Jubilant Foodworks IPO Analysis - Domino's Pizza

A very costly pizza

While growth prospects are encouraging for this exclusive franchisee of Domino's Pizza in India, the company's book value is just Rs 5.88 and profits have spurted only in the first half

Jubilant Foodworks, promoted by Shyam Bhartia, Hari Bhartia and Jubilant Enpro Private Limited, is a food-service company and currently operates Domino's pizza stores in India and, through its sub-franchisee, in Sri Lanka. The company is the largest pizza chain in India and one of the fastest growing multi-national fast food chains between 2006-2007 and 2008-2009, in terms of number of stores. The company is the market leader in the organized pizza home delivery segment in India with over 65% market share. As of November 30, 2009, it operated 286 stores in India located in 22 states and union territories, including in 59 cities across the country, and, through a sub-franchisee, DP Lanka Private Limited ("DP Lanka"), five stores in Sri Lanka.

It operate its 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 stores in India, Nepal, Bangladesh and Sri Lanka. The Domino's brand was founded in the United States of America in 1960 by Thomas and James Monaghan. Since then that business has grown into a global network of over 8,500 pizza stores in more than 60 countries involving over 2,000 franchises.

Jubilant Foodworks was founded in 1995 and opened its first Domino's pizza store in January 1996. The company on an average sold 1.81 million pizzas, including add-ons such as garlic bread and cheese dip each month throughout Domino's pizza stores in FY09 and for the half-year ended September 30, 2009, 2.46 million pizzas (including Add-ons) were sold each month. Recently, the company also began offering pasta and choco lava cake to its customers as a side

item. The company has opened 60 stores in fiscal 2009 and it plans to open between 65 and 70 stores in fiscal 2010, of which it had opened 45 stores as of November 30, 2009. To service its stores in India, it operates (as of November 30, 2009) four regional supply chain centers, or commissaries, located in Noida (Delhi NCR), Mumbai, Bangalore and Kolkata.

The company intends to enter capital market to raise money in the range of Rs 306 crore to Rs 328.7 crore by issuing around 2.27 crore equity shares out of which 40 lakh equity shares will be fresh issue and 1.87 crore equity shares will be offer for sale by the India Private Equity Fund (Mauritius) and Indocean Pizza Holding Limited. The company will be getting Rs 54 crore to Rs 58 crore from sales of 40 lakh equity shares, out of which it will use Rs 35 crore for pre-payments of term loans in order to reduce the interest burden of the company.

Strengths

The company is market leader in the organized pizza home delivery segment in India with over 65% market share.

Due to favourable demographics, rising income levels, growth of middle class, increase in urbanization and nuclear families and increase in number of working women, the company's growth prospects are encouraging.

Weaknesses

The company will continue to face competition from organized as well as unorganized palyers and has to compete with national and international pizza chains, such as Pizza Hut, Papa John's, Smokin Joe's and Pizza Corner. Also the company has to compete on a broader scale with casual dining and other international, national, regional and local food service businesses.

The company is present in food industry, which uses agri commodities as raw material. Most ingredients used in pizza and side dishes, including cooking oil, flour, cheese, meat products and vegetables, are commodities and therefore subject to price fluctuations as a result of seasonality, weather, demand in local and international markets and other factors. This may affect the company's margin and bottom line.

The Company has accumulated loss of Rs. 62.31 crore on September 30, 2009, which has resulted in erosion of a substantial portion of net worth. Pre-issue book value as of Sep 2009 is just Rs 5.88.

Valuation

The company has shown very sharp growth for the half year ended September 2009. Its net sales stood at Rs 182.47 crore for the half-year ended September 2009 whereas the company had recorded the sales of Rs 280.16 crore for FY09. The margin has also improved to 16.1% compared to 12.5% in FY09. The company's net profit for the six months ended September 2009 is Rs 12.10 crore compared to Rs 6.74 crore for FY09. At the issue price of Rs 135 - 145, on the EPS of Rs 1.1 for FY2009, the PE works out to 123 to 132 times. However P/E on annualized first half EPS of Rs 3.8, works out to 35 to 38 times.