Jubilant Foodworks: Fresh from the oven; initiating with Buy:: Deutsche Bank

Jubilant Foodworks
Reuters: JUBI.BO Bloomberg: JUBI IN Exchange: BSE Ticker: JUBI
Fresh from the oven; initiating
with Buy


Generating free cashflow
A 65% market share in the under-penetrated Indian Quick Service Restaurant
sector, an exclusive franchisee of a globally successful brand and solid execution
(in terms of both new store openings and robust supply chain) drive a 42%
revenue CAGR (FY11-13E), 70% gross margin, negative working capital (~11% of
revenue) and FY11-13E 60% FCF CAGR. While the near-term valuation factors in
aggressive growth, our FY12E EPS is higher than consensus by 18%. We see
material upside potential: initiating coverage with a Buy.




Exclusive franchisee of a globally successful brand
Jubilant Foodworks (JFL) operates its pizza stores pursuant to a Master Franchise
Agreement with Domino‘s International, which provides it with the exclusive right
to develop and operate Domino‘s pizza delivery stores in India, Nepal, Bangladesh
and Sri Lanka. It is this association with Domino‘s that provides JFL with the
technical, marketing and operational expertise to compete successfully with other
restaurants in the QSR industry in India. JFL has a dominant 65% market share in
the organised pizza home delivery segment in India.

Robust supply chain; ranked top among Domino’s franchisees worldwide
The cornerstone of JFL’s operational success is based on its efficient supply chain
that drives negative working capital. Its operations rank among the top three
within Domino’s global operations. JFL has centralised the sourcing, warehousing
and distribution of its raw materials, as well as the production of dough at its
commissaries. This reduces the storage space required at its stores, thereby
enabling JFL to minimise its store operating costs, without incurring significant
additional expenses at the commissary level. The effects of its efficient supply
chain are reflected in its relatively high gross margins and negative working capital.

Initiate with a Buy and a target price of INR810
Our DCF-based target price of INR810 is based on a cost of equity of 13.6% and
4.5% terminal growth. Downside risks include increase in royalty charge to
Domino’s International and execution risk in the opening up of new stores.



Investment thesis
Outlook
A 65% market share in the under-penetrated Indian Quick Service Restaurant sector, an
exclusive franchisee of a globally successful brand and solid execution (in terms of both new
store openings and robust supply chain) drive a 42% revenue CAGR (FY11-13E), 70% gross
margin, negative working capital (~11% of revenues) and 60% FCF CAGR over FY11-13E.
While the near-term valuation factors in aggressive growth, our FY12E EPS (the basis of our
DCF-derived target price) is 18% higher than consensus.
JFL operates its pizza stores pursuant to a Master Franchise Agreement with Domino‘s
International, which provides it with the exclusive right to develop and operate Domino‘s
pizza delivery stores and the associated trademarks in the operation of pizza stores in India,
Nepal, Bangladesh and Sri Lanka. This has provided JFL with the ability to use Domino’s
globally recognised brand name, as well as operational support for pizza and food technology
(such as recipes), commissary and logistics management support, global marketing and
vendor development know-how. It is this association with Domino‘s that provides JFL with
the technical, marketing and operational expertise to compete successfully with other
restaurants in the QSR industry in India. JFL has a dominant 65% market share in the
organised pizza home delivery segment in India.


Valuation
Our DCF-derived target price of INR810 per share is based on the following assumptions:
�� Risk-free rate of 6.4% (Deutsche Bank estimate), market risk premium of 7.2%
(Deutsche Bank estimate) and Beta of 1, implying a cost of equity of 13.6%.
�� Growth in the stable phase of 4.5% (which is the long-term growth rate in the number of
households in India). Our valuation for Jubilant Foodworks works out at INR810 per
share.
At our target price of INR810 per share, the shares would trade at 30x FY13E earnings.


Risks
Significant dependence on the master franchise agreement with Domino’s
International
The master franchise agreement between JFL and Domino’s International was renewed in
September 2009 for another term of 15 years, which will continue until 31 December 2024
and is further extendable for a period of ten years (subject to certain conditions). Should JFL
default on the provisions of the agreement, then Domino’s International would have the right
to terminate the agreement.
Royalty to Domino’s may increase
JFL paid a royalty of 3% on its revenues in FY10. While the agreement with Domino’s is valid
until 2024, it is possible that after that date the royalty may increase. The company also pays
USD5,000 per new store opened.




