Company may find it difficult to sustain over 30% growth in same-store sales in coming quarters.
If Jubilant Foodwork’s spectacular growth story over the last six quarters is anything to go by, India is a nation of pizza lovers. Believe it or not, the company has been clocking over 30 per cent growth in same-store sales (SSS), a critical indicator of the health of any retail business. Given that the company has the exclusive franchise for Domino’s Pizza in India, it controls a lion’s share of the pizza market — 50 per cent in the formal pizza market and 70 per cent in the home delivery segment. No wonder, the margins are at a mouth-watering 18 per cent.
However, to expect it to grow same-store sales at 30 per cent seems unsustainable. As is evident, competition is fast snapping at the heels of Domino’s. Analysts say Yum! Brands is planning to open 300 Pizza Hut delivery outlets by 2015, up from the 27 at present. And, going by the advertisements on air, the pricing of Pizza Hut’s pizzas also looks rather aggressive. While this may not impact Jubilant’s FY12 and FY13 earnings, there will be an impact on margins and revenues over the medium to long term.
According to UBS Investment Research, Jubilant’s earnings over FY06-11 grew at a compounded annual rate (CAGR) of 61 per cent, driven by a 48 per cent revenue CAGR. Its stock is currently trading at 41 times its FY13E PE (price/earnings). The premise of such a valuation is that consumers in India will continue to eat Domino’s pizzas at the current rate for years to come. However, UBS thinks “a change in consumer preference beyond what we think is reasonable at this stage would be required for Jubilant’s growth rates to beat forecasts for the next five-seven years. We base our price target on 35x FY13E PE”.
Also, with the economy slowing, urban India is expected to curb discretionary spends. Edelweiss Capital notes that Jubilant’s SSS growth had dipped to six per cent during the previous downturn (FY09). The top five cities still account for 57 per cent of Domino’s stores (and, possibly a higher share of sales). Further, the proportion of matured stores (above five years) will continue to rise from 28 per cent now to 50 per cent by FY16. Clearly, the proof of this will be tested over the next couple of quarters.
