Demand trends bottoming out

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1 BSE SENSEX S&P CNX 28,975 8,755 Bloomberg JUBI IN Equity Shares (m) 65.3 M.Cap. (INR b) / 104/1.7 ( 52-Week b) Range 1,695/939 ( ) 1, 6, 12 Rel. Per (%) 16/12/12 Avg Val (INR M)/Vol 328/262 Free float (%) 51.2 Financials & Valuation (INR Billion) Y/E MAR 2015E 2016E 2017E Sales EBITDA Adj. PAT Adj. EPS (INR) EPS Gr. (%) BV/Sh.(INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) EV/EBITDA (x) Div. Yield (%) February 2015 Update Sector: Retail CMP: INR1,593 TP: INR1,800 (+13%) Buy Demand trends bottoming out SSG to recover to high single digits after three to six quarters. Lower inflation positive for discretionary demand revival. Increasing salience of Dunkin Donuts format to be margin dilutive. Demand bottoming out: In our interaction with JUBI s management, it maintained the recent commentary of demand bottoming out, but did not change the guidance of high single digit same store growth in three to six quarters. Demand patterns across regions or formats are not materially dissimilar. However, incrementally, sales trends are getting better QoQ. If inflation continues to moderate and job creation gathers pace, it will aid revival of discretionary consumption and QSR, as per management. Competitors raise discounts: Competition is intensifying both from Pizza and non-pizza QSR players (for stomach share), with increased promotions (discount-led). The 150 new store additions per annum for two to three years will continue, as per management. However, in FY15, JUBI slightly tweaked its strategy by opening 35-40% of additional stores in top 10 cities, compared to 50% earlier, to limit the adverse impact of cannibalization on existing stores in metros. We note new stores typically operate at ~75% of the productivity of mature stores and reach system level productivity in around three years. Dunkin Donuts proof of concept established: After various iterations on menu mix, size of store, ambience etc, the proof of concept has been established and management is looking to expand Dunkin s presence in new geographies (as of 3QFY15 Dunkin had 50 stores in 18 cities). Most stores are profitable at the store level. Given the dine-in format and lower margins (high wastage and scale inefficiencies lower volume and store count), increasing salience of Dunkin in the total revenue pie will be margin dilutive even after the brand beaks even, as margins of Dunkin will be lower versus Dominos. RM costs benign; inflation in other costs continue: As per internally tracked metrics, inflation in 80% of its overall cost bucket (including RM) was 7% in 2QFY15. We note that cheese, one of the key RM for JUBI (~26% of RM) is showing benign trends. However, rental and manpower costs continue to remain inflationary. Renewal of lease at higher rates and continued revision in minimum wages by state government are impacting the respective costs. On discounting, it aims to keep the surprise element to prevent the consumer from planning her orders in advance, which otherwise can cannibalize regular pizza sales. Maintain Buy: Though aided by a lower base, we see signs of sequential recovery in JUBI s performance. Revival in SSSG coupled with softening in RM prices (cheese) should aid earnings growth ahead, as operating leverage comes to fore (new stores operate at ~75% of mature store s productivity). We believe JUBI will be a key beneficiary of urban consumption recovery. Aided by lower base, we estimate 55% EPS CAGR over FY15E-17E. Maintain Buy with a target price of INR1,800 (40x FY17E EPS, 30% discount to threeyear average P/E to factor lower SSS growth versus FY10-12). Gautam Duggad (Gautam.Duggad@MotilalOswal.com); Manish Poddar (Manish.Poddar@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Other takeaways Volume contribution from regular-sized pizza offering is ~60% of total, with Pizza Mania being the largest contributor. JUBI is tracking negative on the internal value for money index. Dunkin: Higher wastage for donuts as shelf life is less than 24 hours, with wastage in India being higher than global levels. In Dunkin, company will focus on delivery of food, while beverages would not be delivered (delivery forms ~10% of Dunkin revenue). Valuation and view Though aided by a lower base, we expect signs of sequential recovery in JUBI s performance. Revival in same store growth coupled with softening in RM prices (cheese) should aid earnings growth ahead, as operating leverage comes to fore (new stores operate at ~75% of mature store s productivity). We estimate 55% EPS CAGR over FY15E-17E (earnings have grown 5% over FY11-14). We build 240bp EBITDA margin expansion to 15% over FY15E-17E. Operating margins have corrected sharply from 18.5% in FY12 to 14.4% in FY14 and 12.6% in 9MFY15. We note that the ~150bp impact is due to expenses related to Dunkin Donuts rampup, and as per management it should continue till Dunkin Donut store count reaches 120. Maintain Buy with a target price of INR1,800 (40x FY17E EPS, 30% discount to three-year average P/E to factor lower SSS growth versus FY10-12). JUBI offers a good play on the underpenetrated and evolving QSR palette in India with consistent market share gains, despite high competitive intensity. Exhibit 1: JUBI consumer P/E (x) PE (x) Peak(x) Avg(x) Median(x) Min(x) Exhibit 2: JUBI P/E premium v/s Sensex 450 PB (x) PE Relative to Sensex PE (%) LPA (%) Feb-10 Aug-10 Jan-11 Jul-11 Dec-11 Jun-12 Nov-12 Apr-13 Oct-13 Mar-14 Sep-14 Feb-15 Feb-10 Aug-10 Jan-11 Jul-11 Dec-11 Jun-12 Nov-12 Apr-13 Oct-13 Mar-14 Sep-14 Feb-15 Source: Company, MOSL Source: Company, MOSL 24 February

