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Jubilant Foodworks: Armed with strong business model - Outside View by Luke Verghese
 
 
Jubilant Foodworks: Armed with strong business model

The management has made a complete success of its endeavour and the markets in turn are giving a thumb's up to the share price

Eighteen years young and going full throttle

To start with--some home truths about the company owned by Shyam and Hari Bhartia the New Delhi based entrepreneurs. (Shyam's better half is the media queen Shobhana, the daughter of the late K. K. Birla). Jubilant Foodworks Ltd is 18 years young and operates the Domino's Pizza brand with exclusive master franchise for India since 1996, with Sri Lanka, Bangladesh and Nepal thrown in. Domino's Pizza India is the 3rd biggest overseas market in number terms for Domino's after the US and the UK. It claims it is the largest and fastest growing food service company in India and that it enjoys a dominant 62% market share in the organised pizza market and more than 70% share in the pizza home delivery segment country wide. The statistics that the company has provided show that the pizza stores have grown from 241 in 2008-09 to 576 in 2012-13. The number of cities covered rising from 47 to 123 in this period. The revenues have risen several folds - from Rs 2.8 bn in the base year to Rs 14.15 bn in the latter year. That makes for a jump of 404%. The PBIDT (profit before interest, depreciation and taxes) has risen faster - by 623% to Rs 2.4 bn. But the profit before tax rose by a phenomenal 2,337% to Rs 1.97 bn. That is to say the PBT to revenues ratio jumped from 2.9% in 2008-09 to 13.6% in 2010-11 before peaking at 15.1% in 2011-12. It clocked 14% in 2012-13. The fall in margins in the latest year may have something to do with the opening of Dunkin Donuts restaurants during the year.

From the statistics it appears that the company generated revenues of Rs 11.6 m per restaurant in the base year, growing to Rs 22 m in 2011-12, and to Rs 24.6 m in the latest year. The figure for the latest year is an approximate as the company also opened 10 Dunkin Donuts restaurants during the year, and separate figures for the two are not available. The Dunkin restaurants opened were primarily across the Delhi-NCR region, and one at Chandigarh. The company is today operating pizza units in 26 states and union territories. That makes for an almost country wide sweep. The cities covered number 123. By far the largest number of pizza stores for a state goes to Maharashtra with Mumbai, Pune and Thane hogging the lion's share. Jubilant has 131 pizza stores in Maharashtra. Not far behind at No.2 position is Karnataka with 85 pizza stores--with Bangalore and Mangalore hogging the lion's share in the state. As a matter of fact the largest number of restaurants for any city belongs to Mumbai with 63, followed by Bangalore with 62, and New Delhi with 59. The IT industry must be the pile driver here judging from Bangalore's pre-eminence. The trend in pizza store numbers is very interesting to note. Large states like Rajasthan, Gujarat, Uttar Pradesh, West Bengal, Madhya Pradesh, Bihar and such like are way behind in the pecking order for whatever reason. Bihar for example has only four stores! But in a sense it also shows the scope for opening new stores as states mature.

Expansion plans

On the expansion front the company plans to open 125 new Domino's Pizza stores in the current year and 18 new Dunkin restaurants. The longer term plan is to open 80-100 Dunkin restaurants in the first five years. The company is also on track in opening Domino's Pizza stores in Sri Lanka. It launched four new stores in the latest year increasing its tally to six stores overall. The markets' have taken a liking to the company's ongoing operations and its plans for the future. The Rs 10 paid up shares swayed between a high of Rs 1,397 and a low of Rs 1,020 during the financial year. The promoter shareholders through their investments arms are the principal beneficiaries of this bonanza as they hold 54% of the outstanding voting capital of Rs 653 m.

So what does the financials have to tell us? The first and most important observation is that inspite of its furious pace of the fixed asset and business expansion, the company is self financing. That is barring a book overdraft of Rs 120 m at year end against an overdraft of Rs 131 m previously. Significantly, the finance costs debited to the P&L account during the year amounted to Rs 0.06 m against Rs NIL previously. This is an oddity as the overdraft facility, assuming that it was availed of, should have led to a higher interest burden.

