Sunday, January 17, 2010

Jubilant Foodworks IPO Analysis

. Sunday, January 17, 2010

By stockOzone team

New Delhi-based Jubilant Foodworks is a food service company having exclusive franchisee to run the international Domino’s brand of pizza stores in India, Nepal, Sri Lanka and Bangladesh. It proposes an initial public offer for sale of 1.9 crore shares and a smaller fresh issue of 40 lakh shares to raise Rs 305-328 crore. Rs 54-58 crore would accrue to the company in lieu of issue of new shares, while remaining would go to the promoters.

The company plans to use a part o the proceeds (Rs 32 crore) for repayment of existing high cost debts and the balance for meeting general corporate expenses. The total issue represents around 35% of the post-issue of the company. While there are no listed peers of this company, an analysis of its business indicates that the issue appears to be priced on the higher side.

The issue is priced within a band of Rs 135-145, with annualised FY-10 per-share earnings at Rs 4.02, resulting in a price-earnings of 34 to 36 times on a post-issue basis. Globally comparable food retailers such as McDonalds, Papa John International's and Dominos Pizza ( the parent company) are available at PE multiples of 13 to 15.

High valuations apart, the issue is also primarily an exit route for strategic investors with just 20 per cent of funds raised actually accruing to the company. This creates uncertainty about funding for the company's future expansion plans, which are key to its growth prospects. Accumulated losses, high interest costs (should the company take recourse to further debt) and potential hikes in raw material costs are other factors that dim the prospects of this offer.

BUSINESS
The company (as of November 2009) operates 286 pizza restaurants in India and five stores through a sub-franchisee in Sri Lanka. The Food Franchising Report 2009 has estimated the company to be one of the largest and fastest growing international food brands in South Asia and the market leader in the organized pizza home delivery segment in India with over 65% share. The company’s pioneering marketing efforts have worked well for it. A relatively short delivery time of about 23 minutes on an average has also been instrumental in increasing the company’s popularity among its customers.

GROWTH STRATEGY

With economic prosperity, demand for convenience food like pizzas and pastas are likely to increase. Moreover, with changing demographic profile, pizza is considered a replacement for meal among youngsters. The company has been aggressive in opening new stores in the existing and new markets in the country. It opened 60 new stores in FY09 and plans to open 65 to 70 stores in FY10. Of these, 45 stores have already been opened (as of November 2009). Under the franshisee agreement, the company is bound to open at least 300 stores over the next 15 years.

FINANCIALS
Since FY 05, the company’s revenues have grown at a compounded annual growth rate (CAGR) of 40% to Rs 281 crore in FY09. While the company incurred loss in FY 05, its profits have grown at a CAGR of 50% since FY06 to hit Rs 6.7 crore at the end of FY09. The company’s operating and net profit margins presently stand at 16% and 7%, respectively. Post the issue, the company is likely to reduce its debtequity ratio from the current 2.6 to around 0.4. Despite generating profits for the last four fiscal years, the company has not paid any dividends to its shareholders in the past. Considering the company’s aggressive growth plan, it may not be in a position to pay dividends in the near future as well.

CONCERNS
The company is in a business that is highly competitive with too many domestic and international brands vying for the consumer’s attention. It may not be easy for the company to raise its market share. Raw materials, mainly commodities, constitute a quarter of the company’s revenues. Rising prices of most agricommodities is likely to put pressure on the company’s operating margins.

VALUATIONS
The company is valued at 35.5 to 38 times of its estimated full year earnings of FY10. For a new player, this is quite a high P/E by any industry standard. The issue, which is predominantly providing an exit route to the company’s institutional investors, has little value to offer to the retail investors. Investors keen on taking exposure in the out-of-home food service industry may probably get better valuations once the company gets listed.

HURDLES
Despite the positive picture presented by JFL, there are a good many risks. For one, with a good portion of the offer proceeds not flowing into the company, should debt be taken on in the future to fund expansion, it could reduce margins and constrain cash flows.

Two, JFL has an accumulated loss of Rs 62.3 crore as of September 2009, against average yearly profits of about Rs 6 crore, , precluding dividend payouts in initial years after listing.. Once losses are written off, the company would face increased taxes, squeezing net margins.

Three, going forward, inflationary pressures could lead to raw material cost increases. Margins, thus, could slip, else JFL may increase retail prices of its products, which could hurt sales.

Current assets, including cash, also do not cover dues to sundry creditors. Of the capital raised that accrues to JFL, almost 40 per cent goes towards issue expenses and general corporate purposes which may be varied and difficult to ascertain.

Dominos Pizza, while enjoying brand equity in the door-delivery segment, still faces tough competition from dine-in eateries, other national lower-priced fast-food chains such as McDonalds, KFC and so on, besides small, local eateries.

These factors, therefore, argue against paying premium valuations for this offer. It may thus be avoided, but price corrections post-listing bringing about more reasonable valuations may be used to enter what is an attractive business with no other listed competitor.

OFFER DETAILS
The issue is open from January 16 to 18. On offer are 22,670,447 shares, of which 4,000,000 shares are a fresh issue. Kotak Mahindra is the lead manager.

Accumulated losses, high interest costs eating into margins and potential hikes in raw material costs make this offer unappetising.

Disclosure: Author does not own any of the stocks discussed here.





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