For the last five years, Noida-headquartered Jubilant FoodWorks Ltd, the master franchisee for Domino’s Pizza and Dunkin’ Donuts in India, saw revenue growing at a compound annual growth rate (CAGR) of 49 per cent, thanks to the buoyant consumer demand.
Investors were quick to lap up the stock, with Jubilant’s share price growing nearly five-fold since its listing in February 2010, even as the Sensex remained flat during the same time. The benchmark FMCG (fast moving consumer goods) Index, meanwhile, grew 67 per cent only.
But all this appears to be changing now as jittery investors hammered the Jubilant stock on Monday, bringing it down nearly seven per cent on the BSE. It closed the day at Rs 1,149.9. The trigger for this were growth concerns amid a slowing economy.
JP Morgan’s equity research division said in a report released on Monday: “Consumption of pizza is discretionary in nature in India and hence affected adversely by economic slowdown. Same-store sales growth for Jubilant moderated to six per cent in the financial year ended March 31, 2009 (the year when Lehman Brothers collapsed, triggering a global meltdown) and earnings growth also declined six per cent year-on-year on account of lower economic growth, which impacted consumer spending. We believe current environment of moderating economic growth does not bode well for sustainability of comparables for Jubilant.”
Signs of a slowdown were visible in the year ended March 31. Jubilant’s same-store sales growth for 2011-12 was 30 per cent, compared with 37 per cent during the previous year. Specifically, the March quarter, considered a strong one for quick-service restaurants (QSR), was surprisingly weak for Jubilant. Same-store sales growth was 26.2 per cent during the quarter, compared with 33.4 per cent a year ago.
Jubilant’s chief executive officer Ajay Kaul, during a conference call to announce his company’s fourth quarter and annual results, had admitted his firm was seeing a “consumer offtake reduction”. “We are seeing first signs of a relative drop,” he had said in response to questions on Jubilant’s lower same-store sales growth number for the quarter.
More importantly, same-stores sales growth for the current financial year was pegged at 18-20 per cent by Kaul, a significant come-down in comparison to previous years.
JP Morgan in its report said it estimated same-store sales growth for Jubilant this year to be 20 per cent and 17 per cent in the next financial year. While it has initiated an underweight rating on Jubilant, JP Morgan added it did see investment positives, driven mainly by an aggressive store expansion of Domino’s and a successful and scalable business model.
“Strong processes for procurement and operations (regional commissary based model) are key strengths for Jubilant. It procures ingredients centrally to ensure consistency and quality. Supply chain for its stores is managed through commissaries located in Noida, Mumbai, Bangalore, and Kolkata. It is also in the process of setting up a new commissary in Chandigarh which should begin its operations soon. The current five commissaries (including the soon-to-be-commissioned one at Chandigarh) have the ability to service 600 stores,” JP Morgan said.
Added Abneesh Roy, associate director, research, Edelweiss Capital: “While there are risks attached in the near-term since discretionary spends are seeing a slowdown, in the mid to long term, I remain positive about the company.”
Jubilant proposes to add 90 Domino stores this financial year, taking its tally up to 555 in India. On Dunkin’s, it proposes to add nine stores to the one outlet it has recently opened in Delhi, taking its tally to 10 in the country. The company will also add about five-six Domino stores in Sri Lanka, where it has two at the moment. And all this will happen at an investment of Rs 150 crore.
