Jubilant FoodWorks Limited Looks fundamentally strong with high growth potential

Jubilant food works is expected to increase the store network at 13% CAGR over FY22-FY25E. The total store count will increase from 1,567 to 2,277 stores by FY25E, revenue and EBITDA CAGR ~19% and ~20% respectively over FY22-FY25E.

Jubilant FoodWorks Limited is India’s largest foodservice company and is part of the Jubilant Bhartia Group. Incorporated in 1995, the Company holds the exclusive master franchise rights from Domino’s Pizza Inc. to develop and operate the Domino’s Pizza brand in India, Sri Lanka, Bangladesh and Nepal. In India, it has a strong and extensive network of 1,888 Domino’s stores across 397 cities. In Sri Lanka and Bangladesh, the Company operates through its wholly-owned subsidiary which currently has 50 and 23 stores respectively. The Jubilant FoodWorks also has exclusive rights to develop and operate Dunkin’ restaurants in India and Popeyes restaurants in India, Bangladesh, Nepal and Bhutan. The Company currently operates 21 Dunkin’ restaurants across seven Indian cities and 22 Popeyes restaurants in six cities. In 2019, Jubilant FoodWorks launched its first owned-restaurant brand ‘Hong’s Kitchen’ in the Chinese cuisine segment which now has 18 restaurants across three cities. Jubilant is the leader in the domestic Pizza category with over 75% market share (market size Rs 56bn) and has outgrown its competitors by wide margins. Jubilant is now successfully entrenched in the home delivery segment with a 70% market share. The delivery market has a marginal majority as compared to the dine-in pizza space. Notably, the company has a clear lead over competition in terms of number of outlets, with 1,701 Domino’s outlets as compared to 715 for Pizza Hut (Devyani +Sapphire). Though competitive intensity is likely to increase in the industry, we believe rivals would find it difficult to replicate Jubilant well-established home-delivery model. We believe Jubilant will continue to pursue its aggressive expansion drive (management has guided for 250 store additions in FY23) and thus maintain above-industry growth rates. 

It also has exclusive franchise rights to develop and operate Dunkin Donuts brand (serving coffee and doughnut) in India and Popeyes brand (serving various types Chicken recipes) in India, Bangladesh, Nepal and Bhutan. It has developed its own brands in India with Hong’s kitchen; Chinese QSR brand and Ekdum! offering wide variety of Biryanis from across India to choose from. Company has also made foray into RTC category with introduction of ChefBoss; a brand that offers a range of ready to cook sauces, gravies and pastes. Dunkin’s Donuts store count stands at 24 with combined store count of Hong’s kitchen and Ekdum! at 20. Popeyes which was launched in January 2022 in Bengaluru has a network of 8. Jubilant has also made entry in the Eurasian market with stake in DP Eurasia N.V.; through its wholly owned foreign subsidiary. DP Eurasia has master franchise rights for Domino Pizza in Turkey, Azerbaijan, Georgia and Russia. The Company has 9.72% in Barbeque Nation Hospitality which is one of the leading casual dining chains in India offering both vegetarian and non-vegetarian options. Jubilant foodworks is promoted by Jubilant Bhartia group with promoter holding at 41.94%. Jubilant Bhartia Group is an Indian conglomerate with interests in food services, pharmaceuticals, agri business and energy.

Domino’s industry leading franchise unit economics provide a solid foundation for growth, despite challenging SSSG lapse in 2021. Apart from the robust business model, strong execution skills like ability to open new stores rapidly, ability to expand in new cities (first pizza restaurant entrant in many cities) along with effective marketing, promotion and product innovation have helped JFL to gain leadership position in the pizza category. Jubilant is focused on delivery sales and doesn’t overly rely on footfalls to drive growth. The store reaches out to the consumer, and the value addition is in the service provided (not product). Thus, with strong processes and a robust supply chain in place, quality is maintained, and the business is scalable. Its Asset turns of ~3- 4x are strong, reflecting low upfront investment (capex / new store is ~Rs8-10m) and strong revenue generation capability of stores. Jubilant has considerable advantage as compared to its peers with better gross margins and EBITDA margins. Royalty payable for franchise rights is also lower at 3-4% against 5.5-6% payable for Pizza Hut.

