Jubilant Foodworks Ltd.

Known for its Domino’s Pizza chain of stores and its recent addition of the iconic Popeyes, Jubilant FoodWorks Limited has been a consistent profitable player in the food market of India. Also, its expansion into foreign territories has been impressive. And yet, investors need to treat this stock with caution. Know the reasons why
 

Jubilant FoodWorks Limited, a key player in India’s food service industry and part of the Jubilant Bhartia Group, operates various renowned food brands. Notably, it holds exclusive master franchise rights for Domino’s Pizza in India, Sri Lanka, Bangladesh and Nepal, boasting a robust network of 1,928 Domino’s Pizza stores across 407 Indian cities. Additionally, it operates Popeyes and Dunkin’ Donuts outlets in multiple countries, with 32 Popeyes and 25 Dunkin’ Donuts restaurants in India alone. The company has also ventured into owned-restaurant brands like Hong’s Kitchen, specialising in Chinese cuisine, with 22 outlets across four cities. [EasyDNNnews:PaidContentStart]

Through its subsidiary DP Eurasia, Jubilant FoodWorks has extended its Domino’s Pizza franchise to Turkey, Azerbaijan and Georgia, with 694 stores, predominantly franchised. DP Eurasia also operates COFFY coffee shops in these regions. In Sri Lanka and Bangladesh, Jubilant FoodWorks operates through wholly owned subsidiaries, with 50 and 26 stores, respectively. DP Eurasia, meanwhile, stands as the sixth-largest Domino’s Pizza franchisee globally, with operations in Turkey, Azerbaijan and Georgia. 

(Source: Jubilant FoodWorks, Investor Presentation) 

Recent strategic moves include the acquisition of a 94.28 per cent stake in DP Eurasia for ₹1,199 crore, primarily funded through debt and cash reserves. Additionally, Jubilant FoodWorks completed the acquisition of the remaining 49 per cent stake in Jubilant FoodWorks Bangladesh Limited. Financially, the company reported revenue of approximately ₹40 crore for the nine months ended FY24. Jubilant FoodWorks continues to expand its presence, innovate and deliver diverse and delicious offerings to its customers through its strong franchise partnerships and strategic acquisitions.
 

Sector Overview

The global food service industry, valued at USD 2.6 trillion, encompasses diverse markets, with India emerging as the ninth-largest, estimated at USD 51 billion. Over the past decade, the Indian food services sector has demonstrated a CAGR of 9 per cent, closely mirroring the country’s nominal GDP growth. However, the advent of the corona virus pandemic disrupted the industry significantly, prompting structural shifts in consumer behaviour, favouring online ordering channels over traditional offline channels.

(Source: Jubilant FoodWorks, Investor Presentation) 

Despite a gradual return to on-premises consumption, off-premises options, particularly online delivery, have witnessed sustained growth, reflecting evolving consumer preferences even post-pandemic. This shift is particularly pronounced in smaller towns, where non-home food consumption has become more prevalent. Organised chains currently represent around 9 per cent of the food services market, with quick service restaurants (QSRs) dominating the segment, commanding over 50 per cent market share. The chained QSR industry in India has experienced remarkable growth, boasting revenue CAGR of 24 per cent over FY 2010-2020, significantly outpacing the overall food services market.

(Source: Jubilant FoodWorks, Investor Presentation) 

Looking ahead, the Indian food services industry is poised for continued expansion, with a projected CAGR exceeding 9 per cent, underpinned by several secular trends. Notably, the chained QSR sector is expected to sustain its rapid growth trajectory, given India’s comparatively low per capita consumption compared to the other emerging markets. The key drivers of this growth include the rise in per capita income, which fuels discretionary spending, and demographic shifts characterised by urbanization, contributing to increased purchasing power in urban centres. 

Moreover, the proliferation of online ordering, facilitated by digital advancements, is expected to further accelerate growth, driven by factors such as convenience and habit formation among consumers. As digital commerce continues to democratise access and expand its reach, the share of online sales in the food service industry is anticipated to escalate, particularly in Tier II, III and IV cities, where delivery ecosystems are rapidly expanding. Ultimately, convenience-driven habits are expected to drive sustained growth in online food ordering, transcending occasion-based consumption to habitual ordering patterns.
 

