Jubilant Foodworks
SELL
JUBI IN EQUITY
March 21, 2017
CEO’s checklist for a turnaround
Consumer Discretionary
Key financials
Year to March
Accounting:
Predictability:
Earnings Momentum:
GREEN
AMBER
RED
Catalysts

Further gross margin decline in
FY18E given higher cheese cost

FY18E SSG to be capped at 7% given
rising competition.

Continued delay in ramp-up of new
stores to over 3 years from erstwhile
2.5 years.
Performance (%)
120
110
100
90
80
70
JUBI IN
Jan-17
SENSEX
Source: Bloomberg, Ambit Capital Research
Research Analysts
FY15
FY16
FY17E
FY18E
FY19E
Net Revenues (` mn)
20,928
24,380
26,253
30,698
37,260
Operating margin (%)
12.2%
11.4%
9.9%
10.7%
11.4%
+ 91 22 3043 3085
Net Profits (` mn)
1,111
1,048
843
1,202
1,721
[email protected]
Diluted EPS (`)
16.9
15.9
12.8
18.3
26.2
RoCE (%)
19%
15%
11%
14%
18%
P/E (x)
66.1
70.2
87.2
61.3
42.6
EV/EBITDA (x)
28.5
26.2
28.1
21.9
16.7
Abhishek Ranganathan, CFA
Mayank Porwal
+ 91 22 3043 3214
[email protected]
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Feb-17
Dec-16
Nov-16
Oct-16
Sep-16
Jul-16
60
Aug-16
Checklist #3 Is sub-franchising feasible?
Jubilant is perhaps the only sizeable master franchisee that has not subfranchised. Jubilant expanded in many small towns, with 240 of them having
<10 stores. Ramp-up at these locations has been delayed due to higher costs
vs lower revenues (lower share of delivery) than stores in major cities. Subfranchisee model is more viable in smaller towns given franchisee-owned real
estate and lower administration costs from family members’ involvement.
Growth multiples cannot be ascribed to earnings from cost savings
Costs saving measures are a short-term fix and do not warrant valuation rerating. Re-building this asset-heavy business will take longer than just a couple
of quarters and could depress margins. Titan, at 33x FY19E EPS, with an assetlight model has demonstrated agility in product pricing to overcome regulatory
disruptions. But Jubilant is constrained by size and cost structure. Our fair value
of `879 implies 33x FY19E EPS; SSG over 10% is a key risk to our SELL rating.
`71/US$1.1
`728.3/US$10.9
`1,119
`879
22
Flags
Jun-16
Checklist #2 Expanding small user base; headcount cut is short term fix
Headcount reduction may boost near-term earnings but compromises delivery
experience in the long run. Investments in product (quality), communicating the
same and technology (ease of ordering, reducing delivery time) helped the US
business in 2010. For Jubilant, given input cost inflation (28% CAGR over
FY11-16) and low user base of 15mn, such measures can be margin-dilutive.
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
Apr-16
Checklist #1 Price drop or product improvement?
Lower prices or better products can drive SSG revival but with margin
compression; 100bps fall in gross margins needs 250bps in SSG to maintain
EBITDA margins. Domino’s offering is rated as mediocre by a large customer
base (on Zomato) vs global positioning as value for money proposition.
Moreover, in just top 10 cities its pricing faces competition from over 11,000
better dining choices (pizza competitors outnumber Dominos 2:1).
Recommendation
May-16
A new CEO and recent commentary on profitable growth have renewed
hope amongst investors. However, the path is not as quick as
delivering pizza in 30 minutes. Correcting price value proposition (10%
price CAGR over FY11-16) no longer assures margin expansion in sync
with SSG. Measures like headcount reduction, while margin accretive,
would impair delivery-centric business. Architecture around product,
technology and advertisement is at the core of growing customer base,
which at 15mn is low despite presence in 260 cities. Own-store model
remains Jubilant’s handicap vs successful Domino’s franchisees globally
that are asset-light but tech heavy. We would like to see steps on the
above by the new management before turning BUYers on a franchise
which is struggling but not beyond resurrection. At 43x FY19E EPS, the
stock factors 7% SSG over FY18-20E but ignores risks associated with
near-term execution and re-building the foundations.
Competitive position: STRONG
Changes to this position: NEGATIVE
Mar-16
COMPANY INSIGHT
Jubilant Foodworks
Addressing price value proposition critical
to SSG revival
Jubilant’s management has long blamed poor macro for the decline in SSG,
but at the heart of SSG revival is price value proposition that needs
correction. A 10% CAGR in pizza prices and increasing democratization of
local chains have resulted in dwindling same store volume growth.
Therefore, margins have contracted to 11% in FY16 from a peak of 18% in
FY12. In the top 10 cities, local pizza outlets ranked better than Domino’s
outnumber it by 2:1 and are a part of 11,000 restaurants (up from 9,000 in
March 2016 –see our report dated 04 March 2016), which compete with 655
Domino’s stores there. The increased share of stores (40%) of smaller cities
(nearly 206 have at best just two stores) which are dine-in heavy (lower asset
turns) have impaired the margin mix.
Price hikes, not macro behind dwindling SSG
The management has stated that poor macro is the cause of muted SSG, which has
been falling since FY13. However, price increases due to cost push from inputs and
wage inflation have resulted in its pizza prices being higher on purchasing power
parity (PPP) than Domino’s franchisees in the US, the UK and Australia. The
company’s commentary in its earnings calls and annual reports since FY13 states
poor macro for falling SSG. However, pricing was never considered a cause for the
dwindling SSG.
Exhibit 1: The company believes macro has had a material bearing on operations
Year
Management commentary on economy
FY13
“The economic environment has been challenging. Nonetheless we have remained committed to capitalize on the growth
potential. The volatile economy demanded even more financial strength, flexibility and disciplined execution and we have delivered on
those. We will continue to strengthen our systems and processes to better equip ourselves to handle unfavourable economic situation
and market scenarios. As mentioned earlier we witnessed the impact of wavering economic conditions on our same store
sales performance. Nonetheless we believe the potential to growth remains intact and we want to continue investing in our business
to generate higher returns as and when the scenario normalizes.
"We have been faced with an unprecedented climb down in sentiment from the consumers’ vantage perspective. JFL is
cognizant of such compulsions and motivations and as a company we have taken steps to maintain a value proposition
for them. I would reckon that nearly 80% - 90% if not more, is attributable to the macro economic factors, splitting of
stores is a phenomenon which is a part and parcel of our business and we believe is no different from last year."
FY14
"As I explained to you when the economic sentiment is weak, it may take more efforts to bring the consumers to you so
that the consumers become more loyal and on long term basis he stays with you. "
"The FSI sector reeled under subdued sales as market growth was severely impacted for a large part of FY2014, mainly in the latter
half. "When you do micro analysis, big trends are still not emerging honestly. The political outcome of the elections which happened a
couple of days back do bring in a sense or call it reassurance, call it optimism, but it is still not reflecting in numbers obviously."
FY15
"Economic parameters are yet to witness a turnaround. As of now we're not seeing any positive, but all the consumer
sentiment and all the research we got which is coming now in the market they are talking about that consumer
confidence is improving and it is expected that consumer will come back to the categories like QSR and all the
discretionary expense will come back."
Clearly, the worst time is behind us. We believe the kind of pressures which we saw in the last one year or so is not there anymore, but
there will be always challenges in a growing economy. There will be inflationary pressures."
FY16
"And if the economy, which we are very positive about, is going to open up, consumer sentiments will improve. Consumers
clearly are telling us that we love Domino's Pizza, we are emotionally connected still highest on your brand but they're also saying that
we are clamping down on eating or consuming food outside of home, and this is kind of conclusive, though qualitativeness in its
nature.."
