Equity | India | Consumer Discretionary Jubilant Foodworks...

Equity | India | Consumer Discretionary

Jubilant Foodworks Ltd.

Delivering returns but valuations stretched… November 21, 2011

REDUCE

Analyst Sunil Sewhani

+91-22- 6614 2690 [email protected] GEPL Capital Research 1

Initiating Coverage

CMP (`) Target (`)

790 709.3

Potential Upside Absolute Rating

-10.5% REDUCE

Market Info (as on 18thNov, 2011)

BSE Sensex 16371

Nifty S&P 4906

Stock Detail

BSE Group A

BSE Code 533155

NSE Code JUBLFOOD

Bloomberg Code JUBI IN

Market Cap (`bn) 55.09

Free Float (%) 45%

52wk Hi/Lo 1021 / 464

Avg. Daily Volume (NSE) 272550

Face Value / Div. per share (`) 10.00 / 0.00

Shares Outstanding (mn) 64.6

Shareholding Pattern (in %) Promoters FIIs DII Others

57.98 35.84 1.28 4.90

Financial Snapshot (`mn)

Y/E Mar FY10 FY11 FY12E FY13E

Net Sales 4,239 6,781 9,900 13,585

EBITDA 666 1,196 1,823 2,582

PAT 330 717 990 1,404

EPS 5.2 11.1 15.3 21.7

ROE (%) 46.6 46.5 41.1 38.9

ROCE (%) 36.6 45.4 41.1 38.9

P/E 67.6 50.1 51.8 36.5

EV/EBITDA 33.5 30.0 27.7 19.0

Share Price Performance

60

80

100

120

140

160

180

Nov

-10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-

11

May

-11

Jun-

11

Jul-

11

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Jubilant Food BSE SENSEX

Rel. Perf. 1Mth 3 Mths 6Mths 1Yr

Jubilant Food (10.7) (13.9) 16.0 34.8

SENSEX (2.2) (0.6) (9.5) (17.9)

Source: Company data, GEPL Capital Research

Investment Rationale

Best candidate to capture growing pie of India’s organised food industry Jubilant Foodworks Ltd. (JFL) is the market leader in the fast-growing Indian pizza market and has a 70% share in the home delivery segment. With 411 stores in India, twice the size of its nearest competitor, and with superior operations, it is best poised to capture the strong growth in India’s Quick Service Restaurant (QSR) industry driven by changing demographics such as a) rising disposable income with higher discretionary spending, b) changing food habits with general profile of population getting younger, c) increase in working population with rising share of women in it. We hence expect a robust 39.9% EPS CAGR in FY11-13E to `1.4 bn.

Growth Strategy: Hungry for more The company has expanded very aggressively in the past five years with a 29% CAGR in store count from 105 stores in FY06 to 378 stores in FY11. We expect the company to add another 160 stores in the next two years taking the total store count to 538 by FY13E. We believe JFL should be able to accomplish its store expansion plans, in view of its strong track record and rapid expansion over the last few years. We believe its store expansion strategy to be three pronged: a) penetrate existing cities, b) enter new cities (mainly tier II and III), and c) improve same store sales. The company also started operations in Sri Lanka to expand its store network, and plans to make use of web portals and increase its presence at airports.

Strong balance-sheet with robust cash flow model

Post-IPO in February, CY10, JFL repaid its debt and currently has net cash of `139 mn and investments of `480 mn (as of Q2FY12). Due to its robust cash flow model led by negative working capital cycle (minimal receivables, faster inventory turn rates and higher credit period by vendors on higher bargaining power) and an attractive pay-back period of ~3 years (cash flow of ~`2.5 mn per outlet against capex of `8 mn per outlet in FY11), we expect JFL to generate strong operating cash flows of `4.1 bn over the next two years (FY11-13E), more than sufficient to meet its capex of requirements of ~ `1.7 bn over the same period. As the revenue growth remains strong and margin and free cash flows improve, the cash on balance-sheet is expected to significantly increase in the coming two years (`2.2 bn by FY13E), making a strong case of dividend payout beginning from end of FY13E.

New recipes for growth: Dunkin’ Donuts The master franchisee agreement with Dunkin Donuts (DD) will help JFL enter the ‘All-Day Food’ category and be a part of the fastest growing chain in the world. Despite the lower ticket size and sales as compared to ‘Dominos’ the company shall be able to maintain its policy of break-even within three years. This is due to a) lower staff cost (1/2 no. of Domino’s), b) lower capex (1/2 of Domino’s) which shall be funded through internal accruals and c) marginally lower rentals despite a higher rent cost per sq. ft owing to a smaller store size.

Valuation

The stock is currently trading at a P/E multiple of 51.8x of our FY12F EPS of `15.3 and 36.5x of our FY13E EPS of `21.7. The stock has a limited trading history and with an average 1 year forward PE of 39.1x since inception. The current valuations hence appear rich even in comparison to its global peers (at 19.8x). Hence, we value the business on DCF basis, considering the strong growth momentum and high cash flow generation ability of the company.

We initiate coverage on Jubilant Foodworks Ltd. with REDUCE rating and a target price of `709 per share valuing the firm on DCF basis which assumes WACC at 13.7% and terminal growth rate of 5% from FY21E.


Jubilant Foodworks Ltd November 21, 2011

GEPL Capital Research| Initiating Coverage 2

Dominos growth at 5.1x has been much higher than the pizza industry average of 3.1 x.

Investment Rationale Best candidate to capture growing pie of India’s organised food industry

According to the India Retail Report, Domino’s is the largest food chain in India with a market share in the organised pizza home delivery segment of 65% and a 50% share of the overall pizza market in India marking its strong presence in India’s Quick Service Restaurant (QSR) segment. The Food Franchising Report has estimated that JFL is one of the largest and fastest growing international food brands in South Asia and the market leader in the organised pizza home-delivery segment. JFL’s operations have been ranked number one in Domino’s global operations, in countries with more than 100 stores in CY06, CY07, CY09 and CY10.

The company has over double the number of stores of immediate competitor (Pizza Hut) in the pizza segment and has a very strong presence in the entire QSR space. It has seen the fastest growth among the pizza brands (excluding Garcias, due to the low base) with growth of 5.1 times in the last seven years, compared to the total pizza brand growth of 3.1 times. The non-pizza brands have seen much faster growth (an average of 6.3 times), mainly due to new chains opening, like KFC, Subway and Costa Coffee, and the rapid expansion seen in Café Coffee Day in the last few years. Despite this, Domino’s Pizza has seen higher growth than the entire QSR industry, which has grown by 4.8 times, in the last six years.

Robust growth in the QSR segment

QSR Growth CY04 Current Growth

Pizza Brands

Dominos 80 411 5.1

Pizza Hut 95 181 1.9

US Pizza 25 69 2.8

Pizza Corner 35 52 1.5

Smokin Joes 35 58 1.7

Papa Johns 0 37

Garcias 1 20 20.0

Total pizza brand growth 271 809 3.1

Non Pizza Brands

McDonalds 60 190 3.2

Subway 30 239 8.0

KFC 4 107 26.8

Café Coffee Day 158 1140 7.2

Barista 60 188 3.1

Costa 0 62

Mad Over Donuts 0 19

Bru 0 10

Total non-pizza brand growth 312 1955 6.3

Total QSR 583 2764 4.8 Source: Company data, GEPL Capital Research




Superior operations to peers’

Despite being in a highly dynamic and competitive environment, JFL has been able to clock strong same store sales (SSS) growth and expand into new stores and cities. The company has been able to grow its sales and profits over the last few years due to superior operations to those of its peers in the QSR segment.

