Jubilant Foodworks
BSE SENSEX
28,082
S&P CNX
8,709
13 October 2016
Update
| Sector:
Retail
CMP: INR1,055
TP: INR1,090 (+3%)
Neutral
Good business, fair valuations; tough near-term outlook
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
JUBI IN
65.8
1584 / 897
1/-27/-36
65.8
1.0
613
55.0
Financials Snapshot (INR b)
2016 2017E 2018E
Y/E Mar
24.4
26.8
32.8
Net Sales
2.6
2.8
4.0
EBITDA
1.0
0.9
1.6
Net Profit
15.0
14.0
24.5
EPS (INR b)
-11.7
-6.2
74.7
EPS Gr. (%)
111.3 124.2 130.6
BV/Sh. (INR)
70.5
75.2
43.1
P/E (x)
9.5
8.5
8.1
P/BV (x)
13.4
11.3
18.8
RoE (%)
14.1
11.9
19.2
RoCE (%)
Shareholding pattern (%)
As On
Jun-16 Mar-16 Jun-15
Promoter
45.0
48.7
48.8
DII
12.2
8.9
4.5
FII
31.7
34.3
41.5
Others
11.1
8.1
5.2
FII Includes depository receipts
Stock Performance (1-year)
Jubilant Food.
Sensex - Rebased
1,750
1,560
1,370
1,180
990
800
Jubilant Foodworks has had a tough time of late
with a plunge in its 1QFY17
same-store sales (SSS) and resignations of its CEO Ajay Kaul (who will continue
until March 2017) and CFO Ravi Gupta in a short space of time. Management
has guided for positive SSS from 2QFY17, but there are no initial signs of
recovery in our retail coverage universe. Customer fatigue due to deals by
online/offline players across the year – as mentioned by Titan’s management in
its recent quarter update – is particularly hurting the QSR/food tech segment.
Operating margins are likely to be under intense pressure
until SSSG crosses
6% levels. Pressure would likely stem from (a) the company’s new strategy of
not taking price increases until December 2016 or even March 2017;
(b) possible minimum wage increases in Karnataka and Delhi, where the
company has 118 and 84 stores, respectively; (c) upcoming lease rental
renegotiations; (d) new stores, which tend to be margin-dilutive as well as
cannibalistic; and (e) Dunkin’ Donuts which will continue to be margin-dilutive
over next few quarters.
We continue to like the business model:
(1) Jubilant’s focus on delivery
(accounting for 50% of all orders and close to 65% of orders in metro cities,
according to our estimates) keeps it relatively insulated compared to peers,
given high lease rentals for retail space in India. (2) Jubilant has also embraced
food tech and thus online orders now form 44% of all orders. (3) Despite
competition, Dominos’ reputation in terms of consistency and timeliness has
not been matched by peers. (4) As the number of stores opened in past three
years (typical payback period) reduces as a proportion of base over the long
term, the pressure created by these store openings will abate. (5) Dunkin’s
EBITDA losses as a proportion of overall EBIDTA will also reduce over next two
years. (6) Once the business reaches a scale of 1,500 stores, incremental store
additions will be much lower, resulting in strong, consistent free cash flows in
subsequent years.
Valuation and view:
Weak 1HFY17 numbers and prevailing weak sentiment
could lead to a fourth successive year of EPS decline for Jubilant. RoCE has
dipped from 42% in FY12 to 11.9% in FY17E. However, we continue to like the
business model despite tepid medium-term outlook. While scope for operating
leverage is huge, a delayed recovery is adversely affecting its financial metrics.
Furthermore, there is uncertainty over the business direction under the new
CEO. We assume a strong recovery in EPS of 74% in FY18E over a low base in
FY17. Valuations at 35x September 2018 are fair, in our view. We maintain our
Neutral
rating and target price of INR1,090.
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 6129 1547
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Jubilant Foodworks
Jubilant Foodworks has had a tough time of late
with a plunge in its 1QFY17
same-store sales (SSS) and resignations of its CEO Ajay Kaul (who will continue
until March 2017) and CFO Ravi Gupta in a short space of time. The company
has also been facing headwinds from weak consumer sentiment and increased
competition from food tech players. Management has guided for positive SSS
from 2QFY17, but there are no initial signs of recovery in our retail coverage
universe. Customer fatigue due to deals by online/offline players across the year
– as mentioned by Titan’s management in its recent quarter update – is
particularly hurting the QSR/food tech segment.