"If the consumer sentiment does not improve, and if GDP growth does not kick-in, if we have all the reforms which we're
talking about the government will take, does not happen, obviously then it becomes very difficult to predict the future. "
Source: Company, Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 2
Jubilant Foodworks
We highlight that the 10% CAGR in pizza prices over FY11-16 has eroded the price
value proposition, resulting in a decline in SSG. The fall in SSG was caused by a
decrease in volumes, indicating lower ordering frequency and a decline in same store
customer base. In contrast, Domino’s Pizza Group plc (‘Domino’s UK’) witnessed only
a 2.3% (CY15) increase in order value, which also includes mix change, thus
sustaining the value proposition and delivering SSG.
Exhibit 2: Price hikes have dented Jubilant’s SSG
Price per order (Rs) (LHS)
Same Store Volume growth (RHS)
YoY growth in number of orders (RHS)
400
60%
300
40%
200
20%
100
0%
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
-20%
FY07
0
Source: Company, Ambit Capital research
Exhibit 3: Measured price hikes taken by Domino’s UK have aided SSG unlike in the
case of Domino’s India
Price hikes-Domino's UK (LHS)
Price hikes-Domino's India (LHS)
SSG-Domino's India
SSG-Domino's UK
40%
14%
12%
10%
8%
6%
4%
2%
0%
30%
20%
10%
0%
CY10
CY11
CY12
CY13
CY14
CY15
Source: Company, Ambit Capital research
Exhibit 4: Domino’s pizzas in India are the most expensive on PPP basis as compared
to other prices in other countries
Non veg medium sized pizza
USA
UK
Australia
India
Indonesia
Chicken pizza prices in US$ - list prices
14.0
20.7
20.9
7.8
3.4
1.0
1.1
1.2
0.3
0.3
PPP indexed to USA
Chicken pizza price in US$ adjusted for PPP
14.0
15.4
16.8
4.2
% by which PPP adjusted pizza prices higher /
0%
35%
24%
87%
lower than list prices
Source: World Bank, Ambit Capital research. Note: Veg Pizza of the same size provides the same results.
4.2
-19%
Competition has emerged stronger due to internet
Food aggregators have disrupted the space by offering deliveries from restaurants at
low and unviable costs. However, the real sustainable disruption comes from
democratisation of local restaurants whose products, experience and value
proposition are showcased through ratings and reviews as against unsolicited
pamphlets. This has also led to mushrooming of smaller local restaurants (there are
now 11,000+ restaurants rated 3 and above [good or excellent] on Zomato in the
top 11 cities) with lower investment in prominent real estate and/or promotions.
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 3
Jubilant Foodworks
Value proposition offered by neighbourhood restaurants is higher
The more sustainable and perhaps less appreciated trend is the disruption caused by
the likes of Zomato. Zomato’s 24,000 online and 200,000 phone orders each day
reflect the disruptive power of foodtech and empowerment of local restaurants. The
popularity of such apps makes customers more open to trying newer or hitherto
untried but well “rated” restaurants. A case in point is that the number of pizza
outlets (at comparable price points) in key cities such as Mumbai, Bangalore, Delhi
etc. is 2x that of Domino’s outlets
Exhibit 5: Cities with the most Domino’s stores face competition from a plethora of restaurants at the same price points
City
Zomato – No. of
Zomato - No. of
Zomato - No.
Zomato - No. of
Domino's restaurants other
restaurants of restaurants
restaurants where Avg. rating
outlets as on than Domino's in
offering pizza
offering
cost for 2 is `500- of Domino’s
March 5, those cities where
(other than delivery where
1000 with average on Zomato
2017
cost for 2 is
Domino’s) at
cost for 2 is
rating of 3 or more
`500-1000
`500-1000
`500-1,000
Delhi NCR
147
5,290
2,496
3.1
297
4,740
Bangalore
95
2,779
1,408
2.8
244
2,148
Mumbai
129
4,774
2,649
2.6
279
4,255
Chennai
56
1,484
728
3.4
73
1,133
Hyderabad
58
1,676
820
2.7
74
1,152
Pune
55
2,403
1,193
2.6
126
1,776
Kolkata*
44
1,350
778
3.5
29
876
Ahmedabad*
26
777
404
2.6
144
496
Navi Mumbai*
17
626
332
3.1
39
605
8
169
206
2.9
23
31
655
21,328
11,014
2.9
1,328
17,212
Surat*
Total
Chain restaurants
offering pizza
(rating above 3 on
Zomato and cost for 2
is `500-1000)
Tossin Pizza, Baking Bad,
Jamie’s Pizzeria,
Instapizza, New York
Slice
Whooppeezz, Mojo
Pizza, Pizza Stop,
Pizzeria, Ovenstory
Pizza, Crunch Pizzas
Joey’s Pizza, Eva’s Pizza,
Francesco’s Pizzeria,
PizzAah
Pizza Republic, Eagle
Boys Pizza, Pizza Hut,
Long Live Pizza
Pizza Hut, Eagle Boys
Pizza, Ovenstory Pizza
Mojo Pizza, Pizza Hut,
95 Pasta n Pizza,
Cheesiano Pizza
Pizza Hut, Eagle Boys
Pizza, Home Slice
Pizza Hut, No Mad Baker
– The Pizzeria,
Hamfoo’s, The Blue
Oven
Pizza Hut, Delicious Den,
Smoking Pizza, La Pino’s
Pizza, Pizzeria House
Pizza Hut, Den’s Pizza
Source: Zomato, Ambit Capital research. * Have included names of standalone outlets too in restaurants offering pizza.
Neighbourhood restaurants’ value proposition is better than that of Jubilant
Price increase has not been peculiar to Jubilant. However, not only has the gap
between prices of local chains and Domino’s pizza increased, the value proposition
too has widened. In FY11, a Domino’s pizza for `160 would be a meal for two people
vs two plates of pav bhaji (a local delicacy) costing `120 for two people. Today, two
plates of pav bhaji cost `220 but a Domino’s pizza is a lot more expensive, at `500.
Democratisation of local restaurants has hit the delivery business
The top 10 cities for Jubilant account for nearly half the number of its stores and
revenues. But the share of delivery-driven business in these stores, at 60%, is higher
than the system-level share of 50%. The empowered local chains’ online presence is
highest in these top 10 cities, which impacts Jubilant’s delivery business and, hence,
asset turns.
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 4
Jubilant Foodworks
Exhibit 6: For Jubilant dine-in accounts for nearly half of
revenues…
Exhibit 7: …but deliveries drive revenues in the top 12 cities
Overall
Top 12 Cities
Dine in
Share of orders
Ticket size
Share of revenues
Delivery
60%
40%
1x
1.75x
46%
54%
Dine in
Share of orders
Ticket size
Share of revenues
Source: Company, Ambit Capital research
Delivery
40%
60%
1x
1.75x
28%
72%
Source: Company, Ambit Capital research
Exhibit 8: The appetite for more Jubilant stores in smaller cities of India is low
No. of cities
Dec-09
Dec-11
Dec-13
Dec-15
0
3
3
4
1
0
0
2
Bangalore, Chennai, Mumbai, New
Delhi, Hyderabad, Pune
1 Kolkata
0 -
50 and
above stores
41-50 stores
March-17 Key cities as on March 2017
6
31-40 stores
2
0
1
1
21-30 stores
0
3
2
1
10-20 Stores
5
2
5
10
6-9 stores
3
5
6
11
3-5 stores
6
15
20
25
22
1-2 stores
42
79
82
174
211
Total
59
107
119
228
260
1 Ahmedabad
Gurgaon, Ghaziabad, Goa, Indore,
10 Nagpur, Navi Mumbai, Noida,
Surat, Thane, Vadodara
11
Source: Company, Ambit Capital research
Exhibit 9: Increasing share of Jubilant’s stores in smaller cities has impacted SSG
Store network
Top 10 cities
Dec-09
Dec-11
Dec-13
Dec-15
March-17
199
277
316
483
650
Top 11-20 cities
28
47
64
112
102
Top 21-30 cities
19
34
40
68
62
Top 31-40 cities
14
20
26
44
42
Top 41-50 cities
7
12
19
34
32
51 and above
19
61
82
212
232
286
451
547
953
1,120
17.2%
30.9%
3.3%
3.2%
-0.7%
SSG stores
286
451
547
876
Stores from top 10 cities in SSG stores
199
277
316
NA
Total
SSG Growth
Source: Company, Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 5
Jubilant Foodworks
Domino’s USA turnaround story is tough to
replicate in India
Positive SSG was the key margin driver but was driven by demand pull. Now,
however, driving SSG needs investments in price (covered in previous
section), product, branding and technology. A case in point is Domino’s
Pizza, Inc. (‘Domino’s USA’), which made investments in improving product,
price value proposition, communication and technology. This helped SSG
(average 7.4% over CY10-16 vs -2.6% over CY06-09), PAT (16% CAGR over
CY10-16 vs -9% over CY06-09) and RoCE (from 47% in CY08 to 76% in CY16).