Key Strengths

Key business perspectives

Exclusive franchisee of a global brand

Consumer focused and innovative

marketing

Excellent project management

Cost consciousness

Positive cash flows from operations

Robust training structure

Robust supply chain

Operational excellence

Key business perspectives

Exclusive franchisee of a global brand

Consumer focused and innovative

marketing

Excellent project management

Cost consciousness

Positive cash flows from operations

Robust training structure

Robust supply chain

Operational excellence


1. Exclusive franchisee of a globally successful brand In the last 50 years or so, ‘Dominos’ (USA) has grown into a global network of over 8,500 pizza stores in more than 60 countries, involving over 2,000 franchisees. The company has successfully expanded over the past 50 years in many countries, including the UK and several countries in Europe and Asia Pacific, through the franchisee route. The brand enjoys a strong connection with its customers, by customising its global menu according to local tastes (e.g.: vegetarian pizza in India and prawn toppings in Australia).

Strong Global Footprint

Top 10 Markets Stores in CY10 Delivery Market Rank in respective Country

UK 626 1

Mexico 579 1

Australia 433 1

India 411 1

South Korea 348 2

Canada 345 3

Turkey 192 1

France 189 1

Japan 186 3

Taiwan 138 2 Source: Dominos USA, GEPL Capital Research




2. Operational excellence JFL has always focused on the delivery-and-takeaway model, enabling customers to eat in the comfort of their own homes and workspaces. The emphasis on quality raw materials and equipment enables it to provide quality products in a timely fashion. Moreover, the products have been designed to suit Indian taste buds. To add to this, the employee training programmes cover various aspect of a store’s operations, (receiving orders, preparation, baking, cutting, routing and delivery) ensuring standardisation of products. The order delivery system, which is based on area mapping, ensures the delivery area of each pizza store is restricted to within a 9-10 minute travel time from the store, reducing the average delivery time to 22.5 minutes. This ensures the company delivers on its promise of “30 minutes or free” and helps keep the pizzas fresh and hot.

30 minutes or FREE

Receive order over phone

00:00:00 00:30:00

Cut, pack and ready for delivery

Deliver pizza and collect bill

Wait Line

Load pizza into oven

Slap pizza and addingredients

Unload pizza from oven

Travel to customers address

Address mapping

Receive order over phone

00:00:00 00:30:00

Cut, pack and ready for delivery

Deliver pizza and collect bill

Wait Line

Load pizza into oven

Slap pizza and addingredients

Unload pizza from oven

Travel to customers address

Address mapping


3. Employee empowerment

Operating in a service-oriented industry, employees act as a critical link to the customers and hence undergo a comprehensive training programme. They are provided performance linked incentives. Similarly, store managers act as CEOs of each store and are provided variable incentives linked to store performance (both sales and profitability), a move which promotes responsibility for costs and has led to profitability at each store.

4. Cost consciousness and pricing policy

Due to the fast expansion and strong growth in sales over the last few years, JFL has been able to benefit from economies of scale and negotiate costs of raw materials, packaging, etc. Moreover, since store managers’ compensation are driven by the sales and profitability of their respective stores, the wastage is kept under check. JFL has implemented six sigma approaches to reduce wastage, improve processes and reduce costs.

The company adopts a uniform pricing policy for its limited menu product offerings across the country. For this reason, tier-II outlets are able to achieve high margins despite relatively low sales, because of operating cost efficiencies such as lower staff costs, lower administrative expenses and lower rents. As a result, these outlets generate higher operating margins than their tier-I counterparts.




5. Innovation and affordability

JFL has modified its menu to suit the Indian tastes and sensibilities. For instance, it has an extensive vegetarian menu (50%) to accommodate the large vegetarian population. JFL also offers a wide spectrum of offering as far as pricing is concerned, starting from `39 (Pizza Mania) going all the way up to as much as `400. Pizza Mania is the entry point for customers, where value for money is the prime rationales behind purchasing, particularly in the tier II and tier III cities. However, JFL offers more variety, aimed at the loyal and frequent customers, in the form of add-ons like Choco Lava, Pasta Italiano and Mexican Wrap etc

6. Robust supply chain and third-party suppliers Dominos operates through four regional supply chain centers, or commissaries, located in Noida (Delhi NCR), Mumbai, Bangalore and Kolkata. JFL plans to open a commissary in North India (Chandigarh) and at the same time relocate its East and West commissaries with a higher capacity, indicating the room for growth. These commissaries primarily manufacture the pizza dough (for the pizza base) and act as warehouses for most of the other ingredients, with primary raw materials, such as cheese, vegetables and meat, being sourced and supplied by commissaries, (except for a few stores, which procure vegetables locally). The company is also in the process of setting up its first commissary for ‘Dunkin Donuts’.

The commissaries help in standardization of quality while the bulk purchasing leads to negotiation of better prices. The growth in stores and scale over the past few years has helped get competitive rate from vendors and hence tackle inflation leading to gross margins remaining steady at ~74-75%. Moreover, JFL follows a multi-vendor policy for most of its key ingredients, to minimise dependence on any single vendor. In addition, it has a dedicated fleet of hired trucks at its disposal to ensure timely delivery of raw materials to its stores.

7. Effective site selection and store management

JFL follows a robust new-store selection process that takes into consideration various factors such as delivery area (eight to nine minutes’ delivery time), household count (15,000-20,000 households) presence of corporate establishments, schools and colleges, location visibility, and presence of competition in the area. The internal project management system ensures purchase of standardised equipment from selected vendors, which enables it to reduce its new-store opening time to 30-45 days on average, from the date of possession of the premises.

8. Consumer focused marketing JFL’s marketing campaigns like “Hungry Kya?”, “30 minutes or free” and “Khusiyon Ki Home Delivery” has helped the Domino’s brand establish a distinctive image in the minds of customers. The company utilises three distinct marketing platforms:

(a) National marketing campaigns on television, print and radio

(b) Local store marketing (LSM)

(c) Customer relationship management (CRM)

The marketing strategy is focused on the continuous changing tastes and preferences of customers. Their main aim remains to increase customer penetration by targeting new customers and increasing the frequency of repeat orders from existing customers.




The Indian Food Industry

The Indian economy is booming, with the largest democracy in the world expected to grow at 8% CAGR until CY20E. Currently, India is the fourth largest economy in the world, after the United States of America, China and Japan in terms of its purchasing power parity. India is also among the fastest growing economies globally and has grown at an average rate of 8.2% per annum during the last five years, according to the IMF.

According to the Technopak Report, the size of the Indian food industry is estimated at ~ US$ 250 bn in CY11E and expected to reach US$ 300 bn by CY15E. The trend towards home delivery is fast gaining popularity, with value sales increasing significantly over the last couple of years. According to the Food Franchising Report, the organized sector is estimated to contribute a mere 7.2% to the food services industry in India and is expected to grow with the change in demographics in India.

