Jubilant FoodWorks: Rich valuations

Dunkin’ Donuts deal boosts the already strong revenue growth outlook

Jubilant FoodWorks announced a master franchisee agreement on Thursday with the US-based quick service chain, Dunkin’ Donuts, for an India launch. Known to be in talks with different groups for some time (including Starbucks, which announced a deal with Tata Coffee last month), the announcement gives a boost to its already strong revenue growth outlook.

Jubilant saw net sales growth of almost 60 per cent on an yearly basis to Rs 186 crore in the December quarter. It came off a same-store sales growth of nearly 36 per cent in the quarter. The 25 new stores were added this quarter, taking the total to 364 stores across 87 cities. The sales boost was mainly volume-based, as the price increase was four-five per cent yearly, according to the management.

It was the second consecutive quarter of margin compression, and inflationary trends (particularly cheese) pulled margins down 80 basis points to 17.4 per cent. Analysts expect further pressure, given the resilience of inflation in the system. Employee costs surged 18 per cent on a quarterly basis, reflecting a full quarter of wage increase taken in September last year, in addition to hiring parallel to expansion.

Analysts expect strong earnings growth to continue as the company expands. However, the growth in the same store sales is expected to settle lower at 20 per cent levels (compound annual growth rate) over the next five years. Operating margins are also expected to see some impact as the management indicated it will be able to partly pass on higher raw material costs.

The terms of the Dunkin’ Donuts agreement, capex outlay and funding will ultimately determine benefits accruing from the deal. The company pays three per cent of total sales to Domino’s International. This franchise agreement is valid till December 2025 and renewable at Jubilants’ option for 10 years further.

The stock has more than doubled since listing, given its growth outlook and strong cash flows. The stock ended 3.2 per cent higher on Thursday at Rs 528.55 over its previous close and trades at a premium valuation of 35.5x consensus financial year 2011-12 earnings estimates.