The quick turnaround was aided by low input cost inflation and low wage
inflation. However, for Jubilant, challenges in replicating the USA measures
lie in sacrificing margins given wage and food inflation in India.
Exhibit 10: Steps taken by Domino’s USA and impact; most of these were taken by new CEO, J Patrick Doyle, who was
appointed in 2010
Steps
Impact on company’s metrics (company operated stores)
Metric
New product creation and Customer involvement in validation:
Created a completely new recipe for its pizzas which ranged from dough
development to testing dozens of cheeses, 15 sauces and 50 crust seasoning Revenue growth
blends and made 1,800 random pizza consumers from eight U.S. markets
taste them for their reviews
Hired 30 tech workers to reconfigure its online ordering system; Today the
tech team has around 400 members and is the biggest division at the
SSG
Headquarters
Rolled out a honest and interactive ad campaign that actively utilized the
internet and technology that showed customers discussing how they felt the Gross margin
pizza was devoid of flavour
Operating margin
Ad spend as a % of
revenues
Source: Ambit Capital research
CY08
CY09
CY10
CY11-16
-9.4%
-6.1%
2.9%
4.3%
-2.2%
-0.9%
9.7%
6.4%
72.4%
74.2%
72.6%
72.7%
16.4%
18.3%
19.5%
23.4%
2.5%
2.4%
1.9%
1.6%
Multi-pronged strategy from product to technology
Domino’s USA faced declining SSG during CY06-08 due to poor tasting pizzas and
low price value proposition. The company took several steps to improve the product
(now it’s a leader amongst national QS`) and value proposition (on par with Pizza
Hut and Papa John’s) and followed it up with innovations in technology to improve
experience and convenience. The outcome was an improvement in SSG (average
7.4% over CY10-16 vs -2.6% over CY06-09) and operating margins (14.5% in CY10
to 18.4% in CY16).
Improvement in product helped boost the value proposition
Though Domino’s USA ranked high on service it ranked low on taste. The company
examined each ingredient from crust to cheese and created a completely new recipe
for its pizzas. The new process ranged from dough development to testing dozens of
cheeses, with multiples sauces and 50 crust seasoning blends. This was followed by
making 1,800 random consumers from eight US markets taste/review the pizzas.
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 6
Jubilant Foodworks
Exhibit 11: Domino’s USA redesigned its pizza recipes and process to improve the
product….
Source: Domino’s USA CY12 presentation, Ambit Capital research
Exhibit 12: ..the outcome being absolute and relative improvement in taste
Source: Domino’s USA CY12 presentation, Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 7
Jubilant Foodworks
Exhibit 13: Domino’s USA has made commendable changes and scaled up the
value for price ladder since 2010
Price Value (0-10 scale)
8
7
6
5
4
3
2
1
0
CY09
CY12
CY15
Source: Ambit Capital research
Investment in experience through technology
Domino’s has been able to keep consumers engaged by introducing unique
innovations (see Exhibit 14) such as 10-minute delivery and one-click ordering. For
instance, recently, Domino’s Australia introduced the Fresh Fast Bake Certified
concept in some of its stores, wherein it ensures pizza delivery within 13 minutes of
ordering. The India business is lagging in terms of innovations because, unlike
franchisees in the UK, Australia and the US, it is an own-store business with lower
focus on technology.
Exhibit 14: Innovations made by Domino’s in the QSR space
Domino's
Australia
Domino's
USA
Online ordering
2005
2007
2007
2011
Mobile App ordering
Pizza Tracker on mobile (allowed
customers to view the status of
their order in a simulated progress
bar)
Pizza Theatre
Pizza profiles (allowed customers
to save their online ordering
information and reorder their
saved favourite combinations in
five clicks, or about 30 seconds)
Order from Xbox
Dom (Siri-like app called Dom
which lets customers place orders
by conversing with a computergenerated voice)
3D Pizza Builder iPad App (offers a
much more realistic 3D view of
customers’ finished orders)
Pizza Car
2009
2007
2010
2012
2010
2008
2009
2013
2012
2012
2012
2013
2013
2013
2013
2015
2014
2014
2014
-
2014
2014
2014
-
2014
2014
2014
-
2015
2015
-
-
Tweet/Message and order
2016
2015
-
-
Domino's One Click order
Piece of the Pie Rewards Loyalty
Program
Domino's Robotic unit
Fresh Fast Bake certified - 3:10
stores
DRU-Drone
2016
2016
-
-
-
2016
-
-
2016
-
-
-
2016
-
-
-
2016
-
-
-
2016
-
Innovation introduced
Instagift
Domino's
Domino's India
UK
Source: Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 8
Jubilant Foodworks
Input cost and wage inflation critical
Domino’s USA invested in improving the product as well as the price value
proposition. It benefited from low wage inflation (2% and that too due to higher
variable payouts), flat rentals and moderate input cost inflation. In the case of
Jubilant, investments in product and price value proposition can be margin-dilutive if
input cost inflation (28% CAGR over FY11-16) and wage inflation (33% CAGR over
FY11-16) continue to be steep.
Exhibit 15: Domino’s USA faced only 2% inflation in labour cost and flat occupancy
cost over the last 6 years
SSG (LHS)
Occupancy costs per store (RHS)
30%
EBITDA margin (LHS)
Labour costs per store (RHS)
US$ mn
0.35
25%
0.30
20%
0.25
15%
0.20
10%
0.15
5%
0.10
0%
-5%
0.05
CY09
CY10
CY11
CY12
CY13
CY14
CY15
-
Source: Ambit Capital research. Note: Inflation in labour costs have been calculated for CY09-CY14 as CY15
labour costs include extraordinary expenses (higher performance based incentives); CY16 occupancy costs are
not available
Exhibit 16: Cheese prices in the USA increased by only 3% CAGR over the last 7 years
Cheese block per pound (US$)
2.5
2.0
1.5
1.0
0.5
CY16
CY15
CY14
CY13
CY12
CY11
CY10
CY09
-
Source: Ambit Capital research
Inflation is a bigger challenge in India
Domino’s USA was able to pull off a reasonably quick turnaround in two years due to
lower input costs, steady rentals and low wage inflation (CY09-14 CAGR of 2% on
per store basis). In India, improving the price value proposition entails sacrificing
gross margins because of sustained food and wage inflation.
March 21, 2017
Ambit Capital Pvt. Ltd.