Indian Food Industry Profile of Indian food industry

210220

300286

273260

247235

150

170

190

210

230

250

270

290

310

CY08

CY09

CY10

CY11

E

CY12

E

CY13

E

CY14

E

CY15

E

US$

bn

3

4

4

5

5

6

6

7

7

8

%

Size Growth %

Organised

7%Unorganised

93%

Organised Unorganised

Source: Technopak, GEPL Capital Research Source: Food Franchising, GEPL Capital Research

Key drivers for the food service industry The food services industry in India is expected to witness a 5% CAGR in the next four years driven by the changing demographics in India, rising urbanization and concept of nuclear families, rising, income levels and growth of middle class, and higher percentage of youth population and growth in working women ratio. Among the various formats, QSR’s and cafes have had the maximum growth over the last few years and given the favourable trends, we expect the growth momentum to continue and believe JFL could be a major beneficiary of these changes.

Changing demographic The changing demographics have led to a higher demand for eating-out and ordering-in services in India. According to the Technopak Report, ordering in or bringing in meals from restaurants is a fairly common practice, with two out of three households in India having done so in any one month.

Approximately 80% of the population eats out at least once a month. Approximately 38% of the population (who eat out at least once a month) eats out at least 7-9 times a month, whereas almost 28% eats out 4-6 times a month.




Percentage of people ordering food on a monthly basis No. of times food ordered-in per month

No

33%

Yes

67%

Yes No

22

20

16

9

0 5 10 15 20 25

1-2 times

3-4 times

5-8 times

Over 8 times

Source: Technopak, GEPL Capital Research Source: Technopak, GEPL Capital Research

Incidence of eating out on a monthly basis Frequency of eating out

Eaten out

80%

Not gone

out

20%

Eaten out Not gone out

Once

10

2-3 times

25

4-6 times

28

7-9 times

11

10-12 times

14

over 12 times

13

Once 2-3 times 4-6 times

7-9 times 10-12 times over 12 times


Rising urbanisation and concept of nuclear families Ordering in or eating out is more prevalent in the cities and towns than in the rural areas. Specifically, the average spends on ordering in, in the tier-I or tier-II towns, is double the average spends in the tier-III towns. By CY21E, over 100 Indian cities will have a population above one mn, up from 35 cities in the CY01 and 60 cities in CY11. The going-out and ordering-in food habit is more prevalent in nuclear families than in joint families in India. According to the Technopak Report, approximately 1.5-2% of joint families give rise to nuclear families every year.

Rising income levels and burgeoning middle class in India

Penetration of QSR industry is also improving due to growing income levels and aggressive marketing by the quick-service restaurant chains in India. The per capita income has grown by 10.9% CAGR from CY00-CY10, to `58,261 and is expected to witness a 12.7% CAGR in CY10-CY15E to `105,714.

With rising income levels, the total number of households in the middle-income group (annual income `45,000-180,000) is expected to increase from 13.3 mn in CY05, to 60.6 mn in CY15E and further to 128 mn in CY25E. We believe QSR’s and other organised players will witness a healthy growth rate, with rising aspirations in the middle class and with changing spending habits.




Rising per capita income in India Burgeoning Indian middle class

105,714

58,261

31,58320,685

12,510

0

20,000

40,000

60,000

80,000

100,000

120,000

CY95 CY00 CY05 CY10 CY15E

Rs

9379

5335

618

41

53

94213210

0%

20%

40%

60%

80%

100%

1985 1995 2005 2015E

Deprived (<2,250) Aspirers (2,250-5,000)

Seekers (5,000-12,500) Strivers (12,500-25,000) Source: IMF, GEPL Capital Research Source: CMIE, GEPL Capital Research

Growth of younger population and female work force The growth of the QSR industry is also influenced by the growing younger population. Thirty-five per cent of India’s population is 20-40 years of age, which provides a greater penetration opportunity. Currently 35.66% of India’s population falls under the 20-40 age bracket, which has been a vast increase from a sub 33% in CY91.

Percentage of population in 20-40 age bracket Age profile of people eating out

29.730.4

32.733.5

35.6

26

28

30

32

34

36

38

CY71 CY81 CY91 CY01 CY11E

%

31-40 years

31%

18-20 years

18%

21-30 years

40%

above 40

years

11%

18-20 years 21-30 years31-40 years above 40 years

Source: CMIE, GEPL Capital Research Source: Technopak, GEPL Capital Research

Moreover, India has the largest number of working women in any single country in the world. Of India’s workforce of 400mn, 30-35% is female, but only one-fifth of these women work in urban areas. There are several factors which have contributed to the numerical growth and evolution of working women in India. Some of the key ones are the greater acceptance and empowerment of women, delayed motherhood and reduced child-bearing responsibilities.




Increase in female population Increase in working women population

489529

568605

639

0

100

200

300

400

500

600

700

CY00 CY05 CY10 CY15E CY20E

mn

wom

en

11.7

13.514.6

16.1

17.9

6

8

10

12

14

16

18

20

CY90 CY95 CY00 CY05 CY10

%

Source: CMIE, GEPL Capital Research Source: CMIE, GEPL Capital Research

Distinguished growth for quick-service restaurants (QSR) industry

The QSR segment has seen a rapid growth in the past few years with the number of outlets increasing by 4.8 times in CY04-11E. We expect the growth momentum in the QSR segment to continue and expect it to outpace the Indian Food Industry growth rate due to the following advantages associated with it.

1. High speed of service and efficiency: The fast speed and consistency of service are the key characteristics of QSR’s.

2. Convenience: Location plays a key role in providing convenience, be it in drive-ins or home delivery stores situated locally which can be easily accessed by customers.

3. Limited menu choice and service: The menus at most quick-service restaurants have a limited number of standardised items. Typically, customers order at a counter, or drive through and pick up food that is then taken to a seating area or consumed off the restaurant premises.

4. Value prices: At quick-service restaurants, average bill amounts are generally lower than in other major segments of the restaurant industry.

QSR as a percentage of total food spend Pizza spend as a percentage of total food spend

48

28

35

52

0

10

20

30

40

50

60

Indi

a

Chi

na

Mal

aysi

a UK

USA

%

1.82.4 2.5

4.0 4.0 4.3

8.08.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Indi

a

Mal

aysi

a

Chin

a

UK

Aust

ralia

Phill

ipin

es

USA

Russ

ia

%





Growth Strategy: Hungry For More

The Technopak Report estimates that only 2% of the monthly expenditure on food bought from outside or ordered in, by households in India, is spent on pizzas and pastas. This highlights the room for growth, along with the fact that a significant chunk of customers order pizza only once a year. A change in these statistics could play a pivotal role in the growth of Domino’s sales.

The company has expanded very aggressively in the past with a 29% CAGR in store count from 105 stores in FY06 to 378 stores in FY11. We expect the company to add another 160 stores in the next two years taking the total store count to 538 by FY13E. We believe JFL should be able to accomplish its store expansion plans, in view of its strong track record and rapid expansion over the last few years. We believe its store expansion strategy to be three pronged: a) penetrate existing cities, b) enter new cities (mainly tier II and III), and c) improve same store sales. The company also started operations in Sri Lanka to expand its store network, and plans to make use of web portals and increase its presence at airports.

a) Penetrate existing cities

Expansion of the store network is the foremost driver for growth. Domino’s Pizza Inc. (USA), in March CY11, indicated that the potential store count for India is 750 stores (compared to 700 stores in May CY10) over the next few years. With a current store count of 411 stores the penetration is just about 55%, highlighting the high growth potential, for more stores.