Exhibit 1: SSSG for QSR players has been plunging
SSSG (%)
JUBI
Westlife
6.6
4.6
1.9
(2.6)
0.5
(5.5)
(9.8) (10.8) (9.0)
(3.4)
(2.4)
(5.3)
(7.9)
0.0
(4.8)
(4.9)
6.3
6.6
3.2
1.7
3.1
2.0
8.4
3.4
2.9
(3.2)
Source: Company, MOSL
Exhibit 2: Yum! Pizza Hut India system sales grew 6% in 3QCY16
System sales growth ex f/x
Pizza Hut India
KFC India
1QCY16
(6.0)
(1.0)
2QCY16
(7.0)
(1.0)
3QCY16
6.0
13.0
Note: KFC India and Pizza Hut India form just 1% of the system sales of respective division.
Source: Company, MOSL
Operating margins are likely to be under intense pressure
until SSSG crosses
6% levels, which appears unlikely in next few quarters. Pressure would likely
stem from (a) the company’s new strategy of not taking price increases until
December 2016 or even March 2017. We believe it will be positive for volumes
but negative for realization growth and margins; (b) possible minimum wage
increases in Karnataka and Delhi, where the company has 118 and 84 stores,
respectively; (c) upcoming lease rental renegotiations (possibly at much higher
rates as store rental deals are for 9-15 years); (d) Dunkin’ Donuts which will
continue to be margin-dilutive over next few quarters and (e) new stores (in
excess of 100 stores even in the current period of slowdown) which tend to be
margin-dilutive as well as cannibalistic. New stores are opening at 70%-80% of
system average, which during slowdown is itself 70-80% of erstwhile system
average.
13 October 2016
2

Jubilant Foodworks
Exhibit 3: Operating margins likely to suffer due to possible
minimum wage increases in Karnataka and Delhi…
Personnel Expense (%)
21.2
23.3
24.9
24.6
7.9
7.6
8.3
9.0
9.9
Exhibit 4: ..and upcoming lease rental renegotiation
Rent Cost (%)
12.5
10.5
12.2
20.0
19.4
19.2
19.6
FY11
FY12
FY13
FY14
FY15
FY16
FY17E FY18E
FY11
FY12
FY13
FY14
FY15
FY16
FY17E FY18E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Increasing promotional activities by competitors
Source: Company, MOSL
We continue to like the business model:
(1) Jubilant’s focus on delivery
(accounting for 50% of all orders and close to 65% of orders in metro cities,
according to our estimates) keeps it relatively insulated compared to peers,
given high lease rentals for retail space in India. Delivery focus and success on
delivery not only mean lower size of stores compared to peers, but also that
stores need not necessarily be on high streets. Peers focus mainly on dine-in
customers and thus the company’s store economics are far better. (2) Jubilant
has also embraced food tech and thus online orders now form 44% of all orders,
which is highly creditable given its huge delivery scale. (3) Despite competition,
Dominos’ reputation in terms of consistency and timeliness has not been
matched by peers. (4) As the number of stores opened in past three years
(typical payback period) keeps on reducing as a proportion of base over long
term, the pressure created by these store openings will abate. (5) Dunkin’s
EBITDA losses as a proportion of overall EBIDTA will also reduce over next two
years. (6) Once the business reaches a scale of 1,500 stores, incremental store
additions will be much lower, resulting in strong and consistent free cash flows
in subsequent years. However (4) and (5) will only pan out when recovery in the
Dominos’ business happens.
13 October 2016
3

Jubilant Foodworks
Valuation and view:
Despite 1QFY17 SSS declining 3.2% (lowest levels since
2QFY15), the stock price has been fairly resilient in the INR 900-1,300 range
since mid-January 2016. At INR1,055, however, the stock is down 33% from its
52-week high and 47% from its all-time high of INR1,984. Weak 1HFY17
numbers and prevailing weak sentiment could lead to a fourth successive year
of EPS decline for Jubilant. Since the company has also been adding nearly 150
stores every year, RoCE has dipped from 42% in FY12 to 11.9% in FY17E.
However, we continue to like the business model despite tepid medium-term
outlook. While scope for operating leverage is huge, a delayed recovery is
adversely affecting its financial metrics. Furthermore, there is uncertainty over
the business direction under the new CEO.
Jubilant’s valuations on EV/sales are at a substantial discount to both Indian
consumer peers as well as listed global QSR majors. Compared to global majors,
however, EV/EBITDA is in line and P/E is most expensive as earnings have
collapsed. While potential for longer-term multifold growth in EPS over the
current low base can be realized amid a recovery, the timing of the recovery is
highly unclear. Nevertheless, given free cash generation potential of the
business over long term, we see upside from CMP based on our DCF
calculations.