Key investment positives
Exclusive franchisee of a globally successful brand
JFL operates its pizza stores pursuant to a Master Franchise Agreement with Domino‘s
International, which provides it with the exclusive right to develop and operate Domino‘s
pizza delivery stores and the associated trademarks in the operation of pizza stores in India,
Nepal, Bangladesh and Sri Lanka. Over its 49-year history, the Domino‘s business has grown
into a global network of over 9,000 pizza stores in more than 60 countries, involving more
than 2,000 franchisees. This has provided the JFL with the ability to use Domino’s
International’s globally recognised brand name, as well as operational support for pizza and
food technology (such as recipes), commissary and logistics management support, global
marketing and vendor development know-how. It is this association with Domino‘s that
provides JFL with the technical, marketing and operational expertise to compete successfully
with other restaurants in the QSR industry in India. JFL has a dominant 65% market share in
the organised pizza home delivery segment in India.


Robust supply chain; ranked top among Domino’s franchisees
worldwide
The cornerstone of JFL’s operational success is based on its efficient supply chain that drives
a negative working capital. Its operations rank among the top three within Domino’s global
operations. JFL operates four regional supply chain centres, or commissaries, located in
Noida (Delhi NCR), Mumbai, Bangalore and Kolkata. These commissaries primarily
manufacture dough (pizza bases) and act as warehouses for most of the other ingredients.
The primary raw materials used in the preparation of the pizzas, such as cheese, vegetables
and meat, are sourced and supplied to the stores by their commissaries, except for a few
stores which procure vegetables locally from vendors within their geographic area. This helps
JFL to ensure consistent quality and also ensure timely delivery of raw materials to its stores.
Furthermore, as the purchase function is centralised and the company purchases large
volumes of ingredients and packaging such as cheese, sauce and pizza boxes, it allows JFL
to maximise leverage and negotiate better prices with its suppliers.
For most of its key ingredients, JFL follows a multi-vendor policy to minimise reliance on any
single vendor and has entered into annual agreements with certain key vendors to ensure the
steady supply of ingredients. In addition, JFL has a dedicated fleet of hired trucks at its
disposal to ensure timely delivery of raw materials to its stores. These trucks are refrigerated
to ensure that the ingredients are supplied in a temperature-controlled environment, which is
monitored during transit to ensure quality and minimise wastage. The effects of its efficient
supply chain are reflected in its relatively high gross margins and negative working capital


Effective site selection and project management focusing on ROI
One of the major factors behind JFL’s continued growth has been its ability to open and then
operate most of its new stores profitably. A robust store selection process that takes into
consideration various factors such as location visibility, presence of competition, household
count as well as presence of corporate and other institutions that would enable it to operate
these pizza stores in a profitable manner is a key differentiator between JFL and its QSR
competitors.


As of 30 September 2010, JFL operated 339 stores in India across 79 cities located in 22
states and union territories, and, through a sub-franchisee, DP Lanka Private Limited, five
stores in Sri Lanka. These included entry into 22 new cities in FY10. Domino’s has mentioned
a store target of 700 stores for its India operations. At present, its competitors include Pizza
Hut (~150 stores pan-India), KFC (~50 stores pan-India) and McDonalds (~170 stores).
JFL also conducts a return-on-investment analysis based on projected sales and profitability
to determine the financial feasibility of the store. The company’s internal project management
system is designed to ensure that they purchase standardised equipment from selected
vendors, plan in detail the procurement of the standard equipments prior to lease signing as
well as designing standardised processes for all functions related to store openings. This has
enabled JFL to reduce its store opening time to between 35 and 45 days on average from
the date of possession of the premises for a new store location.


New product introductions and innovative marketing drive
revenues
JFL utilises three distinct marketing platforms, (a) national marketing campaigns on television,
print and radio, (b) local store marketing and (c) customer relationship management. Its
innovative marketing strategy that emphasised delivery within 30 minutes of an order’s being
taken or no charge would be made has become a marketing case study whereby delayed
public services are being compared unfavourably to efficient pizza delivery.
JFL’s local store marketing is aimed at increasing customer penetration by targeting new
customers and increasing the frequency of repeat orders from existing customers. The
strategy includes address mapping of an entire delivery area to precisely identify key demand
areas for a store as well as intensive coverage of households and corporates within a store‘s
sales area using store-specific door hangers and fliers. JFL also utilises details of customers‘
past transactions from its point of sales software system to provide customised
communication including mobile text messages and offers, relevant to each consumer
thereby maximising returns from individual customer relationships by increasing the
frequency of orders.
JFL’s product innovation and value promotions are another driver for footfall frequency. For
example, the company began offering a limited number of pasta dishes at the stores and
launched its own low-cost pizza – Pizza Mania. JFL, on a continuous basis, keeps evaluating
increasing dine-in space at selected existing pizza stores. This is quite apart from periodically
refurbishing its stores, and it intends to continuously upgrade its facilities and general pizza
store ambience.