High store count potential

Top 10 markets Current stores Potential store count Potential reached

UK 626 1,100 56.9

Mexico 579 700 82.7

Australia 433 550 78.7

India 392 750 54.8

South Korea 348 400 87.0

Canada 345 400 86.3

Turkey 192 700 27.4

France 189 650 29.1

Japan 186 400 46.5

Taiwan 138 150 92.0

Total 3,477 5,800 59.4

Source: CMIE, GEPL Capital Research




b) Potential to expand exists

JFL has over 200 stores, located in and around its four commissaries, which account for ~50% of the total store count. The company plans to open a new commissary in Chandigarh to cater to the strong growth potential in North India and relocate the Kolkata and Mumbai commissary to meet the additional demand highlighting the growth potential the company has seen and expects in the future.

Also, the increase in penetration in states across India is visible over the last two years. With 40 single store cities, the company has scope to open further stores in these cities and also penetrate further into existing cities.

Store locations Increasing penetration in existing states

Cities No of stores

Delhi & NCR 66

Mumbai 64

Banglore 48

Pune 23

Chennai 22

Hyderabad 19

Kolkata 14

5-10 stores per city 36

2-4 stores per city 73

Single stores 46

Total 411

33

68

39

20

71

94

60

27

0

10

20

30

40

50

60

70

80

90

100

New Delhi Maharashtra Karnataka Tamil Nadu

Stor

es

CY09 Current Source: Company data, GEPL Capital Research

c) Expand into tier-II and tier-III cities

Over the last few years, expansion by existing players and new entrants (McDonalds, Pizza Hut, TGIF, KFC, Subway, etc) has resulted in a higher concentration of QSR players in the metros. This has created opportunities in tier-II and tier-III cities. JFL has realised the potential of these cities and has decided to split store additions equally between a) tier-I, and b) tier-II and tier-III cities, to achieve balanced growth. Currently, ~50% of the total stores are located near its four commissaries and ~ 70% of its stores are located in tier-I cities. We expect this mix to change with the increasing focus on new cities and opening more outlets in single store cities.

The company adopts a uniform pricing policy for its product offerings across the country. In the absence of differential pricing, lower sales (~30%) in tier II and tier III, because of lower volumes emanating from a lower frequency of orders and repeat visits, are compensated by certain operating cost efficiencies (lower staff and administration expenses), making tier-II and III cities higher operating-margin stores.

The company plans to add half of new stores in tier II and III cities with a larger store area catering more to the dine-in model. With the increase in disposable and per capita income, we believe tier II and III expansion will be margin accretive for the company and help build scale to improve overall margins, even in a scenario of intensive competition from other players.




Target customer base in QSR segment

Target customer base Estimated household (mn) Distribution of households (%)

Category Household income All India Urban Rural All India Urban Rural

Deprived < 120 k 114 18 96 51.5 26.1 63.1

Aspirers 120 k -250 k 75 29 46 33.9 42.3 30.2

Middle class 250 k - 1,000 k 28 19 9 12.8 27.4 6.2

Rich Over 1,000,000 4 3 1 1.7 4.3 0.6

Total 222 69 153 100 100 100

Source: : India Retail Report, GEPL Capital Research

d) Same stores sales growth to drive revenues

Same store sales (SSS) growth refers to year-on-year growth in sales for stores in operation for two full years. Same store sales growth is driven primarily by two factors, the average bill per order (BPO), and the number of orders received by the stores. Same store sales (SSS) contributed close to 75% of the total sales for Domino’s in FY11. SSS growth in FY11 stood at 37.2% in FY11 despite a strong base of 22% SSS growth in FY10. With the introduction of new products, the company has also achieved a SSS growth of 37% and 26.7% in Q1FY12 and Q2FY12 respectively, there by beating the five-year CAGR of 21.5%. This has made the SSS growth in Indian operations being one of the strongest across the globe.

Historically, opening additional stores in existing and new markets in India has contributed substantially to store sales growth. We expect same-store sales (SSS) growth of 43.4% in FY11-FY13E and expect 160 stores to be added in the next two years, taking the total store tally to 538 stores by FY13E. We expect SSS to continue leading the revenue share with 80% contribution in FY13E (~75% by FY11-end).

Same store sales growth in last 5 years Same store sales growth across regions in FY11

19.91

5.98

22

37.2

2522.5

0

5

10

15

20

25

30

35

40

FY08 FY09 FY10 FY11 FY12E FY13E

%

Same store sales growth last 5 year CAGR

Avg. 5 yrs. CAGR of 21.5%

37

12

11

7

5

0 10 20 30 40

India

UK

Australia

USA

Europe

%

Source: Company data, GEPL Capital Research Source: Company data, GEPL Capital Research




Sri Lanka back in focus

The company had five stores in Sri Lanka (all in Colombo) during the IPO which were shut down in 1QFY11. JFL has now formed a wholly owned subsidiary in Sri Lanka, to start operations under its owned stores. The first store has rolled out in June with 3-5 stores expected to open by the end of FY12E and 25-30 stores in the next 5 years. Though the potential in Sri Lanka is not as high as it is in India, the management is upbeat on the growth possibilities and how the plans could unfold.

New distribution channels to help growth JFL plans to venture into new distribution channels to expand its market presence. The company also plans to integrate other distribution channels with its pizza stores, such as the web and mobile technology. Online ordering has seen an uptick in 4QFY11 and is expected to add to the higher order frequency in the coming quarters. Brand building initiatives remain a key growth driver for the company and it intends to leverage this branding position and introduce innovative, consumer-tested and profitable new product varieties and value promotions.

Airport franchisee stores: better margins though store count low JFL currently has two sub-franchised stores, which are both at the airports, as the airport structure across India requires food outlets to go through a food operator. The company’s airport retailing venture, a footfall-driven model, is in sync with the strategy of expanding consumer base by opting for institutional tie-ups. The sub- franchised stores help earn a franchisee fee and also revenue from the sale of ingredients. Franchising helps a company grows faster, without any cash flow or capex. With the sub-franchisee airport model the costs per outlet reduces (rentals bared by sub-franchisee, lower staff due to no delivery, lower administrative expenses) making the model lucrative for margin if the company can scale up these operations to form a significant chunk of their business.

The domestic airline passenger traffic (pan-India) was 54 mn in FY11, while the international passenger traffic stood at 13.4 mn in FY11. The airline passenger traffic is expected to rise to 123 mn by CY15E (domestic = 99.3 mn and international = 23.7 mn). With average revenue per store of `19.8 mn in FY11, the conversion rate of the total footfall is 7.8%. Hence we believe, if the company can add stores and even capture 10% of the total passenger traffic by CY15E, it would result in additional revenue of `112 mn for the company, most of which would straight away reflect in the margin. Though, currently, we do not expect a huge share of revenues from the airport franchisee route, the potential for revenue growth is high, bearing in mind the increase in a) the number of passengers, b) the higher conversion rate from the higher penetration in airports and c) the larger ticket size, with a 5% fixed rise in menu prices.

