Reduce Jubilant Foodworks; target Rs 709: GEPL Capital

"Jubilant Foodworks Ltd. (JFL) is the market leader in the fast-growing Indian pizza market and has a 70% share in the home delivery segment. With 411 stores in India, twice the size of its nearest competitor, and with superior operations, it is best poised to capture the strong growth in India’s Quick Service Restaurant (QSR) industry driven by changing demographics such as a) rising disposable income with higher discretionary spending, b) changing food habits with general profile of population getting younger, c) increase in working population with rising share of women in it. We hence expect a robust 39.9% EPS CAGR in FY11-13E to Rs 1.4 bn."

"The company has expanded very aggressively in the past five years with a 29% CAGR in store count from 105 stores in FY06 to 378 stores in FY11. We expect the company to add another 160 stores in the next two years taking the total store count to 538 by FY13E. We believe JFL should  be able to accomplish its store expansion plans, in view of its strong track record and rapid expansion over the last few years. We believe its store expansion strategy to be three pronged: a) penetrate existing cities, b) enter new cities (mainly tier II and III), and c) improve same  store sales. The company also started operations in Sri Lanka to expand its store network, and plans to make use of web portals and increase its presence at airports."

"The master franchisee agreement with Dunkin Donuts (DD) will help JFL enter the ‘All-Day Food’ category and be a part of the fastest growing chain in the world. Despite the lower ticket size and sales as compared to ‘Dominos’ the company shall be able to maintain its policy of breakeven within three years. This is due to a) lower staff cost (1/2 no. of Domino’s), b) lower capex (1/2 of Domino’s) which shall be funded through internal accruals and c) marginally lower rentals despite a higher rent cost per sq. ft owing to a smaller store size.”

"The stock is currently trading at a P/E multiple of 51.8x of our FY12F EPS of Rs 15.3 and 36.5x of our FY13E EPS of Rs 21.7. The stock has a limited trading history and with an average 1 year forward PE of 39.1x since inception. The current valuations hence appear rich even in comparison to its global peers (at 19.8x). Hence, we value the business on DCF basis, considering the strong growth momentum and high cash flow generation ability of the company. We initiate coverage on Jubilant Foodworks Ltd. with REDUCE rating and a target price of Rs 709 per share valuing the firm on DCF basis which assumes WACC at 13.7% and terminal growth rate of 5% from FY21E, says GEPL Capital research report.

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