The cash flow that it generated from operations of Rs 2.10 bn was more than sufficient to take care of the fixed asset expansion of Rs 1.8 bn during the year. (In the preceding year the company generated cash of Rs 1.71 bn from operations and expended Rs 1.25 bn on capex.) The working capital management helps to garner the cash flow. The trade receivables are at rock bottom levels since it sells cash down, and the inventories too at Rs 234 m is only a pittance of the total revenues of Rs 14.1 bn. Besides, the trade payables at Rs 1.32 bn towers over that of the receivables--excluding cash that is. What's more, the current liabilities greatly exceeded the current assets at year end. No wonder then that the company had a surfeit of cash at year end. It has parked Rs 940 m in current investments, and the cash balance at year end translated into Rs 371 m.

How its top-line accrues

The company earns its bread from the sale of manufactured products and traded products. Total revenues rose 38.4% to Rs 14.07 bn. The manufactured products consist of Pizza items valued at Rs 10.65 bn and ‘Others' valued at Rs 2 bn. Then there is the sale of traded items valued at Rs 1.41 bn and consists of beverages, dessert, dips and others. This latter item brings in very large margins on sale. Rounding out the Christmas pudding is the ‘other income' of Rs 78 m. The largest revenue expenditure item is ‘cost of materials consumed' at Rs 3.67 bn. This consumption cost accounts for 26% of the ‘revenues from operations'. Apparently, pizzas are inflation proof judging from the low consumption cost. Besides, as stated earlier, the company makes a hefty margin on the purchase/ sale of bought out items. Assuming that the company was able to sell all that it purchased during the year, it would have earned a gross margin on sale of Rs 811 m in 2012-13 against a gross margin of Rs 627 m previously. Other revenue costs attributable to its purchase/sale are not known, but the fact is that the company is making a bundle at the end of the day on traded items. Traded items are also inflation proof given the margins that it generates.

The revenue expenses

The other large revenue expenses items-- besides employee costs which rose 37% to Rs 2.7 bn --are to be found in a sub-head called ‘Other Expenses'. This expenditure grew by 43% to Rs 5.27 bn. The biggest item of expenditure here is rent which shot up 51% to Rs 1.16 bn, and advertisements which grew 52% to Rs 618 m. (To be added to the rent that it shelled out is the security and other deposits paid of Rs 659 m. The average rent paid would amount to Rs 97 m per month and the rental deposit thus totes up to the equivalent of 6.81 months of rent paid.) Power and fuel is another big ticket item at Rs 726 m. The other expenditure item to take note of is Franchisee fees at Rs 476 m. This expense rose 41% and represents the fees that the company pays to the owners of the Domino's brand. The fees payable should up quite some in the next year given the spate of new Domino's stores openings in the anvil, and the Dunkin Donuts brand has also to be taken into reckoning. Presently, the fees paid work out to 3.4% of the revenues from operations if that is the way it is to be measured. This looks like money for jam anyways.

The fixed assets schedule is another give away on how the food and beverages industry functions. The company owns no land. The commercial space that it ‘owns' is of the leasehold variety. The value of such space amounts to Rs 1.85 bn. This along with the plant and machinery valued at Rs 2.69 bn accounts for 80% of all gross block. The other big item is ‘vehicles' valued at Rs 421 m. All in all the total value of the gross block on tap amounts to Rs 5.66 bn. The gross block is relatively small compared to the revenues that it realises. This is a major plus point.

The siblings

The other big point in its favour is that the management has not yet seen the need to incorporate siblings. The only group company investment is in its sibling Jubilant FoodWorks Lanka Pvt Ltd valued at Rs 210 m. The acquisition price per share amounts to Rs 4.22 per Indian rupee. It has however incorporated a sibling in Mauritius called JFW Holdings Mauritius Pvt Ltd and this could signal a red herring of sorts. No capital has been issued by this company as yet, and besides, the directors have not proferred any information on the need to incorporate such an entity.

The Sri Lankan offspring has as yet taken only a few baby steps. In the first year of commercial operations it rustled up revenues of Rs 67 m in Indian rupees but registered a pre-tax loss of Rs 35 m. On a capital base of Rs 213 m it has accumulated losses of Rs 68 m. But this unit should be up and running in no time given the experience of its promoters. Probably the company may require additional capital injection to get its cash flow moving in the right stream.

Given the present state of functioning and its plans for the future this ‘all weather' stock could be seriously looked at as an investment proposition.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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