Valuations of 35x September 2018 are fair, in our view. We maintain our
Neutral
rating and target price of INR1,090.
Exhibit 6: EV/sales of JUBI is lower compared to most consumer peers
Companies
Jubilant Foodworks
Shopper's Stop
Titan Company
Asian Paints
Britannia
Colgate
Dabur
Emami
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Jyothy Labs
Marico
Manpasand Beverages
Nestle
P&G Hygiene
Page Industries
Parag Milk Foods
Pidilite Inds.
Radico Khaitan
United Spirits
FY16
3.4
0.9
2.7
5.3
3.8
5.8
5.0
9.1
5.5
5.5
5.9
6.9
3.4
5.1
4.0
6.7
7.8
7.6
5.5
1.3
4.4
EV/Sales (x)
FY17E
2.5
0.8
2.9
6.8
4.4
6.1
6.0
9.6
5.8
5.4
5.9
7.2
3.4
5.9
4.1
6.4
7.0
7.3
1.6
5.8
1.2
3.9
FY18E
2.1
0.7
2.4
5.8
3.7
5.3
5.1
8.0
5.0
4.9
5.3
6.3
2.9
4.9
2.7
5.3
5.7
5.8
1.3
4.7
1.0
3.4
Source: Company, MOSL
13 October 2016
4

Jubilant Foodworks
Exhibit 7: Valuation comparison with global QSR players
P/E (X)
FY17E
Domino's Pizza Inc
McDonald's Corp
Yum! Brands Inc
Arcos Dorados Holdings Inc
Cafe de Coral Holdings Ltd
Westlife Development Ltd *
Jubilant Foodworks
DPZ US Equity
MCD US Equity
Yum US Equity
ARCO US Equity
341 HK Equity
WLDL IN Equity
JUBI IN Equity
37.3
21.1
24.6
22.7
51.5
25.2
N/A
75.2
FY18E
31.2
19.1
22.4
35.5
40.4
21.6
N/A
43.1
FY19E
26.4
17.9
21.0
23.2
32.1
16.6
2146.5
39.9
EV/EBITDA (X)
FY17E
20.1
13.2
13.1
8.5
28.0
12.7
59.3
24.6
FY18E
18.0
12.7
12.7
7.6
22.5
11.2
43.6
16.9
FY19E
16.1
12.3
13.2
7.4
18.4
9.6
31.8
14.4
EV/Sales (X)
FY17E
4.0
4.9
3.1
0.6
5.5
1.8
3.4
2.5
FY18E
3.7
5.3
3.1
0.6
4.7
1.6
2.9
2.1
FY19E
3.4
5.8
3.1
0.6
4.1
1.4
2.3
1.8
Domino's Pizza Enterprises Ltd DMP AU Equity
Source: Company, MOSL, Bloomberg
Exhibit 8: Free cash flow assumption
INR m
Sum of PV of FCF
Terminal value
PV of terminal value
EV
Net debt
Equity value
No of shares
Per share value
CMP
Terminal growth
Debt
Equity
Cap employed
Cost of equity
Cost of debt
WACC
42,479
335,119
42,638
85,117
(1,222)
86,339
66
1,312
1,055
6%
17
7,324
7,342
11.80%
7%
11.80%
Source: Company, MOSL
Stress Case Assumptions result in 26% downside to CMP
We are assuming SSSG of 2.7%, 7% and 10% in FY17E/FY18E/FY19E on stress
case assumption.
For EBITDA margins to increase, SSSG has to increase higher than the 6-7%
average operating cost increase.
We are thus assuming 50 bp decline in EBITDA margin in FY17 followed by 80 bp
increase to 11.1% by FY19.
EBITDA and PAT are likely to increase by only 17.2% CAGR between FY16-FY19.
This is after 4 years of flat PAT between FY12-FY16. The preceding 6 years
before that had witnessed 94% PAT CAGR.
ROE even after assuming some recovery in FY18 and FY19 is only 17.6%, which
while better than the 11.3% likely in FY17 is a far cry from the 30% plus ROE that
the company reported before FY14.
13 October 2016
5

Jubilant Foodworks
Earnings growth over a 3 year period will be in line with peers and ROE is lower.
The stock will thus not trade at either a premium to FMCG peers or in line with
its own historical multiples as ROE is much lower.