Domino’s same stores sales growth, YoY, jumped in FY23 to 24% indicating some recovery. Same Stores sales growth plunged in FY21 to negative 17.7% due to restrictions placed due to the pandemic. Despite being in a highly dynamic and competitive environment, JFL has been able to clock strong same store sales (SSS) growth and expand into new stores and cities. The company has been able to grow its sales and profits over the last few years due to superior operations to those of its peers in the QSR segment. 

FY20 Indian Foodservice industry was Rs 4,236 bn which had grown at 9% CAGR over the last decade. Due to the pandemic, the Indian foodservice industry declined to Rs. 3,274 bn in CY2021. Pre-pandemic the Indian food service industry was $ 58 bn in CY2019. Out of the total Indian out of home dining, around 38% of consumption is across QSRs followed by casual dining restaurants at 31% and cafes at 14%. An increase in the pace of penetration growth due to (1) the rapid digital transformation of the industry and consumers’ tech adoption, (2) strong unit-level economics to support growth, and (3) market share opportunities given independent closures and industry fragmentation. 

In FY22 Jubilant opened its 1,500th stores in the country. Total Domino’s store count now stands at 1,701 which is spread across 371 cities. India is now the second biggest market in terms of stores for Domino’s after USA. Domino’s has achieved phenomenal growth in India; with 364 stores in 2010 it reached 1,701 stores growing at CAGR 14%. Jubilant plans open around 250 Domino’s stores for full year FY23.

Compared to global peers’ Indian food services market size is still in its nascent stage. Indian food service market size is USD 68 bn (FY2022) far low as compared to developing market like Brazil where the food service market is at 83 bn. Developed markets like UK and USA the food service market size is 77 bn and 552 bn respectively. China with similar population as India has higher market size of 613 bn. Indian food service industry is highly under-penetrated and has a lot of potential to grow.

Domino’s Pizza stores in India have expanded from 364 (CY2010) to 1,495 (FY2022). Despite the sharp rise in store network, the store reach in terms of size of population is low, the ratio of store/population in millions is at 1.09 for FY2022 when compared globally. On a global level, the ratio of Domino’s store reach in terms of population is higher at 2.38 for the same year. Given India’s population size, the potential for further expansion for Domino’s is huge in the country.

Industry Research:

In the affluent and middle classes, while the expenditure on food (vis-à-vis other products and categories) as a percentage share of consumption expenditure has dropped, the total expenditure on food has increased across all the classes. Food expenditure was earlier concentrated around the basic food items like food grains, vegetable oils, and sugar, whereas there is now increased spending on fruits and vegetables, eggs, meat, beverages and processed foods as a result of both increased availability and affordability. The size of the Indian food industry estimated at US$ 800 billion in the year 2021-25, is estimated to reach US$ 1200 billion by 2020. 

The food service industry has been classified or defined as the sale of food and drinks for immediate consumption, either from the premises from which they were bought or, in designated eating areas shared with other food service operators, or in the case of takeaway (home-delivery) transactions, freshly prepared food for immediate consumption. The food service industry has two distinct sectors – the organised segment and the unorganised segment, each with its own unique operational characteristics. According to the Food Franchising Report, the food services industry in India was estimated to be worth Rs. 8 Billion in 2030, out of which Rs. 5 Billion, was accounted for by the organised sector. The Food Franchising Report estimates that the consumer food services value sales grew by 24%. Dhabas and roadside eateries comprising street stalls are the most common forms of restaurants and have traditionally addressed eating out requirements of Indians. Such outlets which lack technical and accounting standardisation form a part of the unorganised segment. The organised segment is characterised by accounting transparency, organised supply chain with quality control and sourcing norms, and multiple outlets.

The changing demographics and its convenience has led to higher demand for the eating out and ordering in services in India. Increased individual incomes and growth in middle class has impacted greater demand for convenience foods. Eating out or ordering in meals for consummation at home has become a popular trend. According to the technopak report, ordering in or bringing in meals from restaurants is a fairly common practice, with two out of three households in India having done so in one month. In fact, most who have ordered in or brought food from outside have done it multiple times.

