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FMCG May 21, 2015 India Research Jubilant FoodWorks INITIATION REPORT Bloomberg: JUBI IN Reuters: JUBI.BO BUY Huge appetite – growth to continue Recommendation Exhibit 1: Key Financials Y/E March (Rs mn) FY13 FY14 FY15P FY16E FY17E Revenue 14,076 17,235 20,745 26,240 34,209 EBITDA 2,465 2,559 2,655 3,455 4,921 EBITDA margin (%) 17.5 14.8 12.8 13.2 14.4 1,367 1,262 1,260 1,750 2,675 EPS (Rs) 20.9 19.3 19.2 26.7 40.8 RoE (%) 31.3 22.4 20.4 23.3 28.1 RoCE (%) 45.6 33.4 28.3 33.0 40.7 P/E (x) 83.9 91.2 91.5 65.9 43.1 Adj. Net profit Source: Karvy Stock Broking CMP: Rs1,761 Target Price: Rs2,040 Upside (%) 16% Stock Information Market Cap. (Rs bn / US$ mn) 52-week High/Low (Rs) 115/1,813 1,790/1,105 3m ADV (Rs mn /US$ mn) 514/8.1 Beta 1.0 Sensex/ Nifty 27,837/8,423 Share outstanding (mn) 66 Stock Performance (%) Absolute 1M 22.8 3M 8.8 12M 55.4 YTD 27.8 Rel. to Sensex 22.1 14.3 35.7 26.3 Performance 35,000 30,000 25,000 20,000 15,000 10,000 5,000 1,850 1,650 1,450 1,250 1,050 850 May-14 Jun-14 Aug-14 Sep-14 Oct-14 Dec-14 Jan-15 Feb-15 Apr-15 May-15 JFL being a dominant player in the domestic QSR industry is likely to benefit from the economic upgrade in urban markets. We believe that the change in business conditions and uptick in the general domestic markets especially in the urban economy would support JFL to record increase in SSS (Same Store Sales) growth. With positive SSS growth we believe that the operating efficiency would improve going ahead. We expect A&P spends, manufacturing expenses, Employee expenses and other operating costs to reduce over our investment horizon and operating margins to expand by 370 bps over FY15-18E. At CMP of Rs1761/Share JFL is trading at 65.9 FY16E and 43.1x FY17E earnings. We value JFL at 50x FY17E PER to arrive at a price target of Rs2040/Share. High growth opportunities for QSR and JFL High contribution of unorganized sector and lower penetration of QSR (Quick Service Restaurants) especially of the Pizza delivery players presents high growth opportunity for JFL. In addition, favorable demographic mix, increasing population of women work force and changing consumer habits is likely to accelerate revenue traction for QSR industry going ahead. JFL being a leader in pizza and pasta industry, is likely to benefit from these factors. Operating margins to expand 370 bps with SSS growth back on track With improving business conditions and favorable base, JFL is likely to report positive SSS growth in the near term. We believe that the domestic market has huge appetite which would help increase the SSS growth over a longer period for JFL. With improvement in SSS growth we expect manufacturing, A&P and employee costs to decline (as % of revenue). Consequently we see 370 bps expansion in operating margin over FY15-18E. Initiate JFL with a BUY and price target of Rs2040/Share Considering positive SSS growth and continuous store additions, we expect JFL to report EPS of Rs26.7/Share and Rs40.8/Share in FY16E and FY17E respectively. Historically JFL has traded at 1-Yr forward PER of 50.6x and ~50-60% premium to consumer companies. During FY10-13 the company was re-rated from a PER of 35x to 60x. Considering this we have valued JFL at a PER of 50x which translates in to a price target of Rs2040/Share and potential upside of 16%. We initiate coverage with BUY. Sensex (LHS) Source: Bloomberg Analysts Contact Sachin Bobade 022 6184 4313 [email protected] Jubilant Foodworks (RHS) May 21, 2015 Jubilant FoodWorks Company Financial Snapshot Profit & loss Rsmn FY14 FY15P FY16E FY17E Net sales 17,235 20,745 26,240 34,209 EBIDTA 2,559 Depreciation 2,655 3,455 4,921 982 1,050 1,124 767 Interest Expense - - - - PBT 1,881 1,748 2,479 3,871 Tax 619 488 729 1,197 Adj. PAT 1,262 1,260 1,750 2,675 EPS (Rs) 19.3 19.2 26.7 40.8 DPS (Rs) 0.0 2.5 3.0 3.5 EBIDTA Margin % 14.8 12.8 13.2 14.4 Adj Net Margin % 7.3 6.1 6.7 7.8 P/E (X) 91.2 91.5 65.9 43.1 EV/EBIDTA (X) 43.4 42.1 32.2 22.2 Company Background Jubilant FoodWorks Limited is a food services company based in Noida, Uttar Pradesh which holds the master franchise for Domino's Pizza in India, Nepal, Sri Lanka and Bangladesh, and also for Dunkin' Donuts in India. Its Dunkin’ Donuts restaurants offer donuts, drip coffee, cappuccino and latte, milkshakes, smoothies, and iced teas, as well as a range of burgers, wraps, sandwiches, and sidebites. In addition, the company sells its products online. As of May 14, 2015, it operates 887 Domino’s Pizza restaurants in 199 cities; and 56 Dunkin’ Donuts restaurants in 20 cities in India. Profit and Loss Ratios Valuation Multiples Balance Sheet Cash Flow Rsmn FY14 FY15P FY16E FY17E Rsmn FY14 FY15P FY16E FY17E Total Assets 8,350 10,053 12,438 16,036 PBT 1,877 1,748 2,479 3,871 Net Fixed Assets 5,471 7,140 7,565 8,119 Depreciation 767 982 1,050 1,124 (427) (488) (729) (1,197) Current Assets 1,964 1,998 3,958 7,002 Tax Investments 1,286 1,286 1,286 1,286 Change in Wkg Cap 135 675 324 520 CF from Operations 2,667 2,917 3,125 4,319 (2,409) (2,650) (1,476) (1,678) (349) 0 0 0 (2,758) (2,650) (1,476) (1,678) Deferred Tax (371) (371) (371) (371) Total Liabilities 8,350 10,053 12,438 16,036 Networth 5,635 6,732 8,285 10,731 Debt 0 0 0 0 Minority Interest 0 0 0 0 2,715 3,320 4,153 5,305 RoE % 22.4 20.4 23.3 28.1 RoCE % 45.6 33.4 28.3 33.0 Net Debt/Equity (0.0) (0.0) (0.2) (0.4) 0.7 0.7 0.7 0.7 20.4 17.1 13.9 10.7 Current Liabilities Balance Sheet Ratios Equity/Total Assets P/BV (X) Capex Investments CF from Investing Change in Equity 15 1 - - Change in Debt 0 0 0 0 Int/Dividends & others 0 (164) (197) (229) 15 (163) (197) (229) (76) 104 1,452 2,411 CF from Financing Change in Cash Opening Cash 304 228 332 1,784 Closing Cash 228 332 1,784 4,195 2 May 21, 2015 Jubilant FoodWorks Investment Rationales JFL to retrace FY10 Margins – a taste of good health With favorable business condition, JFL had reported significant improvement in same store sales (SSS) growth during FY09-13 period. Better GDP growth, favorable economic, micro and macro conditions and growth in urbanization helped the overall QSR industry during that phase. However, the SSS de-grew during FY14 and 1HFY15 due to slowdown in overall economy. We believe that the change in economic scenario would act as a strong catalyst for SSS growth. We see current business conditions as perfect ‘ingredients’ for better ‘recipe’ for the future growth. We believe that change in economy and business environment would augment growth momentum of overall QSR industry and especially JFL. In addition, with the increase in SSS growth, operational expenses would decline considerably as higher SSS growth augments revenue growth which outpaces the operating costs. SSS growth is back JFL being a dominant player in the domestic QSR industry is likely to benefit from the economic upgrade in urban markets. We believe that the change in business conditions and uptick in the general domestic markets especially in the urban economy would support JFL to record increase in SSS growth. We also believe that the company would report double digit SSS growth in the coming couple of years and strong sales growth over the same period. We have forecasted 8%, 12% and 15% SSS growth and 27%, 30% and 32% sales growth for FY16E, FY17E and FY18E respectively. 