Cheese costs in India have gone up
by 15-20% YoY in 4QFY17 as milk
prices have gone up 20%. This is
likely to add pressure on gross
margins of Jubilant in the event of
no price hikes for the pizzas.
Page 9
Jubilant Foodworks
Exhibit 17: Jubilant has increased prices as food and wage inflation remains high
Price of a medium sized Non-veg (treat) pizza at Domino's (LHS)
Inflation in milk and milk products (RHS)
Inflation in meat (RHS)
Inflation in employee cost (RHS)
400
20%
15%
300
10%
200
5%
100
0%
0
-5%
FY12
FY13
FY14
FY15
FY16
9mFY17
Source: Ambit Capital research
Small user base may flatter to deceive
Jubilant’s user base of 15mn customers is small given its network of 1,111 stores
across 260 cities. Promotions have not been successful in driving volume growth as
this customer base hasn’t grown. On the contrary, promotions can be
counterproductive as loyal customers gain from lower pricing even as new customer
additions continue to underwhelm.
Exhibit 18: Jubilant’s customer base is low given its large network of stores
Customers ordering
once
Customers ordering
multiple times
Total
50%
50%
100%
Percentage (%)
Number of times ordered (x)
1
7
Weighted orders (x)
0.5
3.5
4
Number of orders (mn)
Number of customers ordering
(mn)
Source: Company, Ambit Capital research
7.5
52.5
60
7.5
7.5
15
Technology is a master franchisee’s domain, but Jubilant continues to lag
A master franchisee has access to Domino’s USA’s knowhow in product development,
commissary and logistics management and vendor development. Currently Jubilant
pays 3.4% of revenues as royalty for the same. But technology is largely the domain
of the master franchisee. Therefore, the onus of development of the app is on
Jubilant. Moreover, it is likely that access to technology from either Domino’s or other
franchisees will come at an additional cost.
Exhibit 19: Jubilant’s app continues to have highest unfavourable ratings amongst leading Domino’s franchisees
Metrics/Company
India
UK
Australia
USA
3.7
13.2
1mn+
10-50mn
25.0%
8.0%
13%
2.0%
Major App features
-Pizza tracker
-One touch
order
-Pizza tracker
-Receive notifications for great deals from
one’s local store
-New On Time Cooking is now available
so one’s pizza is ready as soon as one
walks in to store to pick up order
-Pizza tracker
-Voice ordering assistant, Dom
-Sign up for Domino’s Piece of the
Pie Rewards and earn points
toward free pizza!
-One touch order
-Pizza tracker
App Developer's name
Jubilant
Foodworks Ltd.
Domino's Pizza
Group, plc
Domino's Pizza Enterprises Limited
Domino's Pizza, Inc.
App downloads (last reported, in
mn)
% of unfavourable ratings for the
app
Source: Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 10
Jubilant Foodworks
Exhibit 20: Mobile orders form <30% of delivery orders for
Jubilant…
40%
35%
30%
25%
20%
15%
10%
5%
0%
Share of online orders(LHS)
Share of mobile orders forming part of online orders(LHS)
Ad spend as a % of Sales(RHS)
SSG(RHS)
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research
March 21, 2017
FY15
FY16
Exhibit 21: …whilst Domino’s UK has leveraged mobile
ordering to generate SSG
80%
Share of online orders forming part of delivered orders (LHS)
Share of mobile orders forming part of online orders (LHS)
Ad spend as a % of Sales (RHS)
SSG (RHS)
40%
60%
30%
40%
20%
20%
10%
0%
0%
CY10
CY11
CY12
CY13
CY14
CY15
Source: Ambit Capital research
Ambit Capital Pvt. Ltd.
Page 11
Jubilant Foodworks
Sub-franchising: Better late than never?
New Domino’s stores have underperformed since FY13 as evident in falling
asset turns (4.2x in FY12 to 3.2x in FY16) and margins (410bps adjusting for
losses from Dunkin Donuts). Jubilant is the one of the few master franchisees
which runs almost all its stores. The closest is Domino’s Alsea (Mexico), which
operates nearly three-fourth of its stores. The advantages of sub-franchising
will be two pronged: a) frees management bandwidth to work on innovation
and technology; and b) helps franchisees operate a tighter ship (high
involvement of family, legacy real estate) and at lower (yet respectable)
return expectations than that of a listed entity.
New store profitability issues need a long-term fix
Delayed ramp-up of new stores has contributed to margin compression. Lower
proportion of the higher ticket size delivery business in stores beyond the top 10 cities
combined with elevated prices has resulted in asset turns falling and margins
compressing. While the company has reduced headcount by 8% last year, the
solution is short term as a material pick-up in SSG would need a higher head count
to ensure optimal delivery experience.
Operating margins have fallen as new store ramp-up is sub-optimal
The company has added 450 stores over the past 3 years whereas margins have
fallen by 410bps (adjusting for losses from Dunkin Donuts). Apart from poor SSG, the
fall in margins is also due to delay in ramp-up of these new stores.
Exhibit 22: Store operating margins have been deteriorating as Jubilant increased the
number of outlets
Store level metrics (` mn)
FY14
FY15
FY16
Revenue
26.7
26.1
25.6
YoY
-2%
-2%
-2%
Food costs
7.0
6.6
6.1
26%
25%
24%
As a % of sales
Employee cost
5.2
5.5
6.0
As a % of sales
20%
21%
23%
Power and fuel cost
1.6
1.5
1.5
As a % of sales
6%
6%
6%
Freight & delivery cost
0.8
0.8
0.7
As a % of sales
3%
3%
3%
Rent
2.4
2.6
2.7
As a % of sales
9%
10%
10%
Packing material costs
1.1
1.0
0.9
As a % of sales
4%
4%
4%
Depreciation
1.2
1.3
1.3
As a % of sales
5%
5%
5%
Other costs
2.6
2.6
2.7
As a % of sales
10%
10%
11%
Total costs (before royalty and advertising expenses)
21.8
21.9
21.9
As a % of sales
85%
87%
88%
4.8
4.2
3.8
18.1%
16.2%
14.7%
1.3%
1.5%
2.5%
19.4%
17.7%
17.2%
348
411
450
Operating profit
Operating Margin %
Dunkin’s impact on margins %
Domino’s store level margin %
No. of stores existing for less than 3 years
The ramp-up/payback of some of
the recent additions to the store
network is now beyond 3 years as
against earlier 3 years –
Management in its 3QFY17
earnings call
Source: Company, Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 12
Jubilant Foodworks
Headcount reduction is not sustainable in the long term
Jubilant’s headcount has been falling since 3QFY16. While this is partly due to
improved efficiencies, it is more likely a response to falling delivery sales/orders.
While the reduction has helped control wage costs, it is not sustainable as delivery
experience will be compromised thus, affecting SSG. Therefore, SSG below 6% (as
guided by the management) is unlikely to bring huge operating leverage from wage
costs. Moreover, sustainable SSG has to be volume driven and hence scope to reduce
headcount significantly is limited.
Exhibit 23: Headcount reduction would affect delivery efficiency
No. of employees per store (LHS)
SSG (RHS)
35
“If another company were to get
out ahead of Domino’s by
providing quick, reliable delivery
without having to manage a staff
of drivers and coordinate routes,
Domino’s would lose some of its
competitive advantage.” – Kelly
Garcia, Head of Ecommerce at
Domino’s Pizza Inc. in a media
interview
40%
35%
30%
25%
20%
15%
10%
5%
0%
-5%
30
25
20
15
10
5
FY11
FY12
FY13
FY14
FY15
FY16
9mFY17
Source: Company, Ambit Capital research
Exhibit 24: The number of orders per store is declining for Jubilant but is still higher
than that of Domino’s UK
Orders per store-UK
Orders per store-India
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
Domino’s UK has 30 employees
per store on an average
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research
Sub-franchising is
long-term solution
globally
proven,
could
be
a
Sub-franchising not only frees management bandwidth but also creates a more
disciplined portfolio of stores. Moreover, managing a staff size of over 25,000 with
wage inflation can be counterproductive, with the end-result being escalating pizza
prices. In the case of Jubilant, sub-franchising some stores and future additions will
help cap input cost inflation. Also, sub-franchising is likely to bring more discipline in
new store openings and functioning as the onus to dedicate time and capital shifts to
the sub-franchisee.
