Equity | India | Consumer Discretionary Jubilant Foodworks ... Equity | India | Consumer Discretionary

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  • Equity | India | Consumer Discretionary

    Jubilant Foodworks Ltd.

    Delivering returns but valuations stretched November 21, 2011

    REDUCE

    Analyst Sunil Sewhani

    +91-22- 6614 2690 sunilsewhani@geplcapital.com 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 Indias 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 Indias 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 Dominos), b) lower capex (1/2 of Dominos) 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.

  • Equity | India | Consumer Discretionary

    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 Indias organised food industry

    According to the India Retail Report, Dominos 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 Indias 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. JFLs operations have been ranked number one in Dominos 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 Caf Coffee Day in the last few years. Despite this, Dominos 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

    Caf 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

  • Equity | India | Consumer Discretionary

    Jubilant Foodworks Ltd November 21, 2011

    GEPL Capital Research| Initiating Coverage 3

    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

    Source: Company data, GEPL Capital Research

    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

    Austr