0% 0% 10% 20% 20% 40% 30% 60% Exhibit 2: Revenue growth to remain high going ahead 40% Exhibit 1: SSS growth for JFL to turn positive FY07 FY09 FY11 Source: Karvy Stock Broking ,Company FY13 FY15 FY17E FY07 FY09 FY11 FY13 FY15 FY17E Source: Karvy Stock Broking ,Company Cost reduction to add flavors to better SSS growth Decline in SSS growth is history now. After four consecutive quarters of negative SSS growth, JFL’s efforts to increase SSS revenues are paying dividends. During Q3FY15, the company recorded positive SSS growth after 12 months. With positive SSS growth we believe that the operating efficiency would improve going ahead. We expect A&P spends, manufacturing expenses, employee expenses and other operating costs to reduce over our investment horizon. In all, revenue growth 3 May 21, 2015 Jubilant FoodWorks during the period would outpace the increase in operating expenses to give rise to 370 bps expansion in operating margins over FY15-18E. Our estimates build in 160 bps decrease in manufacturing and rent expenses, 90 bps reduction in employee cost and 110 bps decline in A&P spends over FY15-18E. JFL recorded highest margins – 15.8% - 18.7% during FY10-13 period. We believe that stable SSS growth and growth in revenues would help JFL to retrace FY10 operating margins in FY18E. We expect operating margins to expand from 12.6% in FY15E to 16.5% in FY18E – representing 370 bps expansion. Exhibit 4: Efficiency to contribute in OPM expansion 17% 17% Exhibit 3: 370 bps expansion in OPM over FY15-18E 3.7% Employee cost saving 1.6% 8% 11% 13% 0.4% RM cost saving Manf & A&P cost Rent cost saving saving 0% 0% 4% 6% 16.5% FY15 FY16E Source: Karvy Stock Broking ,Company FY17E FY18E FY18E FY15 Margin FY18E Margin Source: Karvy Stock Broking ,Company 4 May 21, 2015 Jubilant FoodWorks Strong business model for healthy future growth Jubilant FoodWorks Ltd (JFL) is the master franchisee for 'Domino's' brand in India, Nepal, Bangladesh and Sri Lanka. Also it is working on and developing donut business with Dunkin’s franchise in the domestic market. JFL till March 2015 operated 838 Domino stores across 185 cities in India. During Q4FY15, the company added 38 more stores in 11 cities to take the store count to 876 and reach to 196 cities. As Donut business in India is very young, pizza continues to remain a key driver for the company. JFL is a market leader with +60% share of the domestic organized pizza delivery market. JFL has reported strong traction over FY10-14 period with (1) revenues growing at 42% CAGR from Rs4.2 bn in FY10 to Rs17.2 bn in FY14, (2) EBIDTA growing at 40% CAGR from Rs669 mn in FY10 to Rs2.6 bn in FY14 and (3) APAT growth of 39% CAGR from Rs337 mn in FY10 to Rs1.3 bn in FY14. The traction in revenues and profitability is attributed to robust same stores sales growth, expansion of store network and operating leverage in the business. FY10 Revenue FY11 FY12 FY13 93% 31% 62% In Rs Mn 1300 1950 0% FY07 FY14 FY08 Growth FY09 FY10 FY11 EBITDA FY12 FY13 FY14 Growth Exhibit 7: EBITDA margin – highest during FY11-13 Exhibit 8: Net profit grew at 39% CAGR over FY10-14 223% 96% 0 0% 5% 10% In Rs mn 460 920 15% 1380 350% Source: Karvy Stock Broking ,Company 20% Source: Karvy Stock Broking ,Company FY07 FY08 FY09 FY10 FY11 EBITDA Margin Source: Karvy Stock Broking ,Company FY12 FY13 FY14 FY07 FY08 FY09 FY10 Net Profit FY11 FY12 FY13 FY14 -31% FY09 650 34% 20% FY08 0 48% 18 12 In Rs Bn 6 0 FY07 2600 Exhibit 6: Ebitda grew at 40% CAGR over FY10-14 62% Exhibit 5: Revenues grew at 42% CAGR over FY10-14 Growth Source: Karvy Stock Broking ,Company 5 May 21, 2015 Jubilant FoodWorks High growth opportunities for QSR industry in India Being very young and under penetrated the QSR industry offers substantial and multi-year growth opportunity in India. According to industry sources, the Indian food services industry is growing at a CAGR of 11% and is expected to reach $68 bn by 2018. At present the organized food industry is accounted by multiple services - Dining, Bars and Lounges, Quick Service Restaurants (QSRs), Food Courts, Cafes and Kiosks. However, the QSR contribution to the overall food industry is miniscule which presents huge opportunity for growth going ahead. According to industry reports, total expenditure on pizza and pasta category is approximately 2% of the overall expenditure on outside food – either dine-in or delivery based. Hence, there is ample growth opportunity in the Indian QSR space in general and pizza and pasta categories in particular. The QSR business is expected to grow at 20% value CAGR on sustainable basis and expected to reach to $1.1bn by 2018. The pizzas and pasta product category is expected to outpace the overall growth of QSR industry. Exhibit 9: Growth opportunity for organized market Organized Market, 30% Exhibit 10: QSR key contributor in organized food market Fine Dining and Frozen Deserts, 10% Cafes, 8% Pubs, Bars, Clubs, and Lounges, 12% Casual Dining and QSR, 70% Unorganized Market, 70% Source: Karvy Stock Broking, Industry Exhibit 11: QSR to remain dominant in licensed players Exhibit 12: Domestic markets- QSR at high growth 508 254 In Rs Bn 112 56 0 0 In Rs Bn 168 762 Source: Karvy Stock Broking, Industry Café QSR Frozen desert 2013 Source: Karvy Stock Broking ,Industry Casual Dine 2018 Fine Dine Pub, Bar, Club & Lounge Café QSR Frozen Casual desert Dine 2013 2018 Fine Dine Pub, Bar, Club & Lounge Source: Karvy Stock Broking, Industry 6 Diners, drive-ins, and dives: Standalone joints serving affordable Indian foods and beverages to the mass market along streets (e.g., at bus stops) Roadside hawkers/vendors: Located usually at street corners, footpaths, selling street foods, juices, lassi, ice cream, snacks, and cater to low income groups. Food carts and trolleys: Standalone units selling street food and snacks such as grilled corn, boiled or roasted peanuts, chaat, paubhaji, idlis, fruit juices, and samosas. Halwais: Confectioners and sweet-makers selling sweets like laddus and burfi; savoury snacks like samosas and pakoras Dhabas: Roadside restaurants located at truck stops, highways. Items sold include Indian food and snacks, lassi, chai etc. Unorganised Sector (84%) Organised Sector (16%) Exclusively sell fresh bottled fruit and vegetable juices, smoothies, and juice blends. Eg: HAS Juice Bar, Tropical Smoothies, Amoretto Standalone structures offering quick snacks and drinks like wraps, Indian snacks, sugarcane, Chinese food etc. Eg: Salad Chef, Big Mos' Rolls and Wraps, Yo China