Potential from Airport sub-franchisee

CY11E CY12E CY13E CY14E 2015E

Total traffic (mn) 67.3 78.3 91.0 105.9 123.1

Conversion rate 7.8% 8.5% 9.0% 9.5% 10.0%

Potential opportunity (mn) 5.3 6.7 7.7 10.1 12.3

Avg ticket size (`) 150 158 165 174 182

Gross opportunity (`mn) 791 1,048 1,280 1,746 2,244

Franchisee fee (%) 5 5 5 5 5

Potential opportunity (`mn) 39.6 52 64 87 112





Dunkin’ Donuts: New recipe for growth

JFL has signed an exclusive 15-year franchise agreement with Dunkin’ Donuts (DD) for India (with an option of renewal for another 10 years) with the first right of refusal, for Sri Lanka, Nepal and Bangladesh. The contours of Dunkin’ Donuts franchisee agreement are similar to Domino’s and include a regular royalty payment, store set-up fee and one-time fee. JFL plans to open 100 stores within five years, in plans to initiate its rollout in a phased manner to ensure sustainable profitability; its maiden store will open in 4QFY12E in the metros (either in Delhi or Mumbai). JFL has a further mandate to open 500 stores in 15 years, which we believe is achievable target.

Reasons for tie-up

1. High return on investment

The ticket size is expected to be much lower than Domino’s (competitors charge close to ~`100 for a donut and coffee). Yet, we believe that the lower capex (through internal accruals) and working capital, changing demographic profile and rise in discretionary spend should help JFL maintain its current model of a return on investment of three-years.

2. Limited capital investment

The store size is expected to be smaller (average size of 750-800 sq. ft) compared to Domino’s (average store size of 1,300 sq. ft) as donuts will not be prepared in-store. Moreover, the commissary will range from 2,000-10,000 sq.ft compared to the 20,000 sq.ft commissary for Domino’s. An average Dunkin’ Donut store will require half the no. of employees required at Domino’s. The rentals will be marginally lower despite a higher rent cost per sq. ft owing to a smaller store size. All these factors will result in a 50% lower capital employed than that of Domino’s.

3. Business fit

The DD business model meets JFL’s hurdle rates, eyeing investment payback of less than three years. While Domino’s acts as a lunch and dinner provider, Dunkin’ Donuts would help JFL enter the ‘All-day part food’ category and help cater to a larger customer base. Given the fact than Indians have a sweet tooth and the willingness to try new products, we expect the Dunkin’ Donuts products to ‘grow’ on Indians in the years to come. Also, given JFL’s execution track record with Dominos, we assume it will show healthy growth in the donut market.

4. Flexibility in model

The agreement with DD gives JFL a lot of flexibility in terms of its product offerings. JFL can localise the food products if it wishes to do so and given JFL’s track record for innovation, we expect the menu to be filled with pleasant surprises.

DD is a footfall-driven model, so the rental costs are expected to be high. But, again, JFL has the flexibility to leverage its position and to operate from smaller areas and kiosks. As far as the raw materials are concerned, JFL will be importing coffee beans at an initial stage, to maintain quality, but will start to process coffee soon.

5. Leverage execution capability

JFL can leverage its position and obtain economies of scale for its raw materials. It can further optimise costs and operations by using its back-end operations like administration and other functions such as human resources, administration, commissary and marketing.




Dunkin’ Donuts brand globally

Dunkin’ Donuts started operations in CY50, currently has over 9,700 stores in over 31 countries and is the fastest growing chain across the globe. Due to its vast variety of foods and beverages (52 varieties of donuts and 12 varieties of coffee) Dunkin’ Donuts serves over 3 mn customers per day, achieving system-wide sales of nearly US$6 bn in the last fiscal.

Strong presence across Asia

Dunkin’ Donuts has had a strong presence in Asia over the last 20-25 years. There are 600 stores in the Philippines and 900 stores in Korea, where the population and demand is much lower. In Asia, 30% of sales come from beverages and 70% from food, while in the US, 40% is from food and 60% from beverages, reflecting the difference in consumption habits from region to region. We expect higher revenue contribution from donuts than from beverages as Indian consumer are price sensitive and tend to spend more on food than on beverages.

Strong margins for Dunkin’ Brand Inc. peers Dunkin’ Brand Inc. (Dunkin’ Donuts’ parent company) as well as its peers in the donut (Krispy Kreme) and coffee (Strabucks, Tim Hortons) segments have witnessed an improvement in margins over the last four years. Dunkin’ Brand Inc. has the strongest margins, which is an effect of its size and consolidation. However, we expect Dunkin’ Donuts’ margins to be much lower than 29% (lack of franchisee revenues), but higher than that of Krispy Kreme margin of 7.4% because of its superior operations.

Dunkin presence in Asia EBITDA margin of competitors

900

600

200

70

30

0 200 400 600 800 1000

Korea

Phillipines

Indonesia

China

Thailand

stor

es

25.325.524.8

25.1 26.6

15.6 15.317.4

13.712.2

29.129.1

24.4

25.5

21.1

7.47.53.65.45

0

5

10

15

20

25

30

35

CY06 CY07 CY08 CY09 CY10

%

Tim Hortons Starbucks Dunkin Brands Inc Krispy Kreme

Source: Company data, GEPL Capital Research Source: Various Companies, GEPL Capital Research

Coffee segment brewing growth in India

There are over 1,500 branded coffee cafes in India of which over 1,000 of have been opened in the last five years. The coffee market in India has seen a 7.9% CAGR in CY04-11 and has the potential to touch US$800-900 mn with a total of 5,000 cafés by CY15E as per Technopak. The coffee consumption in India has doubled since the mid 90s (1.1 mn tons) because of the growing coffee café culture. However, the per-capita consumption of coffee in India is one of the lowest in the world at ~85 grams, compared to 2.8 kgs in UK, 3 kgs in Australia, 4.2 kgs in USA and 5.8kgs in the Brazil. This is because India is predominantly a tea drinking nation with coffee being mainly consumed in South India.




Per capita coffee consumption Store expansion for Coffee chains in India

12

7.9

5.8

4.23.3 3 2.8

1.10.1

0

2

4

6

8

10

12

14

Finl

and

Swti

zerl

and

Braz

il

USA

Japa

n

Aus

tral

ia UK

Hon

g K

ong

Indi

a

per

capi

ta c

onsu

mpt

ion

2,232

500

300

200

200

150

60

158 1,132

190

10

16

18

73

- 500 1,000 1,500 2,000 2,500

CCD

Barista

Costa

M.O.D

Gloria Jeans

Bru

Stor

es

CY04 Current CY14E


Scope for Dunkin Donuts in India

As Indians are known for their sweet tooth, JFL believes the donut venture could really catch on in India, and that the initial demand will be driven by footfall. Hence, rent costs per square foot could be higher than that of Domino’s. However, much less space would be required (750-800 sq. ft for DD, compared to ~1,300 sq. ft for a Domino’s). JFL believes that it would incur a higher ad spend to create brand awareness and it expects a lower ticket size for DD, but this will be negated by the lower employee cost (half of Domino’s employees due to non-delivery model) and lower capex per store (half that of Domino’s). Moreover the company should be able to leverage on other expenditure (IT, HR, finance, admin etc.) hence bringing down the sales requirement to break-even.