Expansion using new distribution channels
Traditionally, JFL’s pizza stores have generally been located in neighbourhood markets in
urban areas. As it seeks new ways to grow its business operations, it has sub-franchised two
stores into India’s expanding infrastructure network of airports. In addition, metro stations
offer a distinct new channel for growth. As the company anticipates that its revenues from
these stores would be driven by commuters at these locations, the intention is to use a menu
of off-the-shelf pizzas.
JFL has integrated other distribution channels with its pizza stores‘ operations, such as web
and mobile technology, to expand its sales. In August 2009, it launched – on a pilot basis – an
online ordering facility for residents in Bangalore and it intends to gradually extend this
service to other locations. JFL also opened pizza stores on certain corporate campuses and in
certain food courts.


Cost consciousness driven by employee compensation structure
In line with its philosophy that the store manager is the CEO of the store, the compensation
for its store managers is driven by the sales and profitability of their respective stores. Also,
all costs attributable to a store are charged at the store-level and the store manager has
discretion to take action in order to increase sales or reduce costs. The policy of centralised
sourcing from an optimal number of vendors further facilitates cost efficiencies, enabling the
company to reduce manufacturing costs.


Leveraging its market position to launch new food services
brands in India
JFL has mentioned that it intends to leverage its current market position and experience in
the food services industry to launch new international food services brands in India. These
could include QSR such as Burger King and Starbucks although no formal announcements are
expected until at least the next two quarters.


Negative working capital driven by centralised sourcing
JFL has centralised the sourcing, warehousing and distribution of its raw materials, as well as
the production of dough at its commissaries, this reduces the storage space required at its
stores, thereby enabling JFL to minimise its store operating costs, without incurring
significant additional expenses at the commissary level. The effects of its efficient supply
chain are reflected in its relatively high gross margins and negative working capital.


Efficiency in capex is a driver of FCF
JFL opened 60 stores in fiscal 2009 of which 44 stores were opened in cities where JFL
already had stores and of the 70 stores opened in fiscal 2010, 31 stores were in cities where
JFL already had stores. To minimise additional capital expenditure and ensure quality control,
JFL plans to open new stores in cities and towns that would be located within less than one
day’s travel distance of its existing commissaries. For new stores where JFL cannot serve
efficiently from its commissaries, the company has developed a back-end production facility
model which should enable the company to service two to three stores in a city. These backend
production facilities procure vegetables and other perishables locally. JFL believes that
its future growth will be driven by its new stores in Tier 2 and Tier 3 towns and, therefore, its
back-end production facilities will play a key role in its success in these cities.

Dabur India: pick of the week: ICICI Securities

Dabur India Ltd has acquired 100% equity in Namaste Laboratories and its three subsidiary companies - Hair Rejuvenation & Revitalization Nigeria Limited, Healing Hair Laboratories International, LLC, and Urban Laboratories International, LLC along with its South African arm – for $100 million, in an all-cash deal, thus, stepping into the hair care products market in the US, Europe and Africa. The Namaste Group controls a 12% market share in the US and enjoys significant market positions in other countries of Africa, the Middle East, Europe and North America. The company’s net sales stand at $83 million with margins ranging at ~13%.Therefore, this acquisition would help the company to strengthen its presence in the African market while the existing distribution network of the Namaste Group in the US would help Dabur to introduce its products there. Thus, we believe the contribution to sales from the international business would increase to around 25% from around 20% currently.  