Situated in shopping malls, airports, hospitals, offices, with several quick service brands serving food at designated stalls. Eg: Kailash Parbat, Comesum, Spoon, Kiosks Food Courts Exclusively sell ice cream, gelato, sundaes, shakes, sorbet, and frozen yogurt. Eg: Amul, Natural Ice creams, Kwality Ice Cream and Frozen Yogurt Parlors Juice Bars Casual or upscale establishments serving alcoholic beverages and food. Eg: Mai Tai, Shiro, Aer, Aurus, Dome, Serves different range of coffee, hot and cold drinks; quick bites such as pastries and sandwiches, etc. Eg: Café Coffee Day, Barista, Costa Café, Starbucks, Fast food restaurants characterized by its low-priced fast food cuisine and minimal table service. Menu items include burgers, pizza, milkshakes, etc. Eg: McDonald’s, Domino’s, Pizza Hut, Haldirams Casual: Offer moderately priced food, casual atmosphere, quick table service. Eg: Hard Rock Cafés, T.G.I. Friday's Bars and Lounges Cafes, Coffee/Tea Bars, Bakery-Cafes Quick Service Restaurants Full Service Restaurants Fine Dining: Offers the finest in food, service, ambience; high priced meals with highly trained staff; usually located in luxury hotels in metropolitan cities. Eg: Taj Hotels, The Leela Hotels May 21, 2015 Jubilant FoodWorks Exhibit 13: Indian Food industry structure – unorganized sector dominates; growth potential for organized Source: Karvy Stock Broking 7 May 21, 2015 Jubilant FoodWorks Exhibit 14: Chained restaurants – Pizza is noticeable Indian Fast Food (Key Players), 6% Ice Creams, 10% International fast Food (non-pizzas), 15% Pizzas, 24% Source: Karvy Stock Broking, Company Confectionar ies, 2% Exhibit 15: Cafes have highest outlets; pizza at second spot Cafes Pizzas Cafes, 44% Intl. fast Food Ice Creams Indian Fast Food Confectionaries 0 600 1200 No. of Outlets 1800 2400 3000 Source: Karvy Stock Broking, Company 8 May 21, 2015 Jubilant FoodWorks Factors present in India's QSR industry are ‘Food for Growth’ We believe that the current macro factor presents stupendous and sustainable growth opportunity for the food processing industry. The necessary triggers like (1) income levels – propensity to spend (2) urbanization - rising awareness (3) Rising woman work force and (4) young population - better acceptance - are longterm growth drivers for the QSR business. Rising income levels- implies better propensity to spend - Rise in income levels would naturally result in higher expenditure on discretionary spends i.e. entertainment, QSR, etc. This in turn will attract growth in the business. Furniture, Appliances, 6% Personal Care, 5% Food & Beverages, 30% 1200 Exhibit 17: Per capita GDP on increasing trend 400 Others, 17% Recretion & Education, 3% 800 Exhibit 16: Food spends have huge scope for growth Clothing & Footware, 8% Rent, Fuel & Power, 9% Source: Industry Transport & Communicat ion, 17% 0 Health, 5% FY2006 FY2008 FY2010 FY2012 FY2014 GDP per capita in USD Source: MOSPI Growth in woman work force - Working women population in India has increased from 14% to 20% (as a % of urban working population) during years 2000 to 2013. Since cooking is a woman centric job in Indian families, rise in working woman population will create additional growth opportunity for QSR business. 9 May 21, 2015 Jubilant FoodWorks Exhibit 19: Indian women work force increasing World developed Less dev FY1980 FY1985 Africa FY1990 Asia FY2000 LatAm 0% 0% 9% 20% 40% 18% 60% 27% 80% Exhibit 18: Women work force growing all over the world FY2010 Source: MOSPI 1981 1991 2001 2011 Source: MOSPI Growth in young population - better acceptance - It is observed that the QSR business is positively benefited by younger population- owing to higher acceptance of food formats like QSR, Dining, Bar, Lounge, Café, etc. India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan. This presents significant growth opportunity for QSR industry Exhibit 20: India has demographic dividend Above 40 Years, 11% Exhibit 21: Rural Youth contribution in outside food 18-20 Years, 18% 60–79, 7.5% 40–59, 18.1% Below 10, 19.8% 80 and above, 0.7% 31-40 Years, 31% 10–19, 21.7% 21-30 Years, 40% Source: MOSPI 20–39, 32.4% Source: MOSPI 10 May 21, 2015 Jubilant FoodWorks Exhibit 22: Urban Youth contribution in outside food 60–79, 7% Exhibit 23: Indian Youth contribution in outside food Below 10, 17% 0-4, 10% 60+, 8% 5-9, 9% 80 and above, 1% 40–59, 21% 10-14, 11% 10–19, 18% 15-59, 63% 20–39, 36% Source: MOSPI Source: MOSPI Rising urbanization - QSR business is more prevalent in Class A or Tier I towns- owing to acceptance of concept of Dining, QSR, Lounges, Cafes, etc. Thus, rising awareness in Tier 2 & 3 cities and higher urbanization of Indian population will create new growth opportunities for the QSR business in the ensuing years. Exhibit 25: Tier 1 and tier 2 towns growth continues 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 Urban Rural 0 0 20 202 40 60 404 80 100 606 Exhibit 24: Urban rural contribution in population 1951 Ratio 1961 1971 1,00,000 and above 1981 1991 Source: MOSPI Exhibit 26: Spending in Tier 1 to continue Exhibit 27: Spending in Tier 2&3 to continue 2011 0 0 6200 7000 12400 14000 18600 21000 Source: MOSPI 2010 2013 Spending per Household in tier 1 Source: GOI Data 2001 50,000 to 99,999 2018E 2010 2013 2018E Spending per Household in tier 2&3 Source: GOI Data 11 May 21, 2015 Jubilant FoodWorks Urban growth to remain strong Urban markets in India are expected to grow faster compared to rural at least in the short run. Multiple factors such as government spend, industrial progress, urban development and employment creation would accelerate urban growth in the coming years. History suggests that the current government regime is always in favor of urban development compared to rural. Food industry has major footprints in the urban geographies than rural and as most of its growth is attributed from urban upswing, incremental focus on urban progress would augment food industry’s prospects. JFL, being a formidable player in the QSR industry is expected to reap significant gains and benefit from the growth opportunity With urban slowdown in past 6 quarters, the company was unable to post positive SSS growth. Nevertheless, economic scenario has reversed since last quarter and urban uptake is accelerating the pace of SSS growth. Consequently the company was able to post positive SSS growth in Q3FY15. We believe that the trend would continue and the SSS growth would remain positive over our investment horizon in stable economic conditions. Also, JFL is likely to explore the growth potential of neighboring markets. We expect JFL to add 150, 155 and 160 outlets in FY16E, FY17E and FY18E. We believe that the company will explore new distribution channels like Airports, Railways, Office Complexes and Malls to augment the overall growth. Exhibit 29: Store additions to remain high -10% Q310 Q311 Q312 Source: Karvy Stock Broking, Company