Jubilant Foodworks Limited?s gameplan for growth isn?t too dissimilar from that of other retailers. The master franchisee for Domino?s Inc in India wants to have greater penetration, build brand equity and try to tap new distribution channels. The top line will be driven by continuous store expansion, the plan is to roll out around 180 pizza parlours in the next few years and the subsequent operating leverage, from the higher scale, should result in margin expansion. Kotak Institutional Equities says operating profit margins (earnings before interest, depreciation and tax/ net sales) could expand from an estimated 14.6% in 2009-10, to 16.4% in 2010-11 and further to 17% in 2011-12.
There?s little doubt that Jubilant is poised to cash in on the growing affluence and changing lifestyle of the Indian consumer, especially the youth which accounts for over a third of the population. The company already commands a share of just under 50% of the organised branded pizza market, which according to estimates put out by FICCI, is growing at a fast 40% every year from the current base of Rs 700 crore. The Jubilant management, however, puts the size of the pizza market at closer to Rs 1,000 crore currently and believes the market could grow at a compounded 25% for another four to five years.
Indeed, the entire business of quick service restaurants (QSR) has already seen a huge growth between 2003 and 2009 having seen a fourfold increase in the number of outlets. Jubilant plans to roll out 65 parlours in 2010-11. Even if the growth tapers off somewhat, the business will continue to be attractive given the demographics of the country and the increasing propensity to spend. Jubilant has grown at a compounded 43-44% in the last few years but could give up some momentum as the base increases. Same store sales are expected to grow in high single digits, somewhere in the region of sub-10%. ?Our same store sales in the last five years has been around 18%, ? says Ajay Kaul, CEO, Jubilant Foodworks, but in steady state that would probably settle at around 8-9%. Kaul doesn?t see too much of a difference in growth patterns across regions observing that all regions are expected to grow at more or less the same pace.
What has probably helped Jubilant is the fact that there is a single franchisee for the entire country, unlike in the case of some competitors like McDonalds, where there are two franchisees. Says Kaul, ?We believe that it?s easier to have the operations, marketing and supply chain under one roof. The food business is execution-oriented, the last mile addition is very high. So it?s better that operations across the country are with us.? While not disclosing any names, Kaul says the company will explore options to tie up with other international brands too. ?The promoters are committed to the food and retail business,? he says.
Concerns relating to competition and escalating real estate prices are valid but not overwhelming at this point in time. However, Kaul says food inflation could be a challenge. Nevertheless, given that lifestyles are only changing even in India?s smaller cities, Jubilant?s head start is a clear advantage and should be able to build on its lead.
The company?s topline is expected to grow at a compounded 30% while the earnings are expected to increase at a compounded 31% between 2010 and 2013. The stock price has come off its recent highs of Rs 344. However, at the current price of Rs 320, the stock is among the most expensive in the consumer space. Analysts expect the company?s earnings per share (EPS) to come in at Rs 7.50 for 2010-11, which would be a growth of approximately 37% over the EPS expected for the current year. However, at Rs 320, the stock is trading at a multiple of close to 43 times which is not justified given that the rate of growth in the earnings is expected to come off to about 20% in 2011-12. As Kotak Institutional Equities points out, the stock trades at more than a 100% premium to global services firms.