The management has refrained from sharing the details of its revenue per store, product offerings and average bill size, etc. However, it does expect the DD model to become cash positive within the first year of operations (store level) and achieve cash breakeven within three years of operations. This is similar to the initial benchmarks for the Domino’s business model of achieving breakeven in less than three years. The company continues to be focused on its new venture and will not be looking at any new acquisitions over the next one-and-a-half to two years, until the DD business stabilises. The company, however, has not denied being in talks with other players in the food industry.

Considering the growth in coffee stores over the last few years and the increasing spend on such stores as a result of macro factors such as higher disposable income, urbanisation, and higher youth working population, we expect the business to receive a positive response from consumers.




Financials

Revenues to record 41.5% CAGR in FY11-FY13E

We expect JFL to deliver a robust 41.5% CAGR in revenues, to `13.59 bn in FY11-13E driven by a) 43.4% CAGR in same store sales in FY11-13E to `12.77 bn, b) 19.3% CAGR in total stores, and c) 17.3% CAGR in FY11-13E in average sales per store to `27.3 mn. JFL on an average undertakes a 2.5-3.0% price hike bi-annually (5% in April CY11 and 2.5% in August CY11). We expect the increased food offerings and higher frequency of orders to attract more customers, hence increasing the average revenue per store.

Net sales Average sales per store

2,8064,239

6,781

9,900

13,585

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

FY09 FY10 FY11 FY12E FY13E

Rs m

n

0

10

20

30

40

50

60

70

%

Net sales Growth %

13.3

19.8

23.7

27.3

15.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0


Rs m

n-5

0

5

10

15

20

25

30

%

Average sales per store Growth % Source: Company data, GEPL Capital Research Source: Various Companies, GEPL Capital Research

Gross margin expected to remain stable at ~74-75%

Milk prices have been on the rise over the last few quarters, which have been leading to pressure on cheese costs, JFL’s core ingredient. The 13 prices hikes over the last year have led to full-cream milk prices shooting to `38/litre compared to `30/itre in March CY10. Despite the 27% hike in prices, we do not expect a steep decline due to a) 15-20% rise in cattle feed since March CY10, b) rise in labour cost impacting inflation, and c) increasing demand for milk and milk products. However, constant product innovation, economies of scale and P&L statement preparation, and price hikes of 2-2.5% every six months have enabled JFL to keep its raw material cost in check. We expect JFL to be able maintain its raw material cost, though with a lag effect resulting in an 80bps increase in raw material costs, in FY11-13E, to 26%.

India wholesale milk price index Quarterly gross margins (%)

157.6

167.2

174.6177.2

196.9

179.3

193.4

174.6

175.4

182.4

150

155

160

165

170

175

180

185

190

195

200

Jan-

10

Mar

-10

May

-10

Jul-

10

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-

11

Sep-

11

Nov

-11

75.5

75.2

74.5 74.5 74.5

73.6

73.0

73.5

74.0

74.5

75.0

75.5

76.0

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

%





EBIDTA margin expected to improve by 140bps in FY11-13E

Improved operating leverage and efficient raw material management has enabled EBITDA margin expansion of 560bps, to 17.6% over FY06-FY11, led by lower rent and other expenses and strong controls on employee and raw-material related costs. The margin expansion can also be attributed to the rapid store expansion and SSS growth.

We expect margins to improve 140bps to 19.0% in FY11-13E, because of its robust sales growth and a track record of operational efficiency. The high margins Domino’s has across the globe substantiate the view that operational efficiencies increase with the number of stores. The stronger margins should enable a quicker breakeven for new stores, as brand-building efforts over the past few years have enhanced brand recall and customers are increasingly more receptive to the cuisine and the menu, according to the company’s findings.

EBITDA and EBITDA margins EBITDA margin across geographies

1,823

336

1,196

666

2,583

12.0

15.717.6

18.4 19.0

0

500

1,000

1,500

2,000

2,500

3,000


Rs m

n

0

5

10

15

20

%

EBITDA EBITDA margin

27.9

17.6

27.625.525.9

26.8

9.611.0 11.8

13.8

14.3

20.520.018.017.616.9

13.0

12.7 12.0

15.7

5

10

15

20

25

30

2006 2007 2008 2009 2010

%

USA Australia UK India Source: Bloomberg, GEPL Capital Research Source: Company data, GEPL Capital Research

Net profit to record 39.9% CAGR in FY11-13E due to higher tax rate

We expect the higher margins and higher average sales per store to drive profitability over the next few years. We expect the net profit growth to be 39.9% CAGR in FY11-13E to `1.4 bn, despite a 46.9% CAGR in FY11-13E in EBITDA, to `2.58 bn. The lower profit growth can be contributed to a higher tax rate of 33%, effective from FY12, compared to 17% in FY11. The company incurred a net loss in FY05 and hence, had lower taxes until FY11.

Net profit

990

717

73

330

1,404

0

200

400

600

800

1,000

1,200

1,400

1,600


Rs m

n

0

10

20

30

40

50

60

70

%

Net profit Growth %





Capex of `1.7 bn in next two years

JFL is expected to incur a capex of `1.7 bn over the next two years. It incurred a capex of `630 mn in FY11, 90% of which was store related. The company incurs capex of ~`7 mn per store, which is expected to go up to `8 mn in FY12E due to inflationary pressures. Moreover, the company expects to open 80 stores, most of which are expected to have dine-in facilities, which should increase the cost per store. The company also plans to relocate its East and West commissary to accommodate higher capacity and plans to open a new commissary in North India (Chandigarh) and start a new commissary for Dunkin Donuts. The cost of the new commissary and relocation of the old ones is expected to be `150-300 mn, but should help reduce transportation costs and improve quality.

Operates on negative working capital cycle

Historically, JFL has operated with negative working capital, primarily because it has minimal receivables (1.6-2.0 days), and faster inventory turn rates (5-7 days) along with a higher credit period from vendors (~150 days) due to greater bargaining power. The negative working capital requirement enables JFL to generate higher cash flows at the operational level. Moreover, Domino’s sales are not seasonal, which further improves its working capital cycle.

Sufficient cash flow from operations to meet incremental capex requirements

With an average operating cash flow of `2.7 mn and capital expenditure of ~`8 mn per outlet, the company enjoys attractive payback period of three years. The faster pay-back period coupled with negative working capital cycle, should generate strong operating cash flows of `4.0 bn over FY11-13E. This should enable the company to fund its future expansions through internal accruals, without much dependence on external borrowing.

Capex and cash flow per store Negative working capital

1.8 1.32.5 2.7

4.0 4.2

7.38.1 8.7 8.7

11.9

9.4

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY08 FY09 FY10 FY11 FY12E FY13E

Rs m

n

Cash flow per store Capex per store

319

779

1,010

1,884

2,210

(294)

(256)

(447)

(689)

(836)

(1,000) (500) 0 500 1,000 1,500 2,000 2,500

FY09

FY10

FY11E

FY12E

FY13E

Rs m

n

Working capital Cash flow

Source: Company data, GEPL Capital Research Source: Company data, GEPL Capital Research




Key Risk

Termination of master franchise agreement or higher franchise fee JFL has exclusive rights to the Domino’s in India, Sri Lanka, Bangladesh and Nepal until CY24 and renewable till CY34. A termination of the master agreement by Domino’s International can impact the business model. Though we think this scenario is unlikely considering that Dominos International has never terminated its contract before the stipulated time period. In addition, franchise fees have been constant at around 3% of sales; any increase in the fee could affect margins.