Exhibit 25: Sub-franchising has been integral to most successful markets of Domino’s
Metric
Share of Sub franchised stores
Franchise fee received as
income (US$ mn-CY16/CY15)
RoCE (CY16/CY15)
CFO (US$ mn) (CY16/CY15)
Domino’s UK Domino’s USA
Domino’s Mexico Domino’s India
99%
93%
77%
NA
NA
312
16
NA
50%
76%
8%
15%
47
287
213
32
Source: Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 13
Jubilant Foodworks
Sub-franchisees have been able to operate on sound store economics
Sub-franchises in the UK and the US have operated on sound economic parameters
and have gained from product and technological innovations. Although they pay
royalty to the master franchisee, their underlying operating margins have improved
due to better SSG. For Jubilant, sub-franchising will help manage wage costs
(currently 23% of revenues) better as well as focus on innovations, which in turn will
enable it to manage pizza price inflation and, hence, value proposition. This could
result in consistent SSG for Jubilant.
Exhibit 26: Operating metrics of Domino’s UK’s franchised stores
£, unless specified
SSG (company)
Average Weekly Unit Sales (£)
Annual Sales per store (£)
CY11
CY12
CY13
CY14
CY15
CY16
3.7%
5.2%
7.0%
11.3%
11.7%
7.5%
14,976
15,317
15,930
17,478
19,517
21,100
778,752
796,484
828,360
908,856
1,014,884
1,097,200
Indicative EBITDA margin (%)
12.50%
12.90%
12.40%
14%
15.50%
15.30%
Indicative EBITDA per store per year (£)
97,344
102,746
102,717
123,604
157,307
167,689
Source: Ambit Capital research
Exhibit 27: Domino’s USA - franchised stores have been profitable…
US$ mn, unless specified
CY11
CY12
CY13
CY14
CY15
CY16
Franchised stores (No.)
4,513
4,540
4,596
4,690
4,816
4,979
Revenues
3,400
3,545
3,862
4,185
4,960
5,678
YoY
8%
4%
9%
8%
19%
14%
SSG
3.4%
3.2%
5.5%
7.7%
11.9%
10.5%
Store EBITDA (US$)
70,000
75,000
78,000
89,000
125,000
134,000
Operating Margin %
9%
10%
9%
10%
12%
12%
CY11
CY12
CY13
CY14
CY15
CY16
Company operated stores (No.)
394
388
390
377
384
392
Revenues
336
324
337
349
397
439
YoY
-3%
-4%
4%
3%
14%
11%
4.1%
1.3%
3.9%
6.2%
12.2%
10.40%
95
88
93
99
104
117
28.3%
27.1%
27.6%
28.3%
26.1%
26.6%
72%
73%
72%
72%
74%
73%
69
76
81
81
98
107
21%
24%
24%
23%
25%
24%
Source: Ambit Capital research
Exhibit 28: …so have been company operated stores
US$ mn, unless specified
SSG %
Food costs
Food costs (As a % of sales)
Gross margin %
Operating Profit
Operating margin %
Source: Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 14
Jubilant Foodworks
Valuations: ‘Multiple’ fault lines
Jubilant has long enjoyed growth multiples (five-year average P/E of 76x on
1-year forward basis) given the large top-down opportunity provided by
demographic size and profile of India. However, growth has been an enigma
since FY13 as price value proposition eroded even as local restaurants,
empowered by technology, improved their customer acceptance. The scope to
improve margins is limited to short term measures of headcount reduction
given cost pressures from inflation in cheese costs. Positive SSG will come
from increased promotions or lower prices, translating to lower gross
margins. The stock at 43x FY19E EPS reflects high growth prospects but given
the near mutual exclusivity of SSG and margins, these valuations are rich.
Our DCF value of `879 (implied 33x FY19E EPS) reflects SSG of 7% over FY1820 but margin expansion of only 110bps given the above-mentioned
challenges. Structural changes like correcting price, improving product and
moving to sub-franchising would make us review our thesis.
Growth and margin improvement not in tandem
Jubilant’s PAT growth has lagged revenue growth since FY12 even as its asset turns
deteriorated. Orders per store have deteriorated as the value proposition eroded.
Phases of positive SSG in FY17 were driven by higher promotions. Improving price
value proposition is the key to SSG growth but will come at the cost of gross margin.
Gross margin would come under pressure also due to steep inflation in milk prices in
India in 4QFY17.
Exhibit 29: Sensitivity of FY19E EPS to SSG and gross margin
Gross Margin
Same Store
Sales Growth
Sensitivity of
FY19E EPS to
77%
76%
75%
74%
73%
72%
71%
70%
5%
30.7
26.8
23.0
19.2
15.3
11.5
7.7
3.8
7%
34.0
30.1
26.2
22.3
18.3
14.4
10.5
6.6
10%
38.9
34.9
30.9
26.9
22.9
18.9
14.9
10.9
12%
42.2
38.1
34.1
30.0
25.9
21.8
17.8
13.7
14%
45.5
41.4
37.2
33.1
28.9
24.8
20.6
16.5
Source: Ambit Capital research
Exhibit 30: High milk prices have impacted gross margin
Gross margin (LHS)
Inflation in milk and milk products (RHS)
76.5%
16%
76.0%
14%
75.5%
12%
75.0%
10%
74.5%
8%
74.0%
6%
73.5%
4%
73.0%
2%
72.5%
The increase in the raw milk prices
was above 20% in 3QFY17 YoY
vis-à-vis the similar quarter of the
last year.
- Bharat Kedia, CFO of Parag Milk
Foods during the 3QFY17 earnings
call
0%
FY12
FY13
FY14
FY15
FY16
9mFY17
Source: Company, Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 15
Jubilant Foodworks
Exhibit 31: SSG has to be revived by promotions and better price value proposition,
which however will impact gross margin
Gross Margin (LHS)
SSG (RHS)
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY20E
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
76.5%
76.0%
75.5%
75.0%
74.5%
74.0%
73.5%
73.0%
72.5%
Source: Company, Ambit Capital research
Exhibit 32: Revenue growth has been largely store network
driven…
EBITDA margin (LHS)
Revenue growth (YoY-RHS)
70%
RoE (LHS)
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
50%
40%
30%
20%
10%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
FY07
FY08
FY09
FY10
0%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Source: Company, Ambit Capital research
FY18E
FY19E
FY20E
60%
FY14
FY15
FY16
FY17E
1600
1400
1200
1000
800
600
400
200
0
FY11
FY12
FY13
# of stores (LHS)
Exhibit 33: … pressuring margins and RoE
Source: Company, Ambit Capital research
Exhibit 34: Promotions will drive asset turns but margins and RoE will remain below
the peaks of FY12
Asset turns (x-LHS)
EBIT Margin (RHS)
ROE (RHS)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY20E
FY19E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Source: Company, Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 16
Jubilant Foodworks
Re-rating warranted only if RoCE accompanies growth
Expectations of a re-rating in recent management commentary ignore the bumpy
path to sustainable RoCE accretion. Notwithstanding near-term measures such as
headcount reduction, there is no visibility of a turnaround akin to Domino’s USA.
