This story’s success is all about converting Indian food habits. While eating out has become a rage, at least in all major and secondary cities, what Jubilant FoodWorks (JFW) is banking on, is to convert the average Indian’s idli-dosa, chana-bhatura, and thali ordering/eating habit into one that leans to pizza consumption.
Surely, not an easy task, as Indians are all prone to ordering their favoutite desi dish while dining out. But considering the growth rates achieved by the purveyors of foreign food, the future looks increasingly exotic.
Domino’s Pizza India, part of the Jubilant Bhartia Group, which rechristened itself as JFW late last year, on February 22, 2010, made a sizzling entry on stock markets, listing at an over 10 per cent premium, battling back the afflictions that plagued other initial public offerings (IPOs) over the recent months — the IPO was a Rs 330-crore affair on the upper band, and the stock initially listed with a Rs 11 premium at Rs 161.6 on an offer price of Rs 145. It moved up to close triumphantly at Rs 229 (day’s high was Rs 241.9), a gain of 58 per cent.
That fireworks would start on listing was clear from the fact that the IPO attracted 59 times QIB subscription, non-institutional was at 51 times and retail was 3.7 times. When the dust of the spectacle settled, JFW had a valuation of Rs 1,456 crore.
Turn-Offs:
This was despite a string of negatives surrounding the company, including the fact that JFW is a debt-ridden company and it approached the public with the IPO to pay off a loan — total debt was approximately Rs 117.17 crore. In fact, of the Rs 58 crore of the IPO proceeds that were to come to the company, Rs 35 crore was for debt repayment. To top it all, it had accumulated losses of Rs 62.3 crore as of September, 2009 (just 20% of funds would reach JFW).
Its price-to-earnings (P/E) multiple was toohigh, over 34 times — three times that of its US parent and those of its peers.
Another reason for the IPO was to allow two private equity (PE) investors in JFW to exit. The two PE investors together held a 31 per cent stake in JFW — VCCircle estimates that their overall net returns were 4 times.
Turn-Ons:
Domino’s 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 raising the number of stores, reported the India Retail Report, 2009. The Food Franchising Report, 2009 gave it a bigger, pan-South Asia, canvas, estimating that it is one of the largest and fastest-growing international food brands there. JFW was also anointed leader in the organized pizza home delivery segment in India with an over 65 per cent market share.
That there is a lot of space to grow for JFW in India is clear from the fact that the organised food industry forms just 12-13 per cent of the total food market, while the pizzas and pastas niche forms 2 per cent. Although JFW has not yet saturated the space it is present in, it is looking to flex its muscle elsewhere too by looking to aggressively add to the stores it already has.
As of August 31, 2009, JFW is operating 274 stores in India located in 20 states and Union Territories, including 55 cities, and, through a sub-franchisee, five in Sri Lanka.
JFW has been catering to an ever-larger share of the Indian mind-set. Its volume and sales have increased from 9 million pizzas in FY07 to almost 22 million in FY09. The cherry on the top is represented by the almost 50 per cent growth in net profits.
JFW even managed to turn a looming negative into a positive by getting the US-based parent to extend its master franchisee contract, already running for 15 years, to 25 years.
At Investors’ Gate
Since, post-IPO, money has flowed out of the company, funds available for expansion, of crucial importance to JFW’s well-being, stand reduced. An expected rise in raw material costs may affect margins too. Competition from PizzaHut, Papa John’s and others is unlikely to abate, and lease rentals are rising. As such investors, who may be looking at JFW for more upside movements, the current valuations may be pricey. Growth possibilities may open a window of opportunity, but only at dips.
This article appeared in the March 2010 issue of Wealth Insight
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