Financials:

At the current market price of | 96, the stock is trading at 29.2x its FY11E EPS of | 3.3 and 25x its FY12E EPS of | 3.8. With Dabur’s foray into new categories via acquisitions (Hobi Kozmetik and Namaste Labs) and strong earnings visibility with the ability to sustain margins, we have valued the stock at 28x its FY12E EPS of | 3.8, therefore, arriving at a target price of | 106. Technical Outlook A look at the long-term price chart shows that the stock is in a clear uptrend, consistently forming higher highs and higher lows on the weekly charts. The stock hit an all-time high of | 112.40 levels in mid-September 2010. Thereafter, it has witnessed a steady corrective decline The most important observation to be made on the price chart is that the corrective price decline appears to have halted at the 50% retracement of the recent rally from March 2010 lows of 78 levels to the all-time highs Also noteworthy is the fact that after a momentary dip below the 200 day exponential moving average (EMA) the share price has witnessed a strong bounce back accompanied by a sharp jump in volumes, thereby re-affirming buying support at the long-term moving average support Among oscillators, the 14 period daily RSI has turned northwards from the oversold region and supports the current upmove whereas the MACD has also given a positive crossover below the trigger line indicating build-up of momentum on the upsides

Fortnightly round up of key banking and economic indicators:: Emkay

Emkaynomics

Fortnightly round up of key banking and economic indicators

n     The growth in non food credit has moved up to 22.8% for the week ended Nov. 19, 2010 and deposit mobilisation inched up to 16.4%

n     The CD ratio has remained relatively unchanged and stood at 73.4% for the week ended Nov. 19, 2010

n     Money supply growth has moved up to 16.9% and the money multiplier inched upwards to 4.93

n     Call money rates as on Dec. 06, 2010 have shed 60bps from last fortnight to 6.3%

n     The spread between call money and reverse repo rates has narrowed as on Dec. 06, 2010 and stands at 109 bps

n     Excess liquidity is absent in the system and stood at `-549.2 bn.  The repo balances stood at ~ `933.8 bn. and reverse repo at ~ `19.1 bn. for the week ended Nov. 19, 2010

n     The spread between the long and short end OIS has increased and stand at 32bps as opposed to 20 bps last fortnight

India – Strategy (Where is the money?): IIFL

India – Strategy (Where is the money?): 

Year to date in FY11, FII inflows, at US$25bn, have already crossed last year’s record US$23bn. Not surprisingly, FII shareholding of India’s market has increased 250bps to ~16% (for BSE200) since the lows of March last year. FIIs now own US$227bn worth of stocks in BSE 500. FIIs are currently underweight large domestic growth sectors—Consumer Discretionary, Staples, and Industrials. They are overweight only Financials (+930bps compared to index), and 36.1% of FII holding is concentrated in Financials. We recommend an Overweight on both IT and Metals. Both these sectors (especially IT) are currently under-owned in institutional portfolios. Fundamentally, the IT sector currently has business momentum, and with the rupee unlikely to appreciate materially, earnings could surprise on the upside. The Metals sector offers a strong hedge to our overweight domestic consumer-focussed portfolio against a sharp rise in global commodities on the back of a deluge of QE2 liquidity.

JP Morgan:: India FMCG: Consumer & Retail Off the Shelf

India Consumer & Retail 
Off the Shelf


Key developments in Indian consumer space over the past month:
• New product launches. 1)  HUL expanded its anti-ageing skin care
portfolio with the launch of two new brands - Ponds Gold Radiance (in
super premium segment) and  Fair & Lovely Forever Glow (in mass
end). Prominent brands competing in this space include HUL’s Ponds
Age Miracle and P&G’s Olay Total Effects which are at the premium
end, 2) Dabur forays into modern OTC healthcare market with launch
of a new brand NUTRiGO (multi vitamin capsules), 3) Danone expands
dairy portfolio with yoghurt launch priced competitively with existing
brands (Nestle, Amul), 4)  Coca-Cola and Nestle JV company - has
introduced ready-to-drink iced tea brand Nestea recently in bottled form
priced at Rs25/bottle, and 5)  Emami  expanded its skin care portfolio
with launch of Boroplus Healthy & Fair winter cream (fairness cream)
targeting the mass segment.

• Pricing Actions. Godrej Consumer has hiked prices for soaps (Godrej
No.1 and Cinthol) by 4%. This was being anticipated for quite some time
given significant cost push for palm oil. 
• Global highlights. In the recent investor seminar, Unilever stated that it
aims to derive c70% of sales from emerging markets in coming years
from c50% currently. Growth drivers include: 1) Straddling the price
pyramid and focus on personal care; 2) Lead market development:
increasing consumer reach e.g. “starter packs”; 3) Low cost business
models and 4) Move with speed into the white spaces.
• Key commodity trends. There was sharp increase in the palm oil prices
over the past month, up 13% m/m, while crude oil was up 4%. Domestic
Sugar prices and wheat prices were both firm, up 6% m/m and 3% m/m
respectively. 
• Performance and Valuation. Over the past month, BSE FMCG Index
was down 1%, outperforming Sensex by 1%. Nestle India and HUL were
the better performers, up 2% and 1% respectively.