Giving 35x target multiple September 2018 stress case EPS, we get a target price
of INR 780, 26% downside to CMP.
How different are our stress case numbers compared to street estimates?
On sales we are 5.2%, 3.7% and 4.3% lower than street expectations for
FY17E,FY18E and FY19E.
On EBITDA we are 14.6%,15.1% and 20.7% lower than street expectations for
FY!7E, FY18E and FY19E.
On PAT, our stress case forecasts are 27.3%, 25.1% and 34.1% lower than street
expectations.
13 October 2016
6

Jubilant Foodworks
Story in charts
Exhibit 9: Revenue CAGR of 16% over FY16-FY18
Sales (INR b)
59.9
50.2
38.8
22.8
20.5
21
FY15
16.5
24
FY16
22.7
9.8
27
33
FY11
FY12
FY13
FY14
FY15
FY16
FY17E FY18E
74.9
74.3
74.8
73.8
73.9
Sales growth (%)
Exhibit 10: Gross margin contraction of 10bp over FY16-18E
Gross Margin (%)
76.2
76.4
76.1
7
FY11
10
FY12
14
FY13
17
FY14
FY17E FY18E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 11: EBITDA margin expansion of 140bp over FY16-18
EBITDA Margin (%)
17.7
18.5
17.1
14.4
12.2
10.8
FY11
FY12
FY13
FY14
FY15
FY16
10.3
FY17E FY18E
12.2
Exhibit 12: PAT CAGR of 28% over FY16-FY18
PAT (INR b)
115.5
74.7
49.1
22.1
0.7
FY11
1.1
FY12
1.3
FY13
1.2
(9.8)
FY14
1.1
(6.1)
FY15
1.0
(11.4)
FY16
0.9
(6.2)
1.6
PAT growth (%)
FY17E FY18E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 13: Reducing margin pressure due to new additions
New Domino's Stores Opened in past 3 Years/Existing stores
57.8
52.1
48.2
46.9
47.9
46.9
Exhibit 14: Earnings recovery will lead to improved RoEs
38
30
28
RoE (%)
36
31
21
17
19
13
11
43.9
41.5
35.7
FY10
FY12
FY14
FY16
FY18E
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Source: Company, MOSL
Source: Company, MOSL
13 October 2016
7

Jubilant Foodworks
Financials and valuations
Income Statement
Y/E March
Net Sales
Change (%)
Material Consumed
Gross Profit
Gross Margin %
Operating expenses
EBITDA
Change (%)
Margin (%)
Depreciation
Other Non-recurring Inc.
PBT
Change (%)
Margin (%)
Tax
Tax Rate (%)
Adjusted PAT
Change (%)
Margin (%)
Reported PAT
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Lease Deposits
Capital WIP
Investments
Deferred tax assets
Curr. Assets, L&A
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liab. and Prov.
Current Liabilities
Creditors
Provisions
Net Curr. Assets
Appl. of Funds
E: MOSL Estimates
(INR Million)
2017E
2018E
26,766
32,835
9.8
22.7
6,306
7,860
20,460
24,974
76.4
76.1
17,700
2,760
4.6
10.3
1,515
131
1,376
-6.2
5.1
453
32.9
923
-6.2
3.4
923
20,982
3,993
44.6
12.2
1,749
160
2,403
74.7
7.3
791
32.9
1,613
74.7
4.9
1,613
2011
6,783
59.9
1,706
5,077
74.9
3,876
1,202
82.0
17.7
293
19
924
176.0
13.6
204
22.1
720
115.5
10.6
720
2012
10,191
50.2
2,617
7,574
74.3
5,693
1,881
56.5
18.5
377
58
1,562
69.0
15.3
488
31.3
1,073
49.1
10.5
1,033
2013
14,145
38.8
3,700
10,445
73.8
8,027
2,418
28.5
17.1
556
77
1,939
24.1
13.7
628
32.4
1,311
22.1
9.3
1,311
2014
17,372
22.8
4,534
12,838
73.9
10,333
2,505
3.6
14.4
787
85
1,803
-7.0
10.4
620
34.4
1,182
-9.8
6.8
1,182
2015
20,937
20.5
5,279
15,659
74.8
13,098
2,561
2.2
12.2
1,011
65
1,615
-10.4
7.7
504
31.2
1,111
-6.1
5.3
1,111
2016
