Growth with riders

Investors of Jubilant FoodWorks were jubilant with the stock touching the 52-week high level of Rs 972 on August 23, even as the Sensex was trading close to a 52-week low. The stock’s superb run on the bourses is consequent to strong growth reported by the company. Maintaining robust growth momentum in same-store sales growth and operating profit margin (OPM) will be important to justify further outperformance. Both seem a challenge.

Manav Vijay, analyst, Edelweiss Securities, says: “We believe our thesis of same-store sales growth (SSSG) coming off and the Ebitda margin peaking is playing out. Thirty per cent plus SSSG is not sustainable and there are downside risks to our FY12 and FY13 OPM estimates.” Additionally, valuations are also expensive at 35 times the FY13 estimated earnings. Nevertheless, given the huge potential in the business and the company’s leadership, most analysts believe long-term investors can accumulate the stock on corrections.

WILL HISTORY REPEAT?
The company’s SSSG of 22 per cent in FY10 improved to 37 per cent in FY11. The same grew above 30 per cent for the sixth consecutive quarter for the June 2011 quarter (Q1’ FY12) at 37 per cent, despite a higher base of 38 per cent in the corresponding period last year. While analysts had expected an upside revision to the SSSG growth guidance in FY12, the management maintained its rate of 20 per cent.
 

ROBUST GROWTH
Rs crore	FY11	Q1’ FY12
Net sales	678.1	216.9
Y-o-Y chg (%)	60.0	60.0
PBIDT	122.1	42.6
Y-o-Y chg (%)	85.8	68.8
PAT	72.0	23.2
Y-o-Y chg (%)	118.4	51.6
Source: CapitaLine Plus

There are only a handful of options available, with store expansion in metros reaching a saturation level, including tapping of tier-1 and-2 cities for future growth. Therefore, acceptance of products will be a challenge and will influence growth. Manish Jain from Nomura India says: “Widespread acceptance of concept of pizza in these cities will lay the foundation for longer-term revenue growth drivers.”

Second, there are downside risks to operating profit margins. Manpower costs (currently 20 per cent of sales) are also likely to go up or may remain high, given the high base of around 12,000 employees, with about 70 per cent of total stores in metros where cost of living is high. Employee cost presents a challenge given high attrition at the store level, points out Gautam Duggad of Prabhudas Lilladher. The same is expected to remain at elevated levels, adds Naveen Kulkarni from MF Global.

Besides, the company will have to spend considerably on marketing and administrative due to expansions, especially beyond metros. Additionally, lower price points (needed to attract price conscious consumers in smaller cities) could affect profit margins. In contrast, Pritesh Chedda of Emkay Global Financial Services sees room for operating leverage, alongside increase in scale and scope of the business model. The management, however, expects to maintain margins in FY12.

OUTLOOK
A 20 per cent SSSG growth in FY12 on a higher base is still good. Analysts are bullish on the category of Quick Service Restaurants (QSR) (untapped) in India and the company’s business model. Jubilant is a leader in the organised pizza industry with 50 per cent market share (overall) and 70 per cent in the home delivery segment, with 392 stores spread across 93 cities.

Says Chedda: “We expect the company to continue its robust earnings growth momentum for the next 5-7 years.” The company is in a sweet spot to deliver a few years of strong revenue and net profit growth, on the back of under-penetration theme, adds Jain. Accordingly, analysts expect revenues and net profit to grow at a CAGR of 54 per cent and 58 per cent, respectively, in FY11-13.

Meanwhile, the company has maintained its target to add 80 stores in FY12 (revised from 70 in May). It plans to open its first Dunkin Donut store by the first half of 2012 and have 100 outlets in the next five years. It also plans to have 30 Dominos stores in Sri Lanka in the next three years.