Q313 Q314 Q315 FY2018E 120 60 0 Q309 0 4% 350 18% 700 32% 1050 180 1400 46% Exhibit 28: SSS growth to be back in coming years FY07 FY09 FY11 FY13 Number of stores FY15 FY17E Store additions Source: Karvy Stock Broking ,Company 12 May 21, 2015 Jubilant FoodWorks JFL is the master chef of QSR business We believe that JFL has already mastered the QSR business - through expansion of the Domino's franchisee in India. The company has very well leveraged the early mover advantage in the pizza delivery business and continues to improve on own capabilities and market capacities. Over the period the company was able to maintain the growth momentum and acquire new customer base for itself and the overall pizza category. Stable growth in its same store sales signifies that the company was able to retain its old customers and increase the turnover frequency over the same period. Delivery based model - comfort for the customer and the company JFL business is focused on the delivery and takeaway oriented model. This presents its customers convenience of eating in the comfort of their own homes and workspaces, with minimal interruption to their schedules and activities, without having to go to a dine-in restaurant and wait for their orders. This is a comfort zone for JFL as well since this helps the company to save the rentals of extra space and management expenses (dine-in cost) Impressive mappings of areas The order delivery system is based on a detailed mapping of the areas in which pizza stores are located. Each pizza store is allocated a distinct area for delivery. The delivery area of each pizza store is restricted to an area within a 9-10 minute travel time from the pizza store - during peak hours. The method and the time mapping are done in such a manner that the process of receiving the order, cooking the pizza and delivering it to the customer does not take more than 30 mins. Consequently, though the company offers ‘delivery in 30 mins or free’ scheme total losses due to delivery error for JFL are minuscule. Exhibit 30: Impressive delivery system for JFL Source: Karvy Stock Broking, Company 13 May 21, 2015 Jubilant FoodWorks Leveraging four pillars for growth JFL has perfectly implemented the 4 main pillars of QSR business i.e. Supply Chain, Site Selection, People Management and Sales & Marketing. Strong supply chain - JFL has successfully implemented centralized distribution systems to supply key raw materials like Pizza Breads, Cheese, Vegetables and Packaging Boxes to various outlets. This helps in standardizing food quality and service levels - key to successful branding in QSR business. Site selection - With +15 years in business, JFL has gathered expertise in site selection -as QSR is a mix of smart site selection and culinary tricks. We believe that outlet selection drives both business volumes and profitability. Till December 2015, JFL has 838 company owned outlets with presence across 184 cities in India. Exhibit 31: Store addition process – taking account of each aspect Source: Company People management - QSR is a service-intensive business and hence people's business in all respects. JFL has a high employee base of +25,000 spread across commissaries, outlets and head office functions. JFL has perfectly executed people management - reflected from its decisions – increase in sales force only during festive seasons. Considering high employee base and service-nature of the business - we believe that the company has achieved huge success in employee management. Exhibit 33: Employee addition would depend on stores 0 0 10 14000 Per Store 20 28000 30 40 42000 Exhibit 32: Employee addition to remain high FY09 FY11 FY13 Source: Karvy Stock Broking ,Company FY15 FY17E FY10 FY12 FY14 FY16E FY18E Source: Karvy Stock Broking ,Company 14 May 21, 2015 Jubilant FoodWorks Sales & Marketing - QSR is an extremely competitive industry where success depends on sales & marketing strategies due to lack of product differentiation. JFL has always implemented winning strategies and successful campaigns. The company's advertising campaigns like - "Hungry Kya?", "30 minutes or free", "Khushiyon Ki Home Delivery" and “Yeh hai rishton ka time” has geared the business to achieve multi-fold expansion. We believe that, JFL is ahead of competition on its ability to connect with the consumers on regular basis. Exhibit 34: New initiatives in last few quarters Quarter New Initiative Q1FY11 Introduced Mexican Wrap and Pasta Italiano Q2FY11 Introduced Pasta Italiano and Mexican wrap Q3FY11 Double Burst Pizza Q4FY11 JFL has rolled out one single no. 68886888 at national level for pizza ordering, Dunkin’ Donuts Q1FY12 Launch of innovative side order such as Chicken Kickers Q2FY12 Cold treat 'Butterscotch Mousse Cake' Q3FY12 Launched 3 new Cheese Pizza and innovative side order Nutty Choco Lava Cake Q4FY12 Launch of 3 new exotic pizzas - 5 Peppers Veg, Zesty Chicken and Chicken Fiesta Launched 3 new pizzas with toppings, 5 peppers in veg, zesty chicken, chicken fiesta in non veg; Re-launch pizza mania; new topping combination golden corn, chunky chicken, zesty chicken Q1FY13 Q2FY13 Q3FY13 Launch of Cheesy Boloroni Pizza; Launch of Taco Indiana; Launch of Online ordering Q4FY13 Q1FY14 Spicy baked chicken, Lebanese rolls - veg and non-veg Q2FY14 Introduced Calzone Pockets Launched the new indulgent Fresh Pan Pizzas – freshly made pan-baked pizza with a deliciously soft, buttery, extra cheesy and crunchy bite; New Restaurant Design -“Pizza Theatre Launched in Ahmedabad, Bangalore, Dehradoon, Dharamshala, Ghaziabad, Gurgaon, Haridwar, Hoshiarpur, Meerut, Mumbai, New Delhi, Noida, Pune, Rangpo, Thane Launch of Dominos Pizza Junior JoyBox, Juniors JoyBox is a complete kids meal and consists of a cheesy pizza slice, two yummy breadsticks with oregano seasoning, a delicious rainbow sprinkled custard dessert, a fruit based beverage and a toy Launch of 10 new Pizzas § The new refreshed menu includes 10 new pizzas with a variety of new offerings in both the vegetarian and non-vegetarian segments. The pizzas introduced in the vegetarian category are Veg Hawaiian Delight, Spicy Triple Tango, Veggie Paradise, Cloud 9 and Chef’s Veg Wonder. The nonvegetarian varieties include Chicken Salami Special, Chicken Hawaiian Twist, Chef’s Chicken Choice, Seventh Heaven and the Chicken Dominator; Launch of South India Pizzas Taco Mexicana - A crispy flaky wrap filled with Mexican Arancini Bean Patty/ Hot & Smoky Chicken Patty rolled over exotic creamy Harissa sauce § Subwich - A freshly baked, butter flavoured bread with a delicious chili jalapeno, three bean Veg Patty or juicy American style herbed Chicken Patty smeared on both sides with the creamy and spicy smoked pepper relish and a layer of exotic bell peppers Subwich- A delicious chili jalapeno three bean Veg Patty or juicy American style herbed Chicken Patty smeared on both sides with the creamy & spicy smoked pepper