Rs192 mn as of September 30, 2011 from Rs100 mn as of
September 30, 2010 primarily because the company has stocked up raw material for the
peak season. In our view, this may likely help it manage gross margin in this quarter
�� Loans and advances as on September 30, 2011 includes ICD of Rs300 mn and an amount
recoverable from a business partner amounting to ~Rs100 mn
Retain 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. We are positive on the tie-up with Dunkin Donuts from a long-term perspective as it
addresses the cyclicality in Dominos business model (pizza business is cyclical due to high
average bill value, in our view). Despite the strong near-term earnings forecast and favorable
view, we find it difficult to justify the current valuation of the company (PE of 34X FY2013E).
We have cut our FY2012E and FY2013E earnings estimates by ~3% as we adjust for the
earnings miss in the 2QFY12. Our EPS estimates for FY2012E and FY2013E are Rs16.1 and
Rs23.6, respectively. We continue to value JUBI on DCF with a target price of Rs750.
Maintain SELL. Upside risk is better-than-expected sales growth
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jubilant Foodworks (JUBI)
Consumer products
Early warning signals visible. While JUBI reported 47% sales growth, same-store
growth (SSG) of 27% was below estimates. Most important, the SSG volumes are
<20%, in our view (possibly due to ~10% price increase yoy for an already expensive
product—average price of a pizza is ~Rs200 and average bill value is >Rs300, in our
view). It is likely deviating from its policy of limiting price increases to ~6% p.a. as it
looks to protect gross margins (GM). Despite price hikes, GM declined 160 bps yoy.
Growth in rent in line with sales growth likely indicates slower-than-expected ramp-up
of newer stores, in our view. JUBI is planning to increase marketing spends to address
any potential impact of demand slowdown. SELL. Our DCF-based TP remains Rs750.
Base effect + food inflation = lower sales growth and gross margin
Jubilant Foodworks reported net sales of Rs2,403 mn (+47%, KIE estimate Rs2,560 mn), EBITDA
of Rs436 mn (+47%, KIE estimate Rs489 mn) and PAT of Rs246 mn (+33%, KIE estimate Rs282
mn).
�� Sales growth of 47% is driven by 27% same-store growth (SSG) of which pricing growth is
~10%. In FY2011 and 1QFY12, SSG was 37%, significantly higher than the average of the six
years prior to that of 20%. 27% SSG this quarter is on the back of 44% SSG in 2QFY11. Most
important, the SSG volumes are <20%, in our view (possibly due to ~10% price increase yoy
for an already expensive product—average price of a pizza is ~Rs200 and average bill value is
>Rs300, in our view). It is likely deviating from its policy of limiting price increases to ~6% p.a.
as it looks to protect gross margins (GM).
�� Despite price hikes, GM declined 162 bps to 73.6% due to higher raw material cost
(inflationary milk price - cheese is an important ingredient for the company’s key products). This
is the lowest gross margin reported by the company in the past 12 quarters. Staff cost and rent
cost were flat as % of sales on yoy basis. Benefits of operating leverage were seen in other
expenditure (138 bps) which helped the company maintain flat EBITDA margin at 18%. Growth
in rent in line with sales growth likely indicates slower-than-budgeted ramp-up of newer stores,
in our view.
�� As of September 30, 2011, the company had investments of Rs480 mn across fixed deposits,
liquid mutual funds and Rs68 mn towards wholly owned subsidiary (Jubilant Foodworks Lanka
Pvt. Ltd). Higher other income of Rs15 mn is likely on account of income from its liquid
investments as well as interest income from the inter-corporate debt (ICD) of Rs300 mn given in
September 2010. According to the company, the ICD will be repaid in 3QFY12E. The entity to
which the loan has been granted has not been disclosed by the company.
�� JUBI is treating the expenses incurred (Rs9 mn or ~4% of 2QFY12 PAT) to ‘operationalise’
Dunkin Donuts as an ‘exceptional’ item. The expenses include staff costs of Rs3.9 mn,
other expenditure of Rs5 mn and depreciation of Rs0.4 mn. As these expenses are in the
nature of normal incubation expense for any new venture within an organization, in our
view this does not necessarily need to be treated as exceptional item.
�� 19 new Domino’s stores were opened in 2QFY12 and total number of stores as of
September 30, 2011 was 411. The company plans to open 80 new stores in FY2012E – it
has launched 33 new stores in 1HFY12 and has signed an additional 29 stores for
opening this fiscal. Number of employees as of September 30, 2011 was 13,539 (an
increase of 2,850 employees yoy).
Key takeaways from the concall with the management
�� The management highlighted that there are early signs of slowdown in discretionary
spending categories. This was manifested in Titan and Asian Paints results and is in line
with our note dated August 30, 2011 where we had highlighted that impact of food
inflation on consumer demand is underestimated and consumer demand is not parabolic.
In order to tackle such slowdown, JUBI plans to increase its market development activities
and adspends in 2HFY12E.
�� The company is planning another price hike of ~3% in November 2011. It has already
taken price hike of 2.5% in November 2010, 5% in April 2011 and 3% in mid-August
2011. The company typically takes ~6% price hike annually and in our view, gross margin
pressure has likely forced it to take series of price hikes this year.
Our view: It is surprising that even with very healthy margins of ~18% and operating in a
highly competitive and growing market, the company chose to risk volume growth by
implementing price increases to recover input cost inflation (in an environment of likely
decline in consumer confidence).
�� The company has set up its operations in Sri Lanka and plans to open 25-30 Domino’s
stores in the next 5 years.
�� JUBI is in the process of relocating two commissaries (in the West and East) and setting
up a new commissary in Chandigarh for Domino’s operations. A commissary for Dunkin
Donuts is also being set up.
�� Inventory has increased to Rs192 mn as of September 30, 2011 from Rs100 mn as of
September 30, 2010 primarily because the company has stocked up raw material for the
peak season. In our view, this may likely help it manage gross margin in this quarter
�� Loans and advances as on September 30, 2011 includes ICD of Rs300 mn and an amount
recoverable from a business partner amounting to ~Rs100 mn
Retain 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. We are positive on the tie-up with Dunkin Donuts from a long-term perspective as it
addresses the cyclicality in Dominos business model (pizza business is cyclical due to high
average bill value, in our view). Despite the strong near-term earnings forecast and favorable
view, we find it difficult to justify the current valuation of the company (PE of 34X FY2013E).
We have cut our FY2012E and FY2013E earnings estimates by ~3% as we adjust for the
earnings miss in the 2QFY12. Our EPS estimates for FY2012E and FY2013E are Rs16.1 and
Rs23.6, respectively. We continue to value JUBI on DCF with a target price of Rs750.
Maintain SELL. Upside risk is better-than-expected sales growth
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