Sustained SSG was at the core of Domino’s USA improved RoCE and consequent
valuation re-rating. The asset-heavy nature of Jubilant (no sub-franchisees),
combined with high wage and food inflation in India, reduces the visibility of SSG
and, hence, limits margin and RoCE growth. Therefore, the stock is expensive at 43x
FY19E EPS compared to better run, discretionary companies such as Titan (33x FY9E
EPS, 28% RoE), Page (35x FY19E EPS, 52% RoE) as well Domino’s Pizza Enterprises
Ltd., Australia (24x CY18E EPS, 39% RoE).
Exhibit 35: Domino’s US re-rated post the turnaround in
CY09…
1-yr fwd P/E
Exhibit 36: …which was reflected in margin and RoCE
accretion
RoCE (LHS)
SSG - Domesic stores (RHS)
EBITDA margin (RHS)
11-yr avg P/E
40
35
30
25
20
15
10
5
0
100%
20%
80%
15%
10%
60%
5%
40%
0%
-5%
0%
Source: Bloomberg, Ambit Capital research
CY16
CY15
CY14
CY13
CY12
CY11
CY10
CY09
CY08
-10%
CY07
Mar-16
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
20%
Source: Ambit Capital research
Jubilant’s earnings growth prospects are better comprehended over FY16 as a base
rather than FY17E due the demonetisation disruption in FY17E. Earnings growth over
FY16-20E will be only 21% for the stock trading at 43x FY19E EPS.
Exhibit 37: Jubilant’s P/E has de-rated to a 14% discount to
average P/E
1-yr fwd P/E
Exhibit 38: Low visibility of sustainable SSG does not
make a case for a re-rating
7-yr avg P/E
RoE (LHS)
140
SSG (RHS)
EBITDA margin (RHS)
50%
120
100
40%
80
30%
40%
30%
20%
60
20%
40
10%
10%
Source: Ambit Capital research
0%
FY17E
FY16
FY15
FY14
FY13
FY12
0%
FY11
Feb-17
Apr-16
Sep-16
Nov-15
Jun-15
Jan-15
Aug-14
Mar-14
Oct-13
May-13
Dec-12
Jul-12
Feb-12
Sep-11
Apr-11
-
FY10
20
Source: Company, Ambit Capital research
Peer comparison – Titan reinventing itself in face of regulatory disruptions
Jubilant is amongst the most expensive consumer discretionary stocks in India. While
the challenges for companies like Jubilant and Bata are internal (price value
proposition, over-expansion, high fixed costs), a franchise like Titan at 33x FY19E EPS
has faced external challenges from regulations. Yet Titan has actively pursued
measures to drive demand through price interventions (reducing making charges),
product innovations (wedding jewellery) and communication. Titan’s asset-light
business, brand investments (Tanishq continues to be an aspirational brand) along
with the above measures mean that it is on track to deliver SSG and double-digit
growth in the jewellery business in FY17 after three years.
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 17
Jubilant Foodworks
Source: Company, Ambit Capital research
FY16
FY15
FY06
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
0%
FY14
10%
FY13
20%
FY11
30%
Capex
FY10
40%
FY08
50%
Brandex
FY12
Rs bn
5
5
4
4
3
3
2
2
1
1
-
Jubilant
FY07
Titan
60%
Exhibit 40: Capex has lagged brandex for Titan
FY09
Exhibit 39: RoE trends – Titan vs Jubilant
Source: Ambit Capital research
Jubilant is also more expensive than the high-growth Domino’s Australia, which
trades at 24x FY19E EPS with 33% earnings CAGR over FY16-19. Domino’s Australia
has delivered sustained SSG (average of 7% over FY10-16) as well as RoE (average of
23% over FY10-16).
Exhibit 41: Peer comparison
MCap
EV/EBITDA
CAGR (FY16-19)/
(CY15-18)
P/E
RoE
RoCE
Relative valuations Country
(US$
mn)
FY18E FY19E
FY17E/ FY18E/ FY19E/
CY16 CY17E CY18E
Sales EBITDA EPS
FY17E/ FY18E/ FY19E/ FY15/ FY16/
CY16 CY17E CY17E CY13 CY14
Indian Companies
Jubilant Foodworks
India
1,120
22
17
87
61
43
15
15
18
11
14
18
19
15
Westlife Development
India
507
41
28
N/A
400
137
16
34 105
(1)
1
4
(4)
3
Speciality Restaurants
India
62
13
9
N/A
46
40
10
30 230
(3)
0
3
16
11
26
24
21
(11)
24
26
International Companies
Yum Brands
USA
22,780
15
15
McDonald’s Corp
USA
104,512
13
13
23
21
19
Chipotle Mexican Grill
USA
11,678
21
16
312
50
34
Papa John's Intl Inc
USA
2,804
7
2
(63)
(33)
(19)
(8)
4
11
219
125
NA
20
19
5
(7)
(8)
2
18
25
NA
NA
15
14
30
27
24
4
9
19
NA
NA
NA
19
21
Berjaya Foods BHD
Malaysia
MK restaurants Group
Thailand
PCL
Just Eat PLC
UK
157
9
8
27
21
17
11
12
26
6
8
10
19
16
1,529
13
12
26
24
21
7
11
11
16
17
18
NA
NA
4,831
24
18
52
35
25
34
60
82
11
13
15
NA
NA
GrubHub Inc
2,957
15
12
38
32
25
29
36
44
9
10
13
NA
NA
8,839
20
17
43
35
30
10
13
20
(12)
(15)
(19)
58
66
2,060
16
15
25
22
20
12
14
19
60
50
43
29
28
3,799
17
14
40
31
25
18
30
33
29
35
39
23
22
5,941
28
23
47
41
33
11
21
20
26
26
28
33
25
USA
Domino's Global
USA
Domino’s Pizza, Inc.
Domino’s Pizza Group
UK
plc
Domino’s Pizza
Australia
Enterprises Ltd.
Other Discretionary peers
Titan Company
India
Trent
India
1,204
23
16
50
37
26
25
49
70
11
13
16
5
8
India
2,510
31
24
59
45
35
22
21
23
47
50
52
42
43
1,687
25
19
NA
156
69
17
22
NA
(8)
6
16
NA
2
Page Industries
Aditya Birla Fashion &
India
Retail
Source: Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 18
Jubilant Foodworks
Exhibit 42: Key assumptions
Particulars (` mn unless otherwise stated)
Store additions (no.)
Same Store Sale growth
FY16
FY17E
FY18E
FY19E
115
120
120
120
3.4%
0.2%
7.0%
7.0%
24,380
26,253
30,698
37,260
EBITDA (` mn)
2,771
2,596
3,297
4,245
EBITDA margins
11.4%
9.9%
10.7%
11.4%
Depreciation
1,282
1,451
1,695
1,922
PAT
1,048
843
1,202
1,721
4.3%
3.2%
3.9%
4.6%
(148)
(37)
787
1,678
(2,264)
(2,159)
(2,167)
(2,325)
(148)
(37)
787
1,678
Revenues
Comments
As guided by the company
Margins expansion from SSG
Others
PAT margin
Cashflow parameters
CFO
Capex
FCF
Capex includes capex for 120 stores each year
and commissary capex
Balance Sheet
Asset turnover
ROE
3.2
3.1
3.3
3.6
15.2%
11.0%
14.1%
17.9%
Source: Ambit Capital research
Revision of estimates to reflect lower gross margins
We lower our gross margin estimates for FY18E and FY19E to 75.3% and 75%
respectively from 75.5% as SSG will be driven by promotions and lower prices. Also,
with higher cheese prices (up 20% in 4QFY17) gross margins will be under pressure
in the absence of price hikes. Consequently, we revise our earnings estimates
downwards by 4% and 6% for FY18E and FY19E to `18.3 and `26.2 respectively.