relish and a layer of exotic bell peppers packed between two freshly baked buttery crusts § Crispy chicken strips - Soft, juicy & crispy boneless chicken strips with Oriental flavour § Cheesy Wonder Pizza Crust - Cheesy combination of creamy chilli cheese spread and liquid cheese filled inside a buttery crust Jubilant FoodWorks Limited, 3 § Cheese Burst Pizza Crust Crust filled with liquid cheese inside. This was launched in the regular size based on popular demand and feedback from consumers Zingy Parcel – An anytime anywhere snack with delicious Paneer/BBQ Chicken topping rolled over a layer of exotic Harissa Sauce inside a yummy Buttery Crust topped with Basil n Parsley Seasoning; Fresh Pan Pizza in Regular size; AHA Value Festival- launched for the following products/offerings meant for different occasions Zingy Parcel for Snacking time – Rs.29 Pizza Mania for Get Together – Rs.49 Kids Meal for Kids Delight – Rs.109 A Value Meal Combo@349/- for Family – starting @ Rs.349 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Source: Company 15 May 21, 2015 Jubilant FoodWorks Multiple growth avenues – recipe for long term growth Given the conducive growth environment for companies in the QSR segment, we expect JFL to fully capitalize its stronghold on the pizza and pasta sub-segment. There are ample growth avenues available to JFL to further consolidate its position in the pizza segment and also grow the segment itself. Alongside growth in new geographies, we expect the following growth avenues to help Domino's cash in on the immense growth potential of the pizza segment. Huge scope for penetration in existing markets - Though, present in 196 cities with 876 outlets, we believe that there is immense potential left in the business to expand in existing geographies. Considering 20% share of Domino’s in overall organized and recognized QSR market and mere 3% of total food expenditure is on pizza category and non-home dining - just 7-times a month in urban households, the company can continue to setup new stores in existing markets without having any adverse impact on current sales. Exhibit 35: Out of home dinning - scope for growth Not gone out to eat, 20% Exhibit 36: Per month off take huge scope for growth More than 12 times, 13% 10 to 12 times, 14% Have gone out to eat, 80% Source: Karvy Stock Broking ,Company Once, 10% 2 to 3 times, 25% 7 to 9 times, 11% 4 to 6 times, 28% Source: Karvy Stock Broking Expansion in to new cities - Domino's brand has largely expanded into Tier 1 and Class A towns at this stage. There is tremendous growth opportunity in Tier 2 and Tier 3 cities in ensuing years- on rising awareness and higher urbanization. Explore new distribution channels - Domino's can explore new distribution formats like Railways, Airports, Petrol Pumps, Malls, etc to augment growth in the business. Annual budget 2015 has facilitated the railway passengers to order food delivery, which could become a revenue driver for companies in the QSR business. Enter new geographies - JFL has licensed the Domino's brand for India, Nepal, Sri Lanka and Bangladesh. The company currently has operations in India and Sri Lanka. Considering robust growth in demand for JFL’s brands in India and Sri Lanka, we believe that JFL can also expand its business in Nepal and Bangladesh. At present JFL has 11 stores in Sri Lanka market. The management is scouting opportunities in the Bangladesh markets and planning to launch its first store in the coming quarters. 16 May 21, 2015 Jubilant FoodWorks Exhibit 37: Geographical distribution of JFL stores States/Union Territory Cities Restaurants Maharashtra 19 179 Karnataka 12 104 New Delhi 1 76 Tamil Nadu 11 61 Gujarat 16 60 Uttar Pradesh 19 59 Telangana 2 47 West Bengal 9 46 Haryana 15 45 Punjab 17 35 Madhya Pradesh 10 30 Rajasthan 8 16 Chhatisgarh 6 14 Uttranchal 9 14 Kerala 5 12 Seemandhra 7 11 Goa 1 10 Orissa 6 10 Bihar 3 9 Assam 2 8 Chandigarh 1 7 Jharkhand 3 7 Himachal Pradesh 6 6 Jammu & Kashmir 2 4 Sikkim 2 2 Puducherry 1 1 Daman 1 1 Meghalaya 1 1 Dadra And Nagar Haveli 1 1 196 876 Grand Total Source: Company 17 May 21, 2015 Jubilant FoodWorks Enhancing revenue from existing outlets - JFL can sweat the existing outlets i.e. increasing the food offerings, increasing the bill per customer and attracting more customers. There is tremendous scope to increase the current revenue per outlet of ~Rs26 mn. Thus, considering the above drivers, we believe that JFL would clock revenue CAGR of 27.1% over FY14-18E. We expect net revenues for JFL to increase from Rs17.2 bn in FY14 to Rs45.0 bn in FY18E. Exhibit 39: Approx revenue contribution for JFL 0 0% 25% 13 50% In Rs Mn 26 75% 39 100% Exhibit 38: Approximate revenue trend for Old stores FY07 FY09 FY11 Revenue Per Old Store Source: Karvy Stock Broking ,Company FY13 FY15 FY17E Revenue Per Avg Store FY08 FY10 FY12 Old Store Contribution FY14 FY16E FY18E New Store Contribution Source: Karvy Stock Broking ,Company 18 May 21, 2015 Jubilant FoodWorks Expect continued expansion of store network Currently, JFL has a network of 876 outlets spread across 196 cities in India. JFL has opened 111 outlets in FY13, 150 outlets in FY14 and 150 outlets in FY15 implying that incrementally 411 outlets have been set-up in the last three years. The aggressive expansion in this period has been undertaken after achieving stabilization in operations and confidence to record profitable growth in the business. However, stable SSS growth run rate of 20-22% declined to 16% and 1.6% in FY13 and FY14 due to adverse economic conditions. The company recorded worst performance during Q3FY14-Q2FY15 – reported negative SSS growth during this period. Nevertheless change in SSS growth trend in 2HFY15 was encouraging. We believe that the positive SSS growth would augment management confidence and it would continue to execute its aggressive expansion over next 3 years. Considering the tremendous expansion opportunities available in the domestic market we believe that it would be a strong growth driver for the company. Our analysis – huge expansion opportunity yet to tap Store per population in Gurgaon, Haryana is amongst the lowest (with more than 10 outlets in a city). The city has 20 stores and population per store is 41,754. If we consider this as a benchmark for other big cities (though dynamics in all cities are different), we believe that there is huge scope for further addition of stores in existing cities. We believe that the company can further add minimum 3617 stores in the existing cities. In top 10 cities alone, the company has scope to add 952 stores. Considering this, we believe that the companies store expansion would continue going ahead. 