Domestic Market – What’s changing?

Hindustan Unilever introduces premium anti-ageing skin care range - Ponds
Gold Radiance and mass anti-ageing skin cream Fair & Lovely Forever Glow
Hindustan Unilever launched the Ponds Gold Radiance range recently in the
premium segment. It will compete with Procter & Gamble, which is a leading player
in premium anti-ageing segment with its Olay Total Effects brand. HUL already has
presence in mid-premium anti-ageing segment with Ponds Age Miracle brand. Ponds
Gold Radiance is priced at Rs799 (for a 50gm pack) which implies a substantial
premium to Ponds Age Miracle priced at Rs300 (for a 50gm pack).

HUL has also introduced a new anti-ageing variant for Fair & Lovely called Forever
Glow to target the mid segment. This is priced at Rs59 for a 25gm pack at c50%
premium to regular FAL SKUs.
Skin care in India is the most sought after personal care category by both local and
global consumer majors given significant head room for growth (23% penetration,
growing at 20% p.a.) with an estimated size of Rs25bn. Rising consumer awareness
and interest, increasing income levels and favorable demographics (growing share of
working women) is driving growth for the category. In terms of key sub-categories of
skin care in India, fairness creams dominate the space with over 45% share followed
by moisturisers at about 22%.
Anti-aging solutions sub-segment is very nascent in India at just 3-5% of overall skin
care category but is fast finding acceptance among consumers. Anti-wrinkle creams
and hair colors started this trend of fighting age and this has now extended into a
wide range of anti aging products. Prominent brands competing in this space include
HUL’s Ponds Age Miracle and P&G’s Olay Total Effects which are at the premium
end. Consumers now prefer to prevent ageing rather than repair the damages at later
stage and high awareness levels coupled with increased availability of these products
is reducing the target age bracket for this segment.


Dabur forays into modern OTC healthcare market with the launch of a new
brand NUTRiGO
Dabur announced its entry into modern OTC healthcare market this week. Their
foray into the Vitamins, Minerals & Supplements category comes with the launch of
Dabur NUTRiGO – Daily Health Supplement with offerings for Men and Women.
This launch is part of Dabur’s aggressive plan to augment its leadership position in
the health care market in India, where the company currently operates with
traditional Ayurvedic products like Dabur Chyawanprash.
There are two variants – Dabur NUTRiGO Total for Men priced at Rs75 (for 10
capsules) and Rs195 (for 30 capsules), and Dabur NUTRiGO Woman priced at Rs85
(for 10 capsules) and Rs225 (for 30 capsules) 
Godrej Consumer raises soap prices by 4%
Godrej Consumer has hiked prices for soaps (Godrej No.1 and Cinthol) by 4%. This
was being anticipated for quite some time given significant cost push seen for palm
oil derivatives. 
For Godrej No.1 company has reduced the weight (from 120gm earlier to 115gm
now) without changing the price. For Cinthol brand they have taken the prices up by
4% (from Rs23 earlier to Rs24 for 100gm regular SKU).

Danone expands dairy portfolio with yoghurt launch
Danone Group has launched yoghurts recently, expanding its dairy portfolio in an
aggressive fashion both in general and modern trade. Yoghurts are available in plain
and flavored formats. Manufacturing for this product is handled by Schreiber
Dynamix Dairies. The regular plain yoghurt has been priced in line with the market
leaders - Amul and Nestle. However the flavored yoghurt is at a significant discount
to that of Nestle’s flavored yoghurt.



Coca-Cola, Nestle JV launches bottled ice tea Nestea
Coca-Cola and Nestle JV company - Beverage Partners Worldwide has introduced
ready-to-drink iced tea brand Nestea recently in bottled form. The product has been
initially rolled out in Mumbai and would be gradually launched pan-India. It is priced
at Rs25 (for a 400ml PET bottle) broadly in line with regular fruit based drinks.
Nestea is already present in India as an instant mix which is marketed by Nestle
India.

Emami expands its skin care portfolio 
With the onset of winter, Emami has introduced Boroplus Healthy & Fair winter
cream (fairness cream). This product targets the mass/mid price segment at Rs27 for
a 25gm pack. As seen in case of Emami's other brands, company has roped in a
leading film personality to endorse the brand and has aggressively started to advertise
this on mass media.
Hindustan Unilever had also introduced a winter specific fairness cream Fair &
Lovely Winter Fairness Cream last year.