Exhibit 43: Revision of estimates
FY18E
FY19E
Old
New
% change in
estimates
7%
7%
-
8%
7%
-1%
Revenues (` mn)
30,698
30,698
0%
37,515
37,260
-1%
Gross margin %
75.5%
75.3%
75.5%
75.0%
EBITDA (` mn)
3,404
3,297
4,383
4,245
EBITDA Margin %
11.1%
10.7%
11.7%
11.4%
PAT (` mn)
1,258
1,202
-4%
1,855
1,721
-6%
19.1
18.3
-4%
28.2
26.2
-6%
SSG
EPS (`)
-3%
Old
New
% change in
estimates
Comments
SSG for FY18E reduced as we build only
volume driven SSG.
Revenue estimates reduced as we build in
lower SSG
We build in lower gross margins as SSG will be
led by promotions
-3%
Lower SSG and lower gross margins impact
EBITDA margins
Source: Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 19
Jubilant Foodworks
Risks
Improvement in SSG: Significant improvement in SSG led by promotions (while still
maintaining gross margins at 75%), which is above our estimate of 7% for FY18E, will
result in operating leverage.
Exhibit 44: Sensitivity of EBITDA margin to SSG
SSG
EBITDA margin
6%
11.1%
7%
11.4%
8%
11.7%
9%
12.0%
10%
12.3%
11%
12.6%
12%
12.8%
Source: Ambit Capital research
Deflation in input costs coupled with price correction: A deflation in input costs,
which hitherto has been the primary reason for price hikes, will give the company
leeway to reduce/correct prices. This can drive volume growth by attracting new
customers and, hence, deliver higher SSG.
Margins expand due to lower rentals: A reduction in rental costs which are 11%
of sales due to re-negotiation will result in margin improvement everything else
remaining the same.
Catalysts
Increase in input costs: With increase in key input costs such as cheese (by 20% in
4QFY17) coupled with absence of price hikes will put pressure on the gross margins
and hence operating margins.
Competition from local chains armed with technology: In the top 10 cities where
Jubilant operates, competition (which has better reviews than Domino’s at similar
price points) has increased over last one year. The number of such restaurants now
stands at 11,000 as against 9,000 in March 2016. Their visibility and accessibility
along with the choice/value proposition has been aided by the internet. This choice
and better value proposition continue to weigh on near-term SSG averaging 7% over
FY18E-20E.
Delay in ramp-up of new stores: A delay in ramp-up of new stores (428 stores
open for less than three years as on 31 December 2016) coupled with increased
competition in the top markets will continue to weigh on operating margins, which
are unlikely to return to the historic highs of 19% soon.
Exhibit 45: Explanation of accounting flags
Segment
Score
Comments
Accounting
GREEN
Jubilant enjoys a high CFO/EBITDA ratio (91% in FY16), indicating clean accounting. However,
miscellaneous expenses account for close to 4% of sales. The company is audited by a quality firm.
Predictability
AMBER
Management has been guiding for positive SSG in the near future but has not been able to deliver it
consistently.
Earnings momentum
RED
Earnings have been downgraded throughout 9MFY17 as the company has not been able to deliver SSG
consistently.
Source: Company, Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 20
Jubilant Foodworks
Jubilant’s forensic score percentile
Jubilant’s greatness score percentile
Source: Ambit HAWK
Source: Ambit HAWK
Jubilant falls in the ‘Zone of Safety’ as it enjoys a high
CFO/EBITDA
Jubilant has fallen in the ‘Zone of Mediocrity’ as it gets
penalized on Balance Sheet and pricing discipline
Source: Ambit HAWK
Source: Ambit HAWK
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 21
Jubilant Foodworks
Balance Sheet
Year to March (` mn)
Share capital
Sources of funds
Gross block
Net block
Investments
Working capital
Cash
Application of funds
FY15
FY16
FY17E
FY18E
FY19E
656
658
658
658
658
6,462
7,324
8,008
8,983
10,289
-
-
-
-
-
7,040
8,002
8,686
9,661
10,967
10,810
12,904
15,063
17,230
19,554
7,572
8,546
9,253
9,725
10,128
767
908
908
908
908
7,040
8,002
8,686
9,661
10,967
FY15
FY16
FY17E
FY18E
FY19E
20,928
24,380
26,253
30,698
37,260
Source: Ambit Capital research
Income statement
Year to March (` mn)
Revenues
21%
16%
8%
17%
21%
EBITDA
2,551
2,771
2,596
3,297
4,245
EBITDA margin %
12.2%
11.4%
9.9%
10.7%
11.4%
Depreciation
1,011
1,282
1,451
1,695
1,922
EBIT
1,540
1,489
1,144
1,601
2,323
PBT
1,615
1,551
1,258
1,794
2,568
PAT
1,111
1,048
843
1,202
1,721
16.9
15.9
12.8
18.3
26.2
YoY %
EPS (`)
Source: Company, Ambit Capital research
Cash flow statement
Year to March (` mn)
FY15
FY16
FY17E
FY18E
FY19E
PBT
1,615
1,551
1,258
1,794
2,568
Depreciation
1,011
1,282
1,451
1,695
1,922
Tax
352
392
415
592
848
Change in working capital
488
(328)
(172)
57
-
CFO
3,113
2,509
2,538
3,545
4,850
Capex
2,863
2,264
2,159
2,167
2,325
180
200
-
-
-
(2,623)
(1,997)
(2,159)
(2,167)
(2,325)
9
(177)
(159)
-
-
Investment
CFI
Issue of shares
CFF
9
(177)
(159)
(227)
(414)
(102)
(148)
(37)
787
1,678
FY15
FY16
FY17E
FY18E
FY19E
Gross margin
74.8%
76.2%
75.5%
75.3%
75.0%
EBITDA margin
12.2%
11.4%
9.9%
10.7%
11.4%
5.3%
4.3%
3.2%
3.9%
4.6%
Free cash flow
Source: Company, Ambit Capital research
Ratio analysis / Valuation parameters
Year to March
Net profit margin
Net debt: equity (x)
(0.1)
(0.0)
(0.0)
(0.1)
(0.2)
RoCE (post-tax)
18.6%
15.2%
11.0%
14.1%
17.9%
RoE
18.6%
15.2%
11.0%
14.1%
17.9%
P/E (x)
66.1
70.2
87.3
61.3
42.8
Price/Sales (x)
3.5
3.0
2.8
2.4
2.0
EV/EBITDA (x)
28.5
26.2
28.1
21.9
16.7
Source: Company, Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 22
Jubilant Foodworks
Institutional Equities Team
Saurabh Mukherjea, CFA
Pramod Gubbi, CFA
CEO, Ambit Capital Private Limited
Head of Equities
(022) 30433174
(022) 30433124
[email protected]
[email protected]
Research Analysts
Name
Industry Sectors
Nitin Bhasin - Head of Research
Aadesh Mehta, CFA
Abhishek Ranganathan, CFA
Anuj Bansal
Aditi Singh
Ashvin Shetty, CFA
Bhargav Buddhadev
Deepesh Agarwal, CFA
Dhiraj Mistry, CFA
Gaurav Khandelwal, CFA
Girisha Saraf
Karan Khanna, CFA
Mayank Porwal
Pankaj Agarwal, CFA
Paresh Dave, CFA
Parita Ashar, CFA
Prashant Mittal, CFA
Rahil Shah
Ravi Singh
Ritesh Gupta, CFA
Ritesh Vaidya, CFA
Ritika Mankar Mukherjee, CFA
Sagar Rastogi
Sudheer Guntupalli
Sumit Shekhar
Utsav Mehta, CFA
Vivekanand Subbaraman, CFA
E&C / Infra / Cement / Home Building
Banking / Financial Services
Retail / Consumer Discretionary
Consumer
Economy / Strategy
Automobiles / Auto Ancillaries
Power Utilities / Capital Goods
Power Utilities / Capital Goods
Consumer
Automobiles / Auto Ancillaries
Home Building
Strategy
Retail / Consumer Discretionary
Banking / Financial Services
Healthcare
Cement / Metals / Aviation
Strategy / Derivatives
Banking / Financial Services
Banking / Financial Services
Oil & Gas / Chemicals / Agri Inputs
Consumer
Economy / Strategy
Technology
Technology
Economy / Strategy
E&C / Infrastructure
Media / Telecom
Desk-Phone E-mail
(022) 30433241
(022) 30433239
(022) 30433085
(022) 30433122
(022) 30433284
(022) 30433285
(022) 30433252
(022) 30433275
(022) 30433264
(022) 30433132
(022) 30433211
(022) 30433251
(022) 30433214
(022) 30433206
(022) 30433212
(022) 30433223
(022) 30433218
(022) 30433217
(022) 30433181
(022) 30433242
(022) 30433246
(022) 30433175
(022) 30433291
(022) 30433203
(022) 30433229
(022) 30433209
(022) 30433261
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Sales
Name
Regions
Sarojini Ramachandran - Head of Sales
Dharmen Shah
Dipti Mehta
Krishnan V
Nityam Shah, CFA
Punitraj Mehra, CFA
Shaleen Silori
UK
India / Asia
India
India / Asia
Europe
India / Asia
India
Desk-Phone E-mail
+44 (0) 20 7886 2740
(022) 30433289
(022) 30433053
(022) 30433295
(022) 30433259
(022) 30433198
(022) 30433256
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Singapore
Praveena Pattabiraman
Shashank Abhisheik
Singapore
Singapore
+65 6536 0481
+65 6536 1935
[email protected]
[email protected]
USA / Canada
Ravilochan Pola – CEO
Hitakshi Mehra
Achint Bhagat, CFA
Americas
Americas
Americas
+1(646) 793 6001
+1(646) 793 6002
+1(646) 793 6752
[email protected]
[email protected]
[email protected]
Production
Sajid Merchant
Sharoz G Hussain
Jestin George
Richard Mugutmal
Nikhil Pillai
March 21, 2017
Production
Production
Editor
Editor
Database
(022) 30433247
(022) 30433183
(022) 30433272
(022) 30433273
(022) 30433265
Ambit Capital Pvt. Ltd.
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Page 23
Jubilant Foodworks
Jubilant Foodworks Ltd (JUBI IN, SELL)
2,500
2,000
1,500
1,000
