Stock to look out for in 2011- JUBILANT FOODWORKS

JUBILANT FOODWORKS

Jubilant is primarily a food-service company and currently operates Domino’s Pizza stores in India. The company was incorporated in 1995 and initiated its operations in 1996. Currently the company has the largest Quick Service Restaurant (QSR) network of over 340 stores spread across 81 cities. The company is the market leader in the organized pizza market with a 50% overall market share and 65% share in the home delivery segment in India. The company focuses on a home delivery and takeaway oriented business model Apart from the Indian market, Jubilant is also a master franchisee for the Domino’s pizza brand in Nepal, Bangladesh and Sri lanka

We believe that Jubilant with ~357 stores spread across 85 cities, and over 50% market share in the fast growing Quick Supply Restaurant (QSR) segment with a strong brand image, and a sustainable business model (negative working capital, strong free cash generation) scores high on the business success front. The company is expected to clock in revenue and profit CAGR of 38% and 60% respectively over FY2010-13E. Given the strong earnings visibility and superior earnings quality (positive free cash generation), the company would continue to enjoy scarcity premium and is expected to trade at higher valuation than the other listed consumption players.
Currently the company with ~ 357 stores spread across 85 cities in India is way ahead of its competitors (Pizza hut ~150 stores, Mc Donalds ~170 stores, and KFC ~50 stores). The company is shoring up its presence in the hinterland, with over 30% of its stores being established in tier II and III cities. In the last few months it has entered into various new tier III cities. The addition includes cities like Calicut, Madurai, Gangtok, Raipur, Jabalpur, Patna and Bhubaneswar. The overwhelming response received by its stores across the new cities and the increasing thrust of the management towards opening stores in these new destinations is a clear testimony to the pent up demand existing in India’s hinterland. The attractive demographic profile coupled with income and wealth effect would continue to drive the strong consumer wave in the Indian economy.
The company’s revenue and earnings have grown at a CAGR of 40% and 74.2% respectively over the last four years from FY2007-10. While for the last two quarters, the overall revenue and earnings have grown at a stellar 64% and 81% respectively, led by new strong marketing efforts and new product offerings. It has enjoyed operating margin in the range of 12-16% over FY2007 to FY2010, while strong operating leverage coming from employee and store rentals led to strong expansion in the margins in H1FY2011 to 18.3%. Jubilant’s Indian Operations rank among the top three within Domino’s global operations. Jubliant has developed a strong supply chain management system with four regional supply centers or commissaries (Nodia [Delhi], Mumbai, Bangalore, Kolkata) spread across the country. These centers primarily manufacture dough and act as a warehouse for other products. Thus the centralised purchase function helps in negotiating better deals from the vendors and enjoying the benefits of scale. The company has a negative working capital cycle.

Regards,
Ankit Rambhia