Financial Overview

Jubilant FoodWorks Ltd boasts a market capitalisation of ₹30,020 crore. The promoters currently hold about 41.94 per cent of the shares, while FIIs and DIIs possess around 27.75 per cent and 21.94 per cent of the shares, respectively. The free float of the company is at 7.97 per cent. Looking at the quarterly financial performance of Jubilant FoodWorks on a consolidated basis, in Q3FY24 the company reported revenue of ₹1,382.3 crore which surged by 3 per cent as compared to ₹1,341.4 crore in Q3FY23, while the EBITDA of the company declined by 2.2 per cent and stood at ₹280.1 crore as against ₹286.5 crore in Q3FY23. 

Similarly, the net profit of the company also declined 18.2 per cent to ₹65.7 crore as compared to ₹80.4 crore in Q3FY23. Additionally, the EBITDA margins in Q3FY24 deteriorated by 120 bps to 20.3 per cent as compared to 21.5 per cent in Q3FY23 while the PAT margin in Q3FY24 also declined by 120 bps and stood at 4.8 per cent as against 6 per cent in Q3FY23. Looking at the previous three quarters’ financial performance of Jubilant FoodWorks on a consolidated basis, in 9MFY24 the revenue of the company stood at ₹4,101.8 crore which surged by 4.7 per cent as compared to ₹3,919.1 crore in 9MFY23, while the EBITDA declined by 7.7 per cent to ₹833.1 crore as against ₹902.4 crore in 9MFY23.

(Source: Jubilant FoodWorks, Investor Presentation) 

Similarly, the net profit of the company also plummeted by 40.9 per cent to ₹191.8 crore as compared to ₹324.5 crore in 9MFY23. Furthermore, the EBITDA margins for 9MFY24 plunged by 280 bps to 20.4 per cent as compared to 23.2 per cent in 9MFY23 while the PAT margin in 9MFY24 also declined by 360 bps and stood at 4.7 per cent as against 8.3 per cent in Q3FY23. Taking into account the company’s financial standing with respect to liquidity and solvency, it becomes apparent that the interest coverage ratio stands at a healthy 2.39 times, the current ratio at 0.51 and the debt-to-equity ratio at 1.25. 

These ratios signify the company’s moderate debt levels and its capacity to readily fulfil interest obligations. Overall, these indicators paint a picture of a decent financial position concerning liquidity and solvency. Additionally, in evaluating the performance metrics, the return on equity (ROE) is at 18.1 per cent while the return on capital employed (ROCE) currently stands at 16.2 per cent. 

Outlook

Despite softer demand post-Diwali and in December, the company achieved a decent performance during the festive season, focusing on consumer up-trade and faster delivery times, thus leading to improved gross margins. The ‘Cheesy Rewards’ programme turned out to be successful with 21.5 million members while premiumisation efforts included the ‘Viva Roma’ range of gourmet pizzas. Domino’s Pizza expanded its store network to over 2,000 locations in India and opened 40 stores in Q3, aiming for 200 stores in the financial year. The commissioning of Jubilant Food Park Bangalore in November facilitated expansion, while Popeyes made its entry into 10 cities with plans for further expansion. 

The business in Bangladesh is currently in its early stages with only 26 stores. However, it is showing strong growth in existing stores and offers potential for expansion into more cities, making it an attractive option for increasing the footprint in international markets. On the other hand, the business in India is facing challenges due to sluggish demand in the pizza category and heightened competition. However, Popeyes is performing well and aims to achieve ₹1,000 crore in sales in the quickest time compared to any other quick service restaurant (QSR). 

Lastly, looking at the key valuation metrics, the company’s price to earnings (PE) ratio is at 136 times, which is substantially higher than its five-year historical median PE of 88 times and also slightly above its industry median of 132 times. Moreover, the price to sales is at 5.61 times, which is also higher than the industry median of 4.05 times. Additionally, the PEG ratio stands at 10.5. However, despite the company’s expansion of their stores, it’s prudent to adopt a cautious stance and observe how this unfolds. This caution is warranted due to several factors. Primarily, there’s a notable fragmentation in the industry, driven by the entry of many organised and unorganised players catering to niche segments. 

This is especially so in the case of unorganised players, which are bolstered further by the emergence of food delivery apps like Zomato and Swiggy, enabling direct consumer engagement for such players. Moreover, the openness of Gen Z to experiment with new brands poses a challenge to customer retention. There is also a currency devaluation risk associated with Turkey, given the significant depreciation of the Turkish Lira which has declined by over 80 per cent in the last five years and 40 per cent in the past year alone. Lastly, the company’s valuation appears relatively high when considering its growth. Hence, as of now, we recommend AVOID.

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