Increasing competition Though Jubilant is a leader by far with a 70% market share in the pizza home delivery market and twice the number of stores than its next competitor, the scenario is fast changing with the entry of new players from across the globe. We expect the competition to intensify with players like Pizza Hut and Papa Johns, undergoing expansion, the entry of new players like California Pizza Kitchen and the rising investments from private equity investors in formal food service businesses. The resultant increase in competition can lead to pressure on the pricing strategies, demand for products translating into potential loss of market share.

Economic slowdown

Jubilant SSS growth declined to 6% in FY09 amidst the global slowdown. We believe a slowdown or slower growth in disposable income could impact the business negatively due to lower discretionary spending.

Changing tastes of customers Factors such as consumer confidence and spending, changes in consumer preferences, prevalent economic scenario and levels of discretionary spending are major influencers for the Company's growth. Moreover, given the focus on tier-II and tier-III cities by Jubilant, the taste for its products will play a critical role in future growth. We do not think this is a major bottleneck, though a failure to capture a particular market can lead to lower than expected revenues for the company.

Drop in quality of products JFL has successfully been able to cater to the tastes and needs fog the Indian consumers. However, a drop in quality of their products could lead to a change in customer preferences for their products and could result in their competitors gaining. We do not see this as a major threat given the strong brand and product preference of the company.

Slowdown in store expansion

Outlet expansion can pose execution challenges, especially as newer outlets tend to be more dispersed and in tier-2 cities. A slower than anticipated SSS growth can further impact the company’s financials and lead to lower profitability for the company

Lower margins due to higher cost pressures With the rise in milk prices and higher inflation costs the margins of the company declined for 3 consecutive quarters before bouncing back in Q1FY12. Although Jubilant undergoes a 5%, price hike every year, a sharp rise in food prices can impact gross margins if the company is unable to pass on these costs to its customers. To add to this, any significant rise in store network, related expenses of rent, employee and other costs could adversely impact the company's performance.




Valuations

The stock is currently trading at a P/E multiple of 51.8x of our FY12E EPS of `15.3 and 36.5x of our FY13E EPS of `21.7. The stock has a limited trading history and with an average one year forward PE of 39.1x since inception. At current P/E multiple of 51.8 x the stock is trading at 33% premium to its historical band. The stock has also seen a strong momentum in the past one year and has traded at a PE multiple of 43.9x of its one year forward EPS. This translates to a 12% premium to its historical band.

The current valuations hence appear rich even in comparison to its global peers. The industry average stands at a PE multiple of 19.8x its FY12E EPS with developed nations like USA and UK (20.8x) commanding a premium over emerging nations (14.9x). Similar, if we compare the stock on a one year forward EV/EBITDA basis, it is trading at a significant premium of 27.7 x its FY12E EBITDA with the industry average of 8.9x and the emerging nations’ average of 6.7x.

Global Comparison

Name Country Mkt Cap (`mn) FY12E P/E FY12E EV/EBITDA

Jubilant Foodworks Ltd India 51,425 51.8 27.7

Industry Average 40,885 19.8 8.9

Developed Nations Average 56,272 20.8 10.0

Cheesecake Factory Inc/The USA 75,900 16.4 6.9

BJ's Restaurants Inc USA 67,675 43.6 16.2

Buffalo Wild Wings Inc USA 59,845 23.8 8.6

Jack In The Box Inc USA 49,095 13.4 5.9

Papa John's Intl Inc USA 45,428 17.0 7.9

Krispy Kreme Doughnuts Inc USA 24,373 22.3 12.8

Mitchells & Butlers Plc UK 73,749 8.1 7.1

Domino's Pizza UK & Irl Plc UK 54,111 21.8 14.9

Emerging Nations Average 35,102 14.9 6.7

Saizeriya Co Ltd Japan 44,643 9.4 3.2

KFC Holdings (Malaysia) Bhd Malaysia 43,354 16.1 8.3

QSR Brands Bhd Malaysia 28,940 13.9 6.1

PF Chang's China Bistro Inc China 32,678 18.6 5.3

Famous Brands Ltd South Africa 25,895 16.7 10.4 Source: Bloomberg, GEPL Capital Research

Sensitivity analysis

We value the business on DCF basis, considering the strong growth momentum and high cash flow generation ability of the company. Assuming the company witnesses a 17.5% SSS growth (Bull case) from FY12E-FY20E we think the stock has a potential to rise to `798 per share which is very close to its current price. Given the fact that the company has achieved a CAGR of 21.5% in the last five years the rising growth on a high base should result in a marginal slow down in SSS growth. We assume the company to generate a 15.5% SSS growth from FY12E-FY20E and arrive at our base price of `709 per share. However, in case of a slowdown in the economy or the ability of the company to innovate and capture new cities and customers, could result in the SSS growth slowing down to 12.5%. We assume this to be our bear case scenario and expect the price to fall to `580per share in such a scenario.




Sensitivity Analysis

SSS growth (%) FY12E EBITDA (`bn) Target Price (`/share)

12.5 10.4 580

15.0 12.0 683

17.5 14.3 798 Source: Company data, GEPL Capital Research

We initiate coverage on Jubilant Foodworks Ltd. with REDUCE rating and a target price of `709 per share valuing the firm on DCF basis which assumes WACC at 13.7% and terminal growth rate of 5% from FY21E.

1 year forward P/E

0

200

400

600

800

1000

1200

1400Fe

b-10

Mar

-10

Apr-

10

May

-10

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11M

ar-1

1

Apr-

11

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Price 22.0x 32.0x 42.0x 52.0x 62.0x Source: Bloomberg, GEPL Capital Research

1 year forward EV/EBITDA

0

200

400

600

800

1,000

1,200

Feb-

10M

ar-1

0

Apr-

10

May

-10

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11M

ar-1

1

Apr-

11

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Price 15.0x 20.0x 25.0x 30.0x Source: Bloomberg, GEPL Capital Research




Company background: A great ‘base'

Jubilant Foodworks Limited (JFL), founded in CY95, and renamed in CY09, is the only listed player in India’s Quick Service Restaurant (QSR) segment. The company’s focus remains on home delivery, though dine-in options at the majority of its stores are also seeing traction. JFL has the Master Franchisee rights to develop and operate Domino’s Pizza in India, Nepal, Sri Lanka and Bangladesh. The Master Franchisee helps use Domino’s globally recognised brand name, operational support for pizza and food technology (such as recipes), commissary and logistics management support, global marketing and vendor development. As part of the Master Franchise Agreement, JFL pays royalty fees at 3% of sales and store opening fees of US$5,000 for every new store.