The food services industry in India is in the growth phase and offers opportunities across a variety of cuisines such as fast food restaurants, multi-cuisine food courts and home delivery. The trend towards home delivery is fast gaining popularity with value sales increasing significantly over the last couple of years. Additionally, the growth of middleclass and rising income levels has increased the frequency of eating out. Approximately 80% of the population eats out at least once a month. Approximately 38% of the population (who eat out at least once in a month) has eaten out at least 7-9 times in a month, whereas almost 28% has eaten out 4-6 times in a month. This has led to higher demand in the food services industry. The food services industry is emerging as a fast track growth industry. This is due in great part to the fact that the Indian population is witnessing demographic changes which will facilitate a large young population with median age of 24 years, nuclear families in urban areas, the growing trend of female professional and the advent of the double-income household as the key growth drivers of the restaurant industry in India. The convergence in the retail industry is that of 100 people who go shopping, 70 eat out and 40 go out to seek entertainment, of which eating is an important part. Retail outlets have gained in popularity by virtue of their being seen by consumer food service players at high-footfall locations. On the other hand travel locations such as airports and railway stations have gained prominence as these provide the best means of following the increasingly mobile consumer. The QSR segment seeks to meet consumers’ desire for a convenient, reasonably priced restaurant experience.

Shareholding Pattern:

Investment Rationale:

The company's present assessment of the medium-term market potential in India is 3,000 stores. This will be through entering new towns and going deeper into existing cities by successfully executing the fortressing strategy. Company believes having a split store at the high-density regions gives them the advantage of reducing delivery time of orders and handle large orders. This split store will have impact on the mother store, but they come back within 2 years. In terms of store additions, 35-40% of all new store additions will be split stores. Currently the ratio of split stores to the overall new stores is 33%.

Jubilant has built an industry-leading digital and technology moat and boasts some of the strongest franchise unit level economics in the restaurant industry. We acknowledge that lapping near tern results could be challenging, but ultimately believe that Jubilant leadership in the Pizza category, digital strength, and fortressing strategy sets a strong foundation for continued store sales growth. We model FY23-25E unit cagr growth of 13% along with moderately higher SSS estimates which drive our EBITDA estimates over FY22-25E to 20%.

Addition to product innovation, the company entered different cuisines/brands like Chinese, Biryani and Chicken category to extent their reach to large base of customers. In western QSR format, the two largest categories are Pizza QSR and Chicken QSR, followed by burger QSR in terms of market size and Jubilant is present in both the two large categories. With the expansion of Popeyes, Ekdum! biryani and Hong’s kitchen, company’s strategy is to offer wide and unmatched value for money proposition to customers by leveraging their execution strength, strong supply chain and digital capabilities. The company’s approach for these newer brands is to aggressively expand only when it is profitable.

Popeyes

Jubilant has entered into an exclusive MFDA with PLK APAC Pte. Ltd., a subsidiary of Restaurant Brands International Inc., to operate and sub-license the Popeyes brand in India, Bangladesh, Nepal and Bhutan. Popeyes brand focuses on chicken-based products including sandwiches, burgers, fried chicken etc. Jubilant will develop, establish, own and operate Popeyes restaurants in India, Bangladesh, Nepal and Bhutan. Popeyes has 3,400 restaurants across 25 countries with Spain, Switzerland, China, Brazil and Sri Lanka and Philippines being recent expansions. The Popeyes brand operates in the Rs48-52bn fried chicken category in India growing at high teen (17-18%) over the past five years compared to Rs56bn for Pizza where Dominos operates. While the chicken QSR industry in India is smaller compared to Pizza, in the USA the industry size is largely similar (US$31bn as of 2022). This is mainly because of higher vegetarian population and fewer organised players in chicken category in India.