500
Feb-17
Dec-16
Oct-16
Aug-16
Jun-16
Apr-16
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
0
Jubilant Foodworks Ltd
Source: Bloomberg, Ambit Capital research
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 24
Jubilant Foodworks
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>10%
SELL
NO STANCE
<10%
We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW
NOT RATED
We will revisit our recommendation, valuation and estimates on the stock following recent events
We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE
We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE
We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically,
and, in some cases, in printed form.
Additional information on recommended securities is available on request.
Disclaimer
1.
2.
3.
4.
5.
6.
7.
AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio
Manager, Merchant Banker and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI.
AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes
to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the
accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this
Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein.
This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of
this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss
howsoever directly or indirectly, from any use of this Research Report.
If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions
in place between AMBIT Capital/ such affiliate and the client.
This Research Report is issued for information only and the 'Buy', 'Sell', or ‘Other Recommendation’ made in this Research Report such should not be construed as an investment advice to any
recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities and should not be intended or treated as a substitute for necessary review or validation or any professional advice.
Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or
subscribe for any investment or as an official endorsement of any investment.
This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in
whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including
United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract,
and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.
Ambit Capital Private Limited is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. SEBI Reg.No.- INH000000313.
Conflict of Interests
8. In the normal course of AMBIT Capital’s business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one client’s interests conflicting
with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients’ interests are protected. AMBIT Capital has policies and
procedures in place to control the flow and use of non-public, price sensitive information and employees’ personal account trading. Where appropriate and reasonably achievable, AMBIT Capital
segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and
should make informed decisions in relation to AMBIT Capital’s services.
9. AMBIT Capital and/or its affiliates may from time to time have or solicit investment banking, investment advisory and other business relationships with companies covered in this Research Report and
may receive compensation for the same.
Additional Disclaimer for Canadian Persons
10. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities.
11. AMBIT Capital's head office or principal place of business is located in India.
12. All or substantially all of AMBIT Capital's assets may be situated outside of Canada.
13. It may be difficult for enforcing legal rights against AMBIT Capital because of the above.
14. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2
Canada.
15. Name and address of AMBIT Capital's agent for service of process in the Province of Québec is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montréal, Québec H3B 2C3 Canada.
Additional Disclaimer for Singapore Persons
16. This Report is prepared and distributed by Ambit Capital Private Limited and distributed as per the approved arrangement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP
289) and Paragraph 11 of the First Schedule to the Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore.
17. This Report is only available to persons in Singapore who are institutional investors (as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore (the “SFA”).” Accordingly, if a
Singapore Person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform Ambit Singapore Pte. Limited.
Additional Disclaimer for UK Persons
18. All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be
reproduced, redistributed or copied in whole or in part for any purpose.
19. This report is a marketing communication and has been prepared by Ambit Capital Pvt Ltd of Mumbai, India (“Ambit”) and has been approved in the UK by Ambit Capital (UK) Limited (“ACUK”)
solely for the purposes of section 21 of the Financial Services and Markets Act 2000. Ambit is regulated by the Securities and Exchange Board of India and is registered as a Research Entity under the
SEBI (Research Analysts) Regulations, 2014. ACUK is regulated by the UK Financial Services Authority and has registered office at C/o Panmure Gordon & Co PL, One New Change, London,
EC4M9AF.
20. In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(1) (persons who have professional experience in matters relating to investments) or Article
49(2)(a) to (d) (high net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended) or (ii) are professional
customers or eligible counterparties of ACUK (all such persons together being referred to as "relevant persons"). This report must not be acted on or relied upon by persons in the UK who are not
relevant persons.
21. Neither Ambit nor ACUK is a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity
with SEC Rule 15a-6.
22. Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes
should inform themselves about, and observe, any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any
such other jurisdictions.
23. This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in
connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be
reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently
verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.
24. The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors’
individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment
decisions. Further information is available upon request. No member or employee of Ambit or ACUK accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or
indirectly, from any use of this report or its contents.
25. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well
as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors.
March 21, 2017
Ambit Capital Pvt. Ltd.
Page 25
Jubilant Foodworks
26. Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add
to or dispose of any such securities (or investment). Ambit and ACUK may from time to time render advisory and other services to companies referred to in this Report and may receive compensation
for the same.
27. Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or
in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment
banking or underwriting services for or relating to those companies.
28. Ambit and ACUK may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this
report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates’ business, circumstances may arise that could result in the interests of Ambit conflicting with
the interests of clients or one client’s interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients’ interests are
protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.
Disclosures
29. The analyst (s) has/have not served as an officer, director or employee of the subject company.
30. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.
31. All market data included in this report are dated as at the previous stock market closing day from the date of this report.
Analyst Certification
Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views
about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this
report.
© Copyright 2017 AMBIT Capital Private Limited. All rights reserved.
March 21, 2017
Ambit Capital Pvt. Ltd.
Ambit House, 3rd Floor. 449, Senapati Bapat Marg,
Lower Parel, Mumbai 400 013, India.
Phone: +91-22-3043 3000 | Fax: +91-22-3043 3100
CIN: U74140MH1997PTC107598
www.ambitcapital.com
Ambit Capital Pvt. Ltd.
Page 26