Jubilant Foodworks Ltd – Play on Rising Indian Aspirations


Company Name – Jubilant Foodworks Limited (Jubilant Foodworks)


Current Share Price – INR 550 (July 29, 2022)


Market Cap – INR 36,308 cr


 

1. What is interesting about the stock?


“Let’s Swiggy it” – an extremely common phrase after India got locked in due to a pandemic. And what tops almost all lists of most ordered foods – pizza and biryani. One company that became synonymous with ordering in, and which might have been the inspiration for all these food delivery companies much before 2020 was Domino’s Pizza. If you were a youngster in the early part of this century in India, you would associate partying at home with friends with treats from Domino’s Pizza.


After a strong start, the business lost its way around 2013 before being brought back on track under the leadership of Pratik Pota in 2017. And in 2022, upon his resignation, investors are again beset with worries about the strategies of his successor and the stock price has corrected by nearly 47%. So, to understand the prospects of this business, we need to understand what he did in the last 5 years. During his tenure, the Company built out its execution capabilities and went on an aggressive expansion plan. It opened new stores for various brands both in domestic and regional markets and enhanced its product portfolio by tying up with several international brands like Popeyes, Dunkin’, and Hong’s Kitchen. The EBITDA margins of the company also improved from 10% to 25%. As of June 30, 2022, the Company operated 1,625 Domino’s outlets, 25 Dunkin’s, and 20 Hong’s Kitchen. Recently, the company added Indian cuisine of biryani, kebabs, breads, and more to its portfolio by launching Ekdum! which now has eight restaurants across three cities. The Company has exclusive rights to develop and operate Popeyes restaurants in India, Bangladesh, Nepal, and Bhutan and recently launched its first Popeyes restaurant in Bengaluru. In Sri Lanka, the company operates through its 100% owned subsidiary, which currently has 36 restaurants. In Bangladesh, the operation is through a joint venture, which manages and operates 10 restaurants. The Company has also forayed into the ready-to-cook segment with a range of sauces, gravies, and pastes under the newly launched brand, Chef Boss.


The Company has also made great strides in developing and promoting its ordering app, which has allowed it to withstand the pressures from delivery apps like Swiggy and Zomato better.


Why invest in Jubilant Foodworks?


The key investment arguments summarized would be:

  • QSR industry is a multi-year growth opportunity, with increased disposable income and proliferation of delivery aggregators, and increased consumption after opening up post a nearly 2-year lockdown

  • Domino’s is a strong brand name, with high network growth potential. The launch of new brands to increase offerings across other popular cuisines like Chinese and dishes like biryani will help the Company grab a larger percentage of outside food incidences

2. Key Historical Financials

  • Company faced challenging times in FY21 but has bounced back strongly in FY22 except for Q1FY22 which got impacted by the COVID wave. Revenue growth of 33% in FY22 vs FY21 and 41% in Q1FY23 vs Q1FY22

  • Jubilant Foodworks EBITDA margin has improved from 18% in FY19 to 25% in FY22; the margin slightly fell in Q1FY23 to 23%

  • Cash Flow conversion (CFO/EBITDA) is quite healthy at 85% in FY22

  • Working capital level is negative in the business which is quite positive

  • ROCE/ROE expanded to 21%/25% in FY22 vs 16%/18% in FY21

3. What is my view on company valuation?


The Company’s share price has fallen ~40% from its peak in Oct’21 on the back of worries around rapid international expansion and associated capital allocation concerns. The growth potential in international markets would be accompanied by execution risk and a newer set of operating conditions.


The Company also announced investments in DP Eurasia (exclusive master franchisee of Domino’s Pizza in Turkey, Russia, Azerbaijan, and Georgia) and Jubilant Golden Harvest Limited (master franchisee of Domino’s Pizza in Bangladesh) and buying a significant minority stake in a Gurgaon based nutrition company, Wellversed Health. This has raised doubts about the capital allocation strategy of the firm. However, the Company continues to trade at ~80x P/E TTM, which is on the higher side.


Dominos US and Yum Foods (Pizza Hut) currently trade at a PEG ratio of 2-2.5x. Assuming 20% growth in Jubilant Foodworks for the next 5 years, the implied P/E ratio comes to 40-50x.


With the impending change in management and the execution ability of the successor to Pratik Pota unknown, the ability to execute the aggressive domestic and international expansion strategy is suspect. If the Company goes wrong in its plan, the impact on future profitability would be large. We would therefore be cautious about the Company, and only like to acquire shares at a significant discount from the current price.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Food is a competitive business and different competitors like cloud kitchen companies like Rebel Foods and in-house brands of food delivery companies like Zomato and Swiggy have become aggressive apart from the existing competitors. Apart from Dominos, the other brands are relatively unknown and would take time to get established, where they would face stiff competition

  • Inflationary headwinds are growing to affect the margins of the business if the Company cannot pass on the increased costs fully to the customer

  • The international expansion would require execution skills being developed in new geographies, which can be a cumbersome and time-consuming process and can impact the financials of the Company

 

About the Author


I have over 16 years of experience in private equity and public markets. I am an engineer by background and MBA from a premier institute in India.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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