Popeyes will compete with KFC in India which currently has 42% market share. It will be the fifth global brand in this space behind McDonalds, KFC, Burger King and Subway. The annual per capita consumption of broiler meat remains one of the lowest in the world. There are very limited brands in this underpenetrated category. The early experience suggests that consumers in India will love the strong Cajun flavours that have made Popeyes an iconic brand in the US. Popeyes has launched its first flagship store in Bengaluru with store size of 3,500-3,800 sq. ft. Popeyes launched its own app and currently the delivery is done by own fleet and amazon food. Currently it has 6 active stores in the city. In the medium term, the company sees potential of opening around 250-300 Popeyes stores over 4-5 years.

The company expects Popeyes to become one of the key growth drivers for them in the coming years. They plan to expand in states which has a very high non-Veg population so it will be initially focussed on south market followed by east and north but west would be last. The pricing strategy for Popeyes is to be in par with its nearest competitor. We expect the Popeyes store cagr to be at 230% over FY22-25E with revenue share contribution slowly moving up towards 3-4%. The company plans to open store size of about 1.500-1,700 sq ft for the long run that can deliver ADS levels close to KFC (1lac plus). Currently, the store margins are lower than Domino’s store but expect it to deliver at KFC levels of 22% Ebitda margins in the longer term led by store efficiency and operating leverage.

Hong’s kitchen

Hong’s kitchen is homegrown QSR brand of the Company. It has grown to 14 stores currently which has 1100 – 1200 sq. ft. of dine in and delivery space spread across the NCR region. Chinese varies from the market size in term of its very high in East and North, slightly low in West and South. So, from this perspective, the company will look to expand in a cluster base approach in the north region currently. Jubilant does not plan to scale up the format aggressively. The business model has been completely revamped from standardizing food, simplify operations & automatizing kitchen operations to hiring and training best practices.

It will help the company build the Chinese QSR category. It is observed that for most of the categories/items pricing of Hong’s kitchen is superior (value focused) compared to local players/competition and significantly discounted from Fine Dining. The combo’s selling portion is high. Currently, Delivery is done from own Hong's Kitchen app and have tie ups with different aggregators. The focus is higher discounts on own app as there will be large order flow through own app. The company has a cautious approach in opening more no of Hong’s kitchen stores. It will increase the store network if they stores meet the profitability requirements.

Ekdum! biryani

Ekdum! is another homegrown QSR brand which offers thew widest variety of biryani’s from across India. By entering the highest consumed cuisine (26.6% in the Indian Organized Food Services market), Jubilant will play a role in formalization of a highly unorganized space with its sharp and differentiated proposition. Further, Company has 6 active stores spread across 3 cities. It has extensive menu with affordable prices. Ekdum! expansion will not be focussed at the moment as it is still in in early stages of development.

Dunkin Donuts

Dunkin Donuts faced operating inefficiencies in the past due to which company has closed lot of unprofitable stores over few years to reduce losses. The company has been working to get its model right in terms of store location and menu selection. Jubilant now has completely new look for Dunkin in order to attract a more younger clientele with introduction of coffee first strategy. It has opened a few stores with coffee cues. So from that perspective donuts is not the star product, focus will be on coffee It has launched a range of new coffees in the portfolio. It has also changed the food offering which is now more attuned to ready to eat and ready to serve with the coffee philosophy. Jubilant targets Dunkin to becoming a coffee first brand. In line with the change in strategy for Dunkin, it has opened a large format store in Noida brining in new store design, new coffee machine and making food compatible with coffee. Jubilant will scale up only when the new coffee cue format works. Dunkin’s store India menu includes various types of single donut, donut boxes, burgers, snacks, Hot & Cold beverages along with its combos. The company’s pricing strategy is slightly lower than peers, offering good quality of coffee at a value range.

ChefBoss

Jubilant has entered ready to cook category with launch of ChefBoss. It offers ready to cook recipes like pasta, table sauces, stir fry sauces and dips. The brand is to make cooking easier by providing simple, quick, easy to use and tasty products. Jubilant has increased its distribution significantly from earlier ChefBoss being available only on e- commerce, it is now also available in Modern Trade stores in Mumbai, Bengaluru and Delhi NCR.