24,383
16.5
5,801
18,583
76.2
15,943
2,640
3.1
10.8
1,282
110
1,467
-9.2
6.0
483
32.9
984
-11.4
4.0
984
2011
645
1,269
1,914
99
2,013
2,904
1,103
1,801
331
34
205
31
659
142
41
89
387
1,050
185
800
65
-391
2,013
2012
651
2,312
2,963
133
3,096
3,935
1,392
2,543
491
135
923
-69
578
187
64
131
196
1,504
304
1,133
67
-926
3,097
2013
653
3,645
4,298
122
4,420
5,802
1,852
3,950
660
102
940
-201
866
240
68
378
179
1,897
441
1,384
72
-1,032
4,420
2014
654
4,846
5,500
146
5,647
8,065
2,601
5,464
921
196
937
-375
1,102
331
90
246
435
2,599
659
1,825
115
-1,497
5,647
2015
656
5,806
6,462
144
6,606
10,810
3,438
7,373
1,142
199
746
-578
1,287
433
119
389
346
3,564
704
2,555
305
-2,276
6,606
2016
658
6,666
7,324
17
7,342
12,904
4,619
8,285
1,388
261
908
-678
1,400
552
125
332
391
4,222
721
3,130
370
-2,822
7,342
(INR Million)
2017E
2018E
658
658
7,516
7,935
8,174
8,593
17
17
8,191
8,611
15,154
6,134
9,020
1,621
261
1,089
-678
1,655
587
141
479
449
4,777
901
3,454
422
-3,122
8,192
17,241
7,883
9,358
1,889
261
1,307
-678
1,883
732
173
557
421
5,409
1,106
3,828
474
-3,526
8,611
13 October 2016
8

Jubilant Foodworks
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
BV/Share
DPS
Payout %
Valuation (x)
P/E
EV/Sales
EV/EBITDA
P/BV
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Debtor (Days)
Inventory (Days)
Creditor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Int./Div. Received
Depreciation & Amort.
Interest Paid
Direct Taxes Paid
Incr in WC
CF from Operations
Extraordinary Items
Incr in FA
Free Cash Flow
Incr in lease deposits
Pur of Investments
CF from Invest.
Issue of Shares
Incr in Debt
Dividend Paid
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2011
11.2
29.7
2012
16.5
45.5
0.0
0.0
2013
20.1
65.8
0.0
0.0
2014
18.1
84.1
0.0
0.0
2015
16.9
98.6
0.0
0.0
2016
15.0
111.3
2.5
16.7
2017E
14.0
124.2
2.5
17.8
2018E
24.5
130.6
2.5
10.2
94.6
10.0
56.5
35.6
64.0
6.6
36.0
23.2
52.5
4.8
28.0
16.0
58.4
3.9
27.2
12.6
62.3
3.3
26.6
10.7
70.5
2.8
25.8
9.5
75.2
2.5
24.6
8.5
43.1
2.1
16.9
8.1
37.6
43.9
49.3
2
8
43
3.4
36.2
42.0
57.5
2
7
41
3.3
30.5
34.9
51.3
2
6
36
3.2
21.5
23.5
31.0
2
7
38
3.1
17.2
18.1
22.3
2
8
45
3.2
13.4
14.1
16.4
2
8
47
3.3
11.3
11.9
13.7
2
8
47
3.3
18.8
19.2
23.4
2
8
43
3.8
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2011
924
-19
293
3
204
16
974
0
638
337
52
205
894
22
-10
0
-75
-62
18
70
89
2012
1,562
-58
377
0
488
-577
1,970
-41
1,132
798
159
718
1,968
22
34
0
-16
41
42
89
131
2013
1,939
-77
556
1
628
-354
2,143
0
1,834
309
170
17
2,021
16
-11
0
122
126
248
131
378
2014
1,803
-85
787
0
620
-332
2,217
0
2,357
-140
260
-3
2,615
15
24
0
226
265
-133
378
246
2015
1,615
-65
1,011
0
504
-923
2,979
0
2,748
232
221
-191
2,778
21
-2
0
-77
-58
143
246
389
2016
1,467
-110
1,282
0
483
-488
2,645
0
2,156
490
246
162
2,564
54
-126
197
130
-139
-57
389
332
(INR Million)
2017E
2018E
1,376
2,403
-131
-160
1,515
1,749
0
0
453
791
-446
-482
2,754
3,684
0
2,250
504
233
182
2,664
-70
0
193
320
57
147
332
479
0
2,088
1,597
268
218
2,573
-1,000
0
193
160
-1,033
78
479
557
13 October 2016
9

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10