19 May 21, 2015 Jubilant FoodWorks Exhibit 40: Huge opportunity for growth in existing geographies Pop (In '000) 8,426 Pop Per Store (In '000) 100 Max exp 202 City Bangalore Stores 84 Area Km Sq. 741 New Delhi 76 1,484 11,008 145 Mumbai 75 603 12,478 Chennai 48 426 4,681 Hyderabad 44 650 Pune 42 Kolkata Ahmedabad Scope for exp Stores 3 Area Km Sq. 682 Pop (In '000) 1,730 Pop Per Store (In '000) 577 Max exp 41 Scope for exp 38 118 City Vizag 264 188 Zirakpur 2 0 96 48 2 0 166 299 224 Panchkula 2 816 210 105 5 3 98 112 64 Haridwar 2 12 225 113 5 3 6,810 155 163 119 Durg 2 182 269 134 6 4 700 3,115 74 75 33 Karnal 2 2,520 287 143 7 5 33 185 4,487 136 107 74 Satara 2 22 327 163 8 6 24 464 5,571 232 133 109 Bilaspur 2 146 331 166 8 6 Gurgaon 21 739 877 42 21 0 Patiala 2 210 446 223 11 9 Thane 21 4,214 1,819 87 44 23 Bareilly 2 235 898 449 22 20 Noida 13 203 642 49 15 2 Bhilai 2 120 1,064 532 25 23 Navi Mumbai Surat 12 344 1,119 93 27 15 Ranchi 2 175 1,073 537 26 24 11 327 4,462 406 107 96 Allahabad 2 63 1,117 559 27 25 Vadodara 11 149 1,667 152 40 29 Dhanbad 2 2,052 1,195 598 29 27 Indore 11 530 1,961 178 47 36 Rajkot 2 170 1,280 640 31 29 Nagpur 10 218 2,405 241 58 48 Kota 2 318 1,951 976 47 45 Goa 10 3,702 1,458 146 35 25 Howrah 2 1,467 4,842 2,421 116 114 Ghaziabad 9 1,933 1,636 182 39 30 Sonipat 2 2,260 293 147 7 5 Bhopal 9 697 1,796 200 43 34 Varanasi 2 3,131 1,202 601 29 27 Faridabad 8 2,151 1,405 176 34 26 Asansol 2 127 1,543 772 37 35 Jaipur 8 112 3,073 384 74 66 Kharar 1 411 60 60 1 0 Lucknow 8 561 2,816 352 67 59 Kullu 1 5,503 18 18 1 0 Chandigarh 7 114 961 137 23 16 1 30 19 19 1 0 Guwahati 7 216 963 138 23 16 Dharamshal aManesar 1 15 23 23 1 0 Patna 7 3,202 1,683 240 40 33 Mussoorie 1 8,856 26 26 1 0 Mysore 6 128 887 148 21 15 Manipal 1 26 34 34 1 0 Raipur 6 226 1,010 168 24 18 Shirdi 1 13 36 36 1 0 Ludhiana 6 310 1,614 269 39 33 Baramati 1 23 54 54 1 0 Cochin 6 95 612 102 15 9 Lonavala 1 38 56 56 1 0 Dehradun 5 3,088 578 116 14 9 Ooty 1 36 88 88 2 1 Amritsar 5 2,683 1,133 227 27 22 Sangrur 1 3,685 101 101 2 1 Bhubaneshw ar Mangalore 5 135 838 168 20 15 Solan 1 33 102 102 2 1 5 132 485 97 12 7 Rishikesh 1 12 102 102 2 1 Jalandhar 5 3,401 862 172 21 16 Bhiwadi 1 3,347 105 105 3 2 Mohali 4 1,093 176 44 4 0 Valsad 1 5,244 115 115 3 2 Siliguri 4 690 510 127 12 8 Bijnor 1 4,049 115 115 3 2 Kanpur 4 3,029 2,767 692 66 62 Hosur 1 5,000 117 117 3 2 Agra 4 188 1,746 437 42 38 Phagwara 1 1,633 118 118 3 2 Coimbatore 4 247 1,051 263 25 21 Neemuch 1 40 128 128 3 2 Jammu 3 167 504 168 12 9 Darjeeling 1 11 132 132 3 2 Greater Noida Secunderaba 3 203 108 36 3 0 Ankleshwar 1 16 141 141 3 2 3 259 214 71 5 2 Shillong 1 64 143 143 3 2 d Jabalpur 3 367 1,054 351 25 22 Rewari 1 483 143 143 3 2 Aurangabad 3 123 1,171 390 28 25 Abohar 1 187 145 145 3 2 Meerut 3 142 1,309 436 31 28 Pathankot 1 11 149 149 4 3 Jamshedpur 3 150 1,337 446 32 29 Erode 1 5,692 157 157 4 3 Trivandrum 3 250 1,687 562 40 37 Navsari 1 2,211 163 163 4 3 Nasik 3 478 3,787 1,262 91 88 1 8,070 163 163 4 3 Vijaywada 3 62 1,048 349 25 22 Rajnandgao n Vapi 1 425 164 164 4 3 Source: Karvy Stock Broking, Company 20 May 21, 2015 Jubilant FoodWorks Exhibit 41: Continued…. City Kanchipuram Stores 1 Area Km Sq. 4432 Pop (In '000) 164 Pop Per Store (In '000) 164 Max exp 4 Scope for exp 3 City Durgapur Stores 1 Area KmSq. 154 Pop (In '000) 567 Pop Per Store (In '000) 567 Max exp 14 Scope for exp 13 Hoshiarpur 1 480 169 169 4 3 Korba 1 6598 583 583 14 13 Bharuch 1 6509 169 169 4 3 Udaipur 1 64 599 599 14 13 Shimla 1 25 172 172 4 3 Cuttack 1 44 606 606 15 14 Daman 1 72 191 191 5 4 Belgaum 1 94 610 610 15 14 Khandwa 1 526 201 201 5 4 Gangtok 1 35 99 99 2 1 Puri 1 3051 201 201 5 4 Nawanshahr 1 1266 612 612 15 14 Dharwad 1 200 204 204 5 4 Anand 1 2940 634 634 15 14 Yamuna Nagar Katni 1 1756 217 217 5 4 Bhav Nagar 1 138 650 650 16 15 1 350 222 222 5 4 Guntur 1 46 651 651 16 15 Gandhidham 1 1023 248 248 6 5 Saharanpur 1 3860 705 705 17 16 Sambalpur 1 6702 270 270 6 5 Salem 1 124 829 829 20 19 Rourkela 1 200 273 273 7 6 Moradabad 1 3493 890 890 21 20 Ratlam 1 4861 274 274 7 6 Kaithal 1 2317 946 946 23 22 Bhatinda 1 3344 286 286 7 6 Solapur 1 14845 951 951 23 22 Tirupati 1 24 287 287 7 6 Kurukshetra 1 1530 965 965 23 22 Dewas 1 7020 289 289 7 6 Mandi 1 23 1000 1000 24 23 Roorkee 1 1382 289 289 7 6 Aligarh 1 3747 1210 1210 29 28 Shahjahanpu rHissar 1 4388 298 298 7 6 Rudrapur 1 2908 1236 1236 30 29 1 3983 301 301 7 6 Hubli 1 202 1350 1350 32 31 Tumkur 1 10597 302 302 7 6 Madurai 1 247 1466 1466 35 34 Kakinada 1 31 312 312 7 6 Bhiwani 1 5099 1634 1634 39 38 Alwar 1 8380 315 315 8 7 Gwalior 1 780 1902 1902 46 45 Junagadh 1 59 320 320 8 7 Gorakhpur 1 5484 4441 4441 106 105 Rajahmundry 1 228 344 344 8 7 Haldia 1 22 201 201 5 4 Burdwan 1 56 347 347 8 7 Nadiad 1 45 225 225 5 4 Kollam 1 58 349 349 8 7 Karad 1 52 74 74 2 1 Ahmad Nagar 1 39 351 351 8 7 Katra 1 45110 9 9 1 0 Muzzafarpur 1 3172 352 352 8 7 Limbdi 1 888 43 43 1 0 Berhampur 1 87 356 356 9 8 Rangpo 1 35 4 4 1 0 Bhilwara 1 10480 359 359 9 8 Amravati 1 270 647 647 15 14 Sri Ganganagar Latur 1 225 371 371 9 8 Silvassa 1 491 22 22 1 0 1 118 383 383 9 8 Puducherry 1 492 1244 1244 30 29 Muzaffar Nagar Ambala 1 2958 392 392 9 8 Kodaikanal 1 21 37 37 1 0 1 1569 407 407 10 9 Bhagalpur 1 110 623 623 15 14 Calicut 1 128 432 432 10 9 Moga 1 2230 150 150 4 3 Davangere 1 77 435 435 10 9 Khanna 1 28 128 128 3 2 Mathura 1 3800 442 442 11 10 Rewa 1 6240 2365 2365 57 56 Tirupur 1 160 444 444 11 10 Nainital 1 3860 87 87 2 1 Panipat 1 64 445 445 11 10 Thrissur 1 101 316 316 8 7 Haldwani 1 1800 452 452 11 10 Rohtak 1 115 373 373 9 8 Jalgaon 1 68 460 460 11 10 Rajpura 1 76 92 92 2 1 Vellore 1 87915 485 485 12 11 Kharagpur 1 127 372 372 9 8 Nellore 1 150 506 506 12 11 Silchar 1 16 229 229 5 4 Jhansi 1 5028 507 507 12 11 Bijapur 1 10541 327 327 8 7 Sangli 1 119 514 514 12 11 Ramnagar 1 3556 79 79 2 1 Jamnagar 1 53 529 529 13 12 Kashipur 1 5 122 122 3 2 Ajmer 1 8481 543 543 13 12 Baddi 1 15 23 23 1 0 Gulbarga 1 64 543 543 13 12 Total 876 4493 3617 Source: Karvy Stock Broking, Company 21 May 21, 2015 Jubilant FoodWorks Dunkin Donuts is an extra topping JFL’s agreement with Dunkin Donuts has created extra lever for the company’s growth. The donut category in India is very young and its industry position is very similar to pizza and pasta category in the early years of 2000’s. Over the period JFL took the initiative for the growth of pizza and pasta category in the domestic market and expanded the overall market size of the category. We believe that with the presence of all favorable business conditions, donut category would continuously growth in the coming decade. This would also reduce the company’s dependency on pizza and pasta business and allow it multi product offerings. JFL currently has 56 Dunkin stores across India Impressive free cash flow – sweetener in the value drink JFL has reported sustained growth in cash flows, alongside the expansion in stores network. The company generated operating cash flow of Rs1.0 bn, Rs2.0 bn, Rs2.2 bn and Rs2.7 bn in FY11, FY12, FY13 and FY14 respectively. The store network also expanded from 241 to 876 over FY09-FY15 respectively. We like this cash generating ability of its business model - operating cash flow of Rs3.6 mn per outlet on annual basis against capital expenditure of Rs9.8 mn per outlet - which indicates a payback period of less than 3 years. Considering this, we believe that JFL would continue to meet its cash flow requirements for store expansion plans. We expect JFL to generate operating cash flow of Rs3.3 bn, Rs3.9 bn and Rs4.8 bn in FY16E, FY17E and FY18E respectively. 