3 Story in charts Exhibit 3: Revenue CAGR of 34.6% over FY15-FY17E Exhibit 4: Gross margins to remain in the 74-76% band Sales (INR b) Sales growth (%) Gross Margin (%) FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Exhibit 5: SSS growth in 3Q benefitted from low base SSS Growth (%) FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Exhibit 6: 41 stores opened during the quarter 3Q Stores Cities QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 Exhibit 7: 240bp EBITDA margin expansion over FY15-17E EBITDA Margin (%) FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Exhibit 8: PAT CAGR of 54.6% over FY15-FY17E PAT (INR b) PAT growth (%) FY11 FY12 FY13 FY14 FY15E FY16E FY17E 24 February

4 Financials and valuations Income Statement (INR Million) Y/E March E 2016E 2017E Net Sales 4,242 6,783 10,191 14,145 17,372 20,647 28,462 37,411 Change (%) Material Consumed 1,050 1,706 2,617 3,700 4,534 5,208 7,061 9,252 Gross Profit 3,192 5,077 7,574 10,445 12,838 15,439 21,401 28,160 Gross Margin % Operating expenses 2,532 3,876 5,693 8,027 10,333 12,813 17,259 22,518 EBITDA 660 1,202 1,881 2,418 2,505 2,626 4,142 5,642 Change (%) Margin (%) Depreciation ,019 1,354 1,702 Int. and Fin. Ch Other Non-recurring Inc PBT ,562 1,939 1,803 1,679 2,840 4,071 Change (%) Margin (%) Tax ,181 Tax Rate (%) Adjusted PAT ,073 1,311 1,182 1,209 2,016 2,891 Change (%) Margin (%) Non-rec. (Exp)/Inc Reported PAT ,033 1,311 1,182 1,209 2,016 2,891 Balance Sheet (INR Million) Y/E March E 2016E 2017E Share Capital Reserves 538 1,269 2,312 3,645 4,846 6,091 8,107 10,998 Net Worth 1,174 1,914 2,963 4,298 5,500 6,745 8,762 11,652 Loans Capital Employed 1,283 2,013 3,096 4,420 5,647 6,845 8,862 11,752 Gross Block 2,276 2,904 3,935 5,802 8,065 11,346 14,946 19,085 Less: Accum. Depn ,103 1,392 1,852 2,601 3,620 4,974 6,676 Net Fixed Assets 1,403 1,801 2,543 3,950 5,464 7,726 9,971 12,409 Lease Deposits ,166 1,434 1,726 Capital WIP Investments Deferred tax assets Curr. Assets, L&A ,102 1,078 1,489 3,452 Inventory Account Receivables Cash and Bank Balance ,812 Others Curr. Liab. and Prov ,050 1,504 1,897 2,599 3,382 4,648 6,750 Current Liabilities ,437 1,825 2,484 3,174 4,289 6,271 Provisions Net Curr. Assets ,032-1,497-2,303-3,160-3,298 Appl. of Funds 1,283 2,014 3,097 4,420 5,647 6,845 8,862 11,752 E: MOSL Estimates 24 February

5 Financials and valuations Ratios Y/E March E 2016E 2017E Basic (INR) EPS BV/Share Valuation (x) P/E EV/Sales EV/EBITDA P/BV Return Ratios (%) RoE RoCE Working Capital Ratios Debtor (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) Cash Flow Statement (INR Million) Y/E March E 2016E 2017E OP/(loss) before Tax ,562 1,939 1,803 1,679 2,840 4,071 Int./Div. Received Depreciation & Amort ,019 1,354 1,702 Interest Paid Direct Taxes Paid ,181 Incr in WC ,708 CF from Operations ,968 2,143 2,217 2,854 4,276 6,167 Incr in FA ,132 1,834 2,357 3,311 3,633 4,178 Incr in lease deposits Pur of Investments CF from Invest ,968 2,021 2,615 3,024 4,227 4,731 Issue of Shares Incr in Debt Others CF from Fin. Activity Incr/Decr of Cash ,570 Add: Opening Balance Closing Balance ,812 E: MOSL Estimates 24 February

6 Corporate profile: Company description Jubilant Foods is the master franchisee of Dominos Pizza Inc in India with 67% market share of organized Pizza market. The Company is the market leader in the organized pizza market with a 50% overall market share and 70% share in the home delivery segment in India. JFL focuses on a home delivery and takeaway oriented business model, which offers its customers the convenience of eating in the comfort of their own homes and workspaces. The company also holds master franchise of Dominos in Sri Lanka, Nepal and Bangladesh. Exhibit 9: Sensex rebased Exhibit 10: Shareholding pattern (%) Dec-14 Sep-14 Dec-13 Promoter DII FII Others Note: FII Includes depository receipts Exhibit 12: Top management Name Designation Shyam S Bhartia Hari S Bhartia Chairman Co-Chairman Exhibit 11: Top holders Holder Name % Holding Copthall Mauritius Investment Ltd 4.5 Morgan Stanley Asia (Singapore) Pte 4.0 Smallcap World Fund INC 3.4 Wasatch Small Cap Growth Fund 2.3 Thornburg Developing World Fund 1.7 Exhibit 13: Directors Name Shyam S Bhartia Hari S Bhartia Arun Seth* Ramni Nirula* Name Vishal Marwaha* Phiroz Vandrevala* Ajay Kaul *Independent Exhibit 14: Auditors Name S R Batliboi & Co LLP Jitender, Navneet & Co Type Statutory Cost Auditor Exhibit 15: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY FY February

7 N O T E S 24 February

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