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Stock Analysis: Jubilant FoodWorks

Priya Kansara Pandya/Mumbai 22 Mar 11 | 09:33 AM

The company's announcement about foray into new businesses is just an attempt to broaden the objects clause, say analysts.
 
After signing master franchise agreement in February 2011 with US-based leading baked food and coffee chain Dunkin' Donuts (DD) for launching their brand in India, Jubilant Foodworks Limited (JFL) announced its plans to diversify into a variety of businesses such as operating hotels, garments and fashion accessories.
 
While it may look like the company, which is focused on the foods business and growing at an enviable growth rate, is planning to enter unrelated businesses, it is not actually the case.  “The announcement is more to do with alteration of the object clause of the Memorandum of Association, which tends to include broader areas in order to avoid the need to alter the same by getting approval from 75 per cent of shareholders," says Bhaumik Bhatia, analyst, IDBI Capital.
 
The management has no plans to enter unrelated businesses (read non-foods) and have no concrete plans to venture into the above businesses in the near term, say most analysts. On the contrary, the company has expressed its intention to tap huge market available by venturing into new business initiatives in the food business by deploying excess cash generated from the current Dominos franchisee thus preventing dilution of its superior return ratio (FY11 estimated return on equity of about 45 per cent).
 
The company’s tie-up with Dunkin’ recently is also a part of the same strategy. JFL plans to open 25-30 Dunkin’ outlets within next three years by spending from its internal accruals, and the first store is expected to open only in Q1CY2012. 
 
However, analysts see limited growth opportunity in the near-term (though the company has a track record and success in developing new product category in foods) due to low product penetration even in metros and requirement of considerable spending on category growth (which will compensate for lower investments per store than Dominos’ average Rs 70 lakh on account of less requirement of employees and smaller size of stores and commissaries due to its dine-in model).
 
In the current foods business (under Dominos) also, JFL is likely to face resistance in sustaining higher growth going ahead. The most important challenge is store expansion though analysts believe there is ample scope to multiply (at least double) its existing 364 outlets in next five years.
 
The company’s expansion in tier 1 cities has reached saturation and most of the incremental expansion is happening in tier 2 and 3 cities (roughly 30 per cent of total stores as on December 2010).
 
Achieving acceptance level of people in smaller towns for witnessing pizza as a food is critical for store expansions. The same will apply for growing Dunkin' in the long-term. Also the higher bill value of pizzas is also a deterrent, thanks to price conscious non-metros. Here, Dunkin' will gain due to lower price points but only after success of product penetration.
 
Analysts expect a CAGR of 23 per cent and 41 per cent in sales and net profit between FY10-13 down from 45 per cent and 102 per cent in FY06-FY10, respectively. Hence, the stock’s outperformance since its listing in February 2010 is unlikely to continue and premium valuation enjoyed by the company due to high growth is expected to soften.
 
“The earnings upgrade cycle has come to an end, which can result in lower valuation premium for the stock," states Amnish Agarwal, analyst Motilal Oswal. Amid key challenges, the company’s valuation at 37 times FY12 estimated earnings is stretched and there is a potential downside of about 12 per cent from the current levels as per consensus analyst estimates.
 
Nevertheless, the company is one of the best long-term play on lifestyle oriented business, which is directly linked to favourable demographics enjoyed by India. Analysts remain positive on the robust category growth of quick service restaurant segment in India and Dominos’ leadership (organized pizza market share of 50 per cent and 70 per cent in the home delivery segment).

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