3.2 1.6 0.0 0.0 2.1 In Rs Mn In Rs Mn 4.2 4.8 Exhibit 43: Per store operating cash flow to improve 6.3 Exhibit 42: Operating cash flow to remain high FY07 FY09 Source: Karvy Stock Broking FY11 FY13 FY15 FY17E FY07 FY09 FY11 FY13 FY15 FY17E Source: Karvy Stock Broking 22 May 21, 2015 Jubilant FoodWorks Headroom for operating margin expansion We like the QSR business model in general owing to its ability to generate operating leverage alongside sustained growth in business volumes. An even closer scrutiny of Domino's model offers tremendous scope for operating leverage - with improvement in operating margins and return ratios in the long run. JFL’s EBITDA margins shrunk in FY14 and FY15 to 14.8% and 12.8% compared to 17.5% in FY13. We attribute this increase to pressure on same store sales growth which resulted in operating margin contraction of 490 bps. Decline in SSS growth is history now. During H2FY15, the company recorded positive SSS growth after 12 months. With positive SSS growth we believe that the operating efficiency would improve going ahead. We expect A&P spends, manufacturing expenses, Employee expenses and other operating costs to reduce over our investment horizon. In all, revenue growth during the period would outpace the increase in operating expenses to give rise to 370 bps expansion in operating margins over FY15-18E. Our estimates build in 160 bps decrease in manufacturing and rent expenses, 90 bps reduction in employee cost and 110 bps decline in A&P spends over FY15-18E. JFL recorded highest margins – 15.8% - 17.5% during FY10-13 period. We believe that stable SSS growth and growth in revenues would help JFL to retrace FY10 operating margins in FY18E. We expect operating margins to expand from 12.8% in FY15 to 16.5% in FY18E – representing 370 bps expansion. 23 May 21, 2015 Jubilant FoodWorks Risks to our investment rationales Further slowdown in the domestic economy Monsoon failure in last year has led to slowdown in the overall consumption. Monsoon this year is expected to remain better. This is likely to boost overall economy. Failure of monsoon could impact both urban and rural economy which in turn would hamper JFL’s performance QSR industry is very competitive The QSR industry is very competitive, owing to little-or-no product differentiation. In India, strong players like Pizza Hut, Papa John's, Smokin Joe's and Pizza Corner, as well as other quick service restaurant chains such as McDonald's and Subway, compete in the business. We believe that, success in the QSR industry depends on getting 4 key things in place i.e. (1) supply chain (2) site selection (3) people management and (4) marketing strategies - mastering these areas is a key challenge. Cost control is very difficult Raw material costs and labor costs are difficult to manage in the QSR business. The continuous inflation in the raw material and labor costs is a key challenge for the QSR players. Further, employee attrition is biggest risk to the business- it destabilizes the business for the short-medium term. 24 May 21, 2015 Jubilant FoodWorks Financials Revenue to increase to Rs45.1 bn in FY18E Net revenues have grown at a CAGR of 42% in FY10-14 period from Rs4.2 bn in FY10 to Rs17.2 bn in FY14. This growth was triggered by expansion of store network and addition of new product categories. JFL has expanded its store network from 306 outlets in FY10 to 726 outlets in FY14. JFL has added another 150 stores in FY15, resulting in a total store count of 876. JFL earns healthy revenue of ~Rs26 mn/outlet, depending on the location of the outlet. Considering the under penetration of QSR formats and pizza category in particular, there is ample opportunity to report sustainable growth in ensuing years. The growth will come from expansion of store network and sweating of existing outlets. We expect 150, 155 and 160 store additions in FY16E, FY17E and FY18E respectively, taking the total store count to 1341 in FY18E. We expect revenues to increase in line with their store expansion. We believe that JFL would achieve revenues of Rs26.2 bn, Rs34.2 bn and Rs45.1 bn in FY16E, FY17E and FY18E - representing growth of 26.5%, 30.4% and 31.6% YoY respectively. 0 20% 16 34% In Rs Bn 32 48% 48 62% Exhibit 44: Revenues to grow at Rs45.1 bn in 18E FY07 FY09 FY11 Revenue FY13 FY15 FY17E Growth Source: Karvy Stock Broking, Company Good traction in operating performance- scope for further improvement Operating profit has grown at a 40% CAGR in FY10-14 period, driven by robust growth in net revenues and partial benefits of operating leverage. The operating margins jumped by 170bps from 15.8% in FY10 to 17.5% in FY13. However, Slowdown in SSS pressurized the operating performance in past 6 quarters – resulted in contraction in operating margin over FY14 to 14.8% in FY14 and 12.8% in FY15. Going ahead we believe that with SSS growth again back in the system, the operating margin would expand hereon. There is scope to improve operating performance in ensuing years, considering the operating leverage in the business especially in marketing spends, commissaries costs and fixed costs per store which do not move in tandem with revenue growth. Thus, JFL is likely to gain from fall in fixed costs as % of revenues in ensuing years and thereby show much faster traction at operating levels. We expect JFL's operating profit to grow at a CAGR of 41% to Rs7.4 bn during FY15-18E - ahead of revenue growth. Consequently, the operating margins are likely to expand by 370 bps from 12.8% in FY15 to 16.5% in FY18E. 25 May 21, 2015 Jubilant FoodWorks 93% 19% Exhibit 46: EBITDA margin to reach 16.5% in FY18E 0% 6% 31% 13% 62% 5000 2500 0 FY07 FY09 FY11 FY13 FY15 EBITDA Growth FY17E 0% In Rs Mn 7500 Exhibit 45: EBITDA to grow at 41% CAGR over FY15-18E FY7 Source: Karvy Stock Broking ,Company FY9 FY11 FY13 FY15 FY17E Source: Karvy Stock Broking ,Company APAT to grow at 50% CAGR over FY15-18E APAT growth was also higher at 39% CAGR in FY10-14 period from Rs337 mn in FY10 to Rs1367 mn in FY13 - benefiting from strong operational performance and comparatively lower growth in depreciation and interest charges. However, the momentum was lost during past six quarters and the APAT growth declined by to Rs1260 mn in FY15. Considering better SSS growth, higher revenue growth and improved operating margins we believe that JFL would re-enter into higher APAT growth trajectory. We expect earnings of Rs26.7/Share, Rs40.8/Share and Rs64.9/Share for FY16E, FY17E and FY18E respectively. Exhibit 48: Expect Rs64.9/Share EPS in FY18E FY11 Net Profit Source: Karvy Stock Broking ,Company FY13 FY15 Growth FY17E 66 44 22 0 223% FY09 -31% 96% In Rs Mn 1430 2860 0 FY07 Rs/Share 4290 350% Exhibit 47: APAT to grow at 50% CAGR over FY15-18E FY07 FY09 FY11 FY13 FY15 FY17E Source: Karvy Stock Broking ,Company Give thumbs up to cash generating ability of business The company generated operating cash flow of Rs2.0 bn, Rs2.2 bn and Rs2.7 bn in FY12, FY13 and FY14. We give thumbs up to the cash generating ability of its business model - operating cash flow of Rs3.6 mn per outlet on annual basis against capital expenditure of Rs9.8 mn per outlet - which indicates payback period of less than 3 years. Expansion of store network and sweating of existing outlets promises strong cash flow generation in ensuing years. Going ahead, we believe that JFL would generate operating cash flow of Rs3.1 bn, Rs4.3 bn and Rs6.1 bn in FY16E, FY17E and FY18E respectively. 