Jubilant Food: Growth strong, but valuation concerns abound

Moneycontrol Bureau

It was another stellar quarter from Jubilant Foodworks. Its net profit was up 52% year-on-year to Rs 29 crore, and net sales rose 46% to Rs 283 crore.

The company is also speeding expansion of its Domino's Pizza chain, even as it starts rolling out the new Dunkin' Donuts outlets.

Jubilant spent Rs 120 crore on expansion in 2011-12, and has pegged a capex in excess of Rs 150 crore in the current fiscal. It has also upped the pace of new store openings. It had planned to open 80 Domino's stores last fiscal, but ended up opening 87. This year it has target of 90 new Domino's outlets.

As of March 31, there were 465 Domino's outlets in 105 cities in India.

"We have speeded expansion a bit. We have had very good, encouraging response in tier II, III cities and we will continue to tap new cities for growth," CEO Ajay Kaul said.

Apart from the 90 Domino's outlets, Jubilant will open 10 Dunkin' Donuts outlets in New Delhi this year. The first store opened earlier this week and it has plans to open 80-100 stores across India over 5 years.

The company doesn't have a break-even target for Dunkin' Donuts yet. But its CFO Ravi Gupta is "confident stores will generate positive cash flows from first year itself."

Jubilant Foodworks' was up 2.7% at Rs 1,079.50 on Friday after closing down 1.7% on Thursday. The stock is up 45% in the last one year and has risen over 7 times its IPO issue price of Rs 145 a share. 

Some brokerages still remain bullish on the stock. CLSA, for instance, upgraded the stock to "buy" from "outperform," saying growth is likely to remain elevated over the medium term and it sees Jubilant as a strong play on consumer food services in India.

IDBI Capital's Bhaumik Bhatia upgraded the stock to "accumulate" from "hold," citing 12% correction in past one week.

"We remain impressed by management's positive tone on healthy same-store growth trend and its ability to maintain profitability despite rising competition (led by pricing power and operating leverage - management has guided to at least match FY12 EBITDA margin of 18.7%). We are yet to factor in earnings from Dunkin' Donuts stores (due to lack of clarity on financials), which in our view, could provide further trigger with metrics similar to Domino's stores in terms of payback and returns (per management)," he says.

However, some others have started questioning Jubilant Foodworks' valuations.

Kotak Institutional Equities advises investors "sell"  the stock.

"We like Jubilant's business model, have strong conviction in the management and see huge growth opportunities for the company driven by changing demographic and socio-economic factors. We are positive on the tie-up with Dunkin' Donuts from a long-term perspective as it addresses the cyclicality in Dominos business model (pizza business is cyclical due to high average bill value, in our view). Despite the strong near-term earnings forecast and favorable view, we find it difficult to justify the current valuation of the company," say Kotak analyst Manoj Menon.

The company has surplus cash but but still it has no near-term dividend plans, the analysts point out further.

Jubilant has cash of Rs 90 crore, currently invested in liquid mutual funds. Company officials said they had not announced any dividend in the wake of the expansion it is doing across the business and will review the situation later in the current financial year. 

Edelweiss Securities too put a "reduce" rating on the stock, saying current valuations at 44 times FY13 P/E are expensive.

Moreover, Edelweiss analyst Manish Sarawagi raises concerns over slowing same-store sales growth.

"After reporting healthy same-store sales growth of average 34% over the past six quarters and 30% in Q3, in Q4 it dipped to 26.2%. Further, the growth came on back of an aggressive price hike of 12%, implying clear slowdown in volume growth," he says.

Sarawagi and Patni expect its same-store sales growth will slowdown further in FY13. The management itself has guided for a 18-20% growth, saying high-base effect will restrict same-store sales this year.

MF Global too feels there is limited upside potential from current level and maintains a "neutral" on Jubilant Foodworks.

Nachiket Kelkar
nachiket.kelkar@moneycontrol.com