Store Count

51 60 65 72105

130181

241306

250

50100

150200

250

300350

400

FY07 FY08 FY09 FY10 FY11

New stores Existing stores

29.2% CAGR


JFL is the market leader in the fast-growing Indian pizza market and has a 70% share in the home delivery segment. With a rapid store expansion the company currently has 411 stores in India (130 in FY07 and 241 in FY09), twice the size of its nearest competitor and continues to aggressively add stores.

Constant innovation and new product launches (Choco Lava, Pasta Italiano and Mexican Wrap) have boosted volumes and the frequency of orders. This has led to the company witnessing a 43% CAGR in pizzas and add-ons sold from FY06-11 to 37.4 mn, while beverages witnessed a 25% CAGR in the same period, to 9.4 mn units.

Pizzas & Beverages sold (mn units)

9.015.6 19.2

27.237.4

3.5

4.04.2

6.4

9.4

0.0

10.0

20.0

30.0

40.0

50.0

60.0

FY07 FY08 FY09 FY10 FY11

mn

unit

s

Pizza+add-ons Beverages YoY growth Source: Company data, GEPL Capital Research




Income Statement Y/E march (`mn) FY09(A) FY10(A) FY11(A) FY12(E) FY13(E)

Total net revenues 2,806 4,239 6,781 9,900 13,585

COGS 718 1,050 1,706 2,574 3,532

Gross Profit 2,088 3,190 5,075 7,326 10,053

Employee Cost 556 805 1,356 1,930 2,649

Selling & Admin Exp. 829 1,173 1,739 3,573 4,820

Other Expenditure 368 546 784 0 1

EBITDA 336 666 1,196 1,823 2,582

EBITDA Margin (%) 16.1 20.9 23.6 24.9 25.7

Depreciation 169 243 293 389 486

Other Income 4 4 22 0 0

Interest (Net) 89 91 3 0 0

PBT 81 335 922 1,434 2,096

PBT Margin (%) 2.9 7.9 13.6 14.5 15.4

Tax 8 1 204 445 692

Minority Interest 0 0 0 0 0

Adjusted PAT 73 334 717 990 1,404

Extraordinary items 0 0 0 0 0

Reported PAT 73 334 717 990 1,404

Balance Sheet Y/E March (`mn) FY09 FY10 FY11P FY12E FY13E Equity capital 582 636 645 647 647 Reserves & Surplus (342) 538 1,269 2,258 3,662 Preference Capital 0 0 0 0 0 Net worth 240 1,174 1,914 2,905 4,309 Minority interest 0 0 0 0 0 Deffered tax liability 0 0 31 26 0 Total debt 824 86 0 0 0 Total Liabilities & Equity 1,064 1,260 1,914 2,905 4,309

Net block 1,065 1,403 1,801 2,363 2,626 Capital WIP 87 25 38 58 78 Total fixed assets 1,153 1,428 1,839 2,421 2,705 Investments 0 0 205 481 481 Goodwill 0 0 0 0 0 Current Assets 336 533 984 1,856 3,784 Inventories 55 71 142 190 261 Debtors 12 29 45 60 82 Cash & bank 30 70 90 690 2,214 Loans & advances 239 362 698 895 1,228 Other Current Assets 239 362 707 917 1,228 Current Liab. & Prov. 427 702 1,150 1,879 2,660 Creditors 323 547 876 1,164 1,597 Other liabilities 75 115 210 271 372 Provisions 29 39 65 445 692 Net Working capital 0 0 0 0 0 Miscellaneous Exp 0 0 0 0 0 Total Assets 1,064 1,260 1,914 2,905 4,309

Key Ratio Y/E (`mn) FY09 FY10 FY11P FY12E FY13E Per Share Ratios Fully diluted E P S 1.3 5.2 11.1 15.3 21.7 Book Value 4.1 18.5 29.7 44.9 66.6 Dividend per share 0.0 0.0 0.0 0.0 0.0 per share FCFO 0.5 1.2 1.6 2.8 3.5 Valuation Ratio P/E 0.0 67.6 50.1 51.8 36.5 P/BV 0.0 19.0 18.8 17.6 11.9 EV/EBITDA 2.4 33.5 30.0 27.7 19.0 EV/Sales 0.3 5.3 5.3 5.1 3.6 Price/ FCFO per share 0.0 285.8 356.0 279.2 225.9 Growth Ratios Sales Growth 32.9 51.1 59.9 46.0 37.2 EBITDA Growth 25.0 98.4 79.6 52.4 41.7 Net Profit Growth (13.3) 351.2 117.6 38.0 41.9 EPS Growth (13.3) 312.5 114.6 37.7 41.9 Common size Ratios Gross Margin 74.4 75.2 74.8 74.0 74.0 EBITDA Margin 12.0 15.7 17.6 18.4 19.0 PAT Margin 2.6 7.8 10.6 10.0 10.3 Employee Cost 19.8 19.0 20.0 19.5 19.5 S&G Expenses 70.5 72.3 74.4 63.9 64.5 Return ratios RoAE 36.5 46.6 46.5 41.1 38.9 RoACE 17.6 36.6 45.4 41.1 38.9 Turnover ratios (days) Debtors ( Days) 1 2 2 2 2 Creditors ( Days) 170 151 152 145 143 Inventory (Days) 6 5 6 6 6 Net working capital (16) (15) (13) (18) (24) Solvency Ratios Total Debt/Equity 3.4 0.1 0.0 0.0 0.0 Interest coverage 1.7 4.7 210.5 - -


Cash Flow Y/E March, (`mn) FY09 FY10 FY11P FY12E FY13E PBT 81 330 922 1,434 2,096

Add: Depreciation 169 243 293 389 486

Add: Interest expense 89 91 3 0 0

Less: Other Income (4) (4) (22) 0 0

Other Adjustments 0 0 0 0 0

Change in working cap. (9) 118 17 456 377

Taxes paid 8 1 204 445 692

CF from operations 319 779 1,010 1,834 2,268

Change in fixed assets (538) (517) (710) (964) (770)

Changes in Int. Asset 0 0 0 0 0

Change in investments 0 (0) (205) (276) 0

Other income 4 4 22 0 0

CF from investing acti. (535) (514) (892) (1,240) (770)

Change in debt 308 (739) (86) 0 0

Change in Equity cap. 0 593 35 1 0

Changes in Pref. capital 0 0 0 0 0

Dividend & dividend tax 0 0 0 0 0

Interest paid (89) (91) (3) 0 0

Other Adjustments 0 0 (31) 4 26

CF from financing acti. 219 (237) (85) 6 26

Change in cash 3 28 32 600 1,524

Opening cash 22 30 70 90 690

Closing cash 30 70 90 690 2,214

Du-Pont Analysis (%) FY09A FY10A FY11E FY12E FY13E

Net Profit Margin 2.6 7.9 10.6 10.0 10.3

Asset Turnover 2.6 3.4 3.5 3.4 3.2

Leverage 4.4 1.1 1.0 1.0 1.0

ROE 36.5 46.6 46.5 41.1 38.9

* FY09 is only for 9 months as the company had changed its FY end date, ** FY12 includes financials of Henkel India




NOTES

Recommendation Rationale

Recommendation Expected Absolute Return (%) over 12 months

BUY >20%

ACCUMULATE <20% and >10%

NEUTRAL <-10% and <10%

REDUCE >-10% and <-20%

SELL >-20%

Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for stock and our recommendation.

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