26 May 21, 2015 Jubilant FoodWorks Valuation Expect sustainable growth in earnings JFL is expected to gain traction in operational performance based on (1) favorable business environment (2) changing socio-economic factors (3) high acceptance of its products and (4) reduction in fixed costs (as % of revenues) with growth in revenues. With improvement in operational performance, we expect the company to report high earning growth in the coming years. We expect earnings of Rs26.7/Share, Rs40.8/Share and Rs64.9/Share for FY16E, FY17E and FY18E respectively - representing YoY growths of 39%, 53% and 59% during the same periods. Very expensive on preliminary analysis At the current price of Rs1770/Share, JFL looks expensive on preliminary screening - at 66.3X FY16E and 43.3X FY17E earnings – very rich compared to consumer companies. Nevertheless, considering the nature of the business and growth opportunity ahead, we believe that the company should be valued at a high steep premium to consumer companies. Nevertheless, scarcity premium would remain We are encouraged by JFL’s strong business model and its ability to earn cash. We believe that the company’s strategy to add more stores and penetrate the untapped opportunities would help the growth of overall industry,. With dominant market share and robust cash flows the company is incomparable to other listed players in the space. Consequently, we expect a scarcity premium to remain with the stock just as it happened since its listing. We value JFL at 50x - ~50% premium to consumer companies – in line with its historical valuations Initiate 'BUY' with price target of Rs2040/Share Historically JFL has traded at 1-Yr forward PER of 50.6x and ~50-60% premium to consumer companies. During FY10-13 the company was re-rated from a PER of 35x to 60x. Considering this we have valued JFL at a PER of 50x which translates in to a price target of Rs2040/Share and potential upside of 16%. We initiate coverage with BUY. Exhibit 50: Price performance for JFL 1700 71 Exhibit 49: 1 Yr Fwd PER valuation chart JFL-1yr Fwd PE (x) 60x JFL-P/E band 54 1200 50x 40x 20 200 37 700 30x Mar-10 Mar-11 Mar-12 Source: Karvy Stock Broking, Bloomberg Mar-13 Mar-14 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Source: Karvy Stock Broking, Bloomberg 27 May 21, 2015 Jubilant FoodWorks Exhibit 51: Profit & Loss Statement Y/E Mar (Rs mn) FY14 FY15P FY16E FY17E FY18E Revenue 17,235 20,745 26,240 34,209 45,009 % growth 22.4 20.4 26.5 30.4 31.6 Operating expenditure 14,676 18,089 22,785 29,288 37,589 EBITDA 2,559 2,655 3,455 4,921 7,420 % growth 3.8 3.8 30.1 42.4 50.8 Depreciation 767 982 1,050 1,124 1,202 Other income 88 74 74 74 74 1,881 1,748 2,479 3,871 6,292 0 0 0 0 0 EBIT Interest Exceptional items 4 0 0 0 0 PBT 1,881 1,748 2,479 3,871 6,292 Tax 619 488 729 1,197 2,039 1,262 1,260 1,750 2,675 4,253 (8) (0) 39 53 59 Adjusted PAT % growth Source: Karvy Stock Broking ,Company Exhibit 52: Balance Sheet Y/E Mar (Rs mn) Cash & cash equivalents Trade receivables FY14 FY15P FY16E FY17E FY18E 228 332 1,784 4,195 8,106 90 109 155 202 266 Inventories 324 390 557 726 955 Loans & advances 258 156 183 210 239 Other assets 1,063 1,011 1,279 1,667 2,194 Investments 1,286 1,286 1,286 1,286 1,286 Fixed Assets 5,471 7,140 7,565 8,119 8,822 Deferred tax assets (liabilities) (371) (371) (371) (371) (371) Total assets 8,350 10,053 12,438 16,036 21,498 Current liabilities & provisions 2,715 3,320 4,153 5,305 6,777 Other liabilities 0 0 0 0 0 Debt 0 0 0 0 0 2,715 3,320 4,153 5,305 6,777 Total liabilities Shareholders' equity 654 656 656 656 656 Reserves & surpluses 4,980 6,077 7,630 10,075 14,065 Shareholders' funds 5,635 6,732 8,285 10,731 14,721 Total Equity and Liabilities 8,350 10,053 12,438 16,036 21,498 Source: Karvy Stock Broking ,Company 28 May 21, 2015 Jubilant FoodWorks Exhibit 53: Cash Flow Statement Y/E Mar (Rs mn) FY14 FY15P FY16E FY17E FY18E PBT 1,877 1,748 2,479 3,871 6,292 767 982 1,050 1,124 1,202 Depreciation Other non-cash adjustments Tax paid Chgange in working capital Cash flow from operating activities (Incr) / decr in capital expenditure (Incr) / decr in investments Cash flow from investing activities Incr / (decr) in borrowings Issuance of equity 314 0 0 0 0 (427) (488) (729) (1,197) (2,039) 135 675 324 520 623 2,667 2,917 3,125 4,319 6,078 (2,409) (2,650) (1,476) (1,678) (1,905) (349) 0 0 0 0 (2,758) (2,650) (1,476) (1,678) (1,905) 0 0 0 0 0 15 1 - - - Dividend paid 0 (164) (197) (229) (262) Others - - - - - 15 (163) (197) (229) (262) Net change in cash (76) 104 1,452 2,411 3,911 Opening Cash 304 228 332 1,784 4,195 Closing Cash 228 332 1,784 4,195 8,106 Cash flow from financing activities Source: Karvy Stock Broking ,Company Exhibit 54: Key Ratios Y/E Mar (%) FY14 FY15P FY16E FY17E FY18E EBITDA margin 14.8 12.8 13.2 14.4 16.5 EBIT margin 10.9 8.4 9.4 11.3 14.0 Net profit margin 7.3 6.1 6.7 7.8 9.4 Dividend payout ratio 0.0 13.0 11.2 8.6 6.2 (4.0) (4.9) (21.5) (39.1) (55.1) 0.0 0.0 0.0 0.0 0.0 RoCE 33.4 28.3 33.0 40.7 49.4 RoE 22.4 20.4 23.3 28.1 33.4 Y/E Mar FY14 FY15P FY16E FY17E FY18E EPS (Rs) 19.3 19.2 26.7 40.8 64.9 DPS (Rs) 0.0 2.5 3.0 3.5 4.0 Book value per share (Rs) 86.1 102.7 126.4 163.7 224.5 P/E (x) 91.2 91.5 65.9 43.1 27.1 P/BV (x) 20.4 17.1 13.9 10.7 7.8 EV/EBITDA (x) 43.4 42.1 32.2 22.2 14.3 6.7 5.5 4.3 3.2 2.4 Net debt: equity Interest/EBIT Source: Karvy Stock Broking ,Company Exhibit 55: Valuation Parameters EV/Sales (x) Source: Karvy Stock Broking ,Company 29 May 21, 2015 Jubilant FoodWorks Stock Ratings Buy Hold Sell : : : Absolute Returns > 15% 5-15% < 5% For further enquiries please contact: [email protected] Tel: +91-22-6184 4300 Disclosures Appendix Analyst certification The following analyst(s), who is (are) primarily responsible for this report and whose name(s) is/ are mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. 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