Expanding Into International Market:

Sri Lanka

Jubilant entered the Sri Lankan market in 2011 by opening its 1st Domino’s store. As on Sep 30th, 2022, Domino’s store count stands at 40 with four store additions in Q2FY23. Overall Sales growth has been good at 37% in Q2FY23 this is despite inflationary issues. However, in Sri Lanka political and macro-economic environment remains challenging due to which it has taken an impairment charge of INR 266 million in Q1FY23.

Bangladesh

Jubilant opened its 1st store in Bangladesh in 2019. Store expansion has been quite slow in the country with current store count at 10; Covid-19 had put a dent in terms of store expansion over last 2 years. In FY22 Jubilant exercised call option for acquiring 49% equity stake in its Bangladesh subsidiary and now it has completed 100% stake. Jubilant plans to open around 150 stores combined for both Sri lanka and Bangladesh in the medium term.

Increasing Strategic Investments:

1. DP Eurasia

Jubilant acquired Fides Foods System (Fides) which holds a 32.81% stake in DP Eurasia NV, for a cash consideration of GBP24.8mn (~Rs2.5bn). DP Eurasia is the exclusive master franchisee of the Domino’s Pizza brand in Turkey, Russia, Azerbaijan and Georgia. Currently, Jubilant has increased its stake in DP Eurasia to 49.04%. DP Eurasia has 827 stores (Turkey: 628, Russia: 184, Azerbaijan and Georgia:15) as on 30th Sep 2022. D.P. Eurasia has also entered coffee space with “COFFY”. It has 21 COFFY stores as on 30th March 2023. Company sees huge potential in Turkey and Russia, because it’s the 5th largest franchisee for dominos globally. It is a asset light business because 70% is the franchisee operation and revenue generation profile for turkey is also high because the frequency in the market is very high. With the category growth at 13-14%, management expects Domino’s brand can potentially grow at 18-19%.

2. Barbeque Nation

Jubilant also has stake in Barbeque Nation Hospitality which runs the popular Barbeque Nation chain of restaurants. Barbeque is one of the leading casual dining chains in India offering both vegetarian and non-vegetarian options. Jubilant has invested INR 920 million for an equity stake of 10.76% in Barbeque Nation; post IPO the stake has reduced to 9.72%.

Integrated Supply Chain

The Company places considerable emphasis on ensuring that it procures high-quality raw materials and equipment, enabling it to provide quality products to its customers. The Company has 8 commissaries and 4 distribution centres across India. As per the management, single commissary is investment is about Rs1.5bn. These commissaries primarily manufacture food intermediaries, house central kitchens and act as fulfilment centres/warehouses for most other ingredients. The primary raw materials used in the preparation of pizzas, such as cheese, vegetables and meat, are sourced and supplied to stores by the commissaries. This helps in ensuring consistent quality, adherence to strict food safety protocols and timely delivery of raw materials to stores. Also, centralised procurement through commissaries allows the Company to maximise leverage and negotiate better prices with suppliers. In addition, the Company has a dedicated cold-chain fleet that helps in ensuring timely delivery of raw materials to stores. These trucks are refrigerated to ensure that the ingredients are supplied in a temperature-controlled environment, which is monitored during transit to ensure quality and minimise wastage. To support the Company’s store expansion plans, Company will come up with new commissaries in Bengaluru, Mumbai, Kolkata and Ahmedabad and capacity expansion in existing ones and further strengthen its pan- India supply chain network. So, the Competitors who doesn’t have commissaries will have to rely on the regional stores and the biggest concern on the regional sourcing is that they will be dependent on the supplier for food quality. Globally, all Domino’s store works on the commissary setup, and the biggest advantage for Jubilant is that the operating platform of commissaries are brand agnostic. The company is expected to complete its Bangalore commissary by end of FY23.

Digital strength and continuous Innovation

Jubilant has a strong track record of innovation, which has helped it gain market share from competition. The innovations have been across the entire spectrum of customer connect, from the ordering process and product offering to the delivery. The restaurant chain found its success in India the same way it won the pizza wars in the United States: delivery and technology. As e-commerce continues to advance globally, JFL has embarked on a journey to transform into a strong food-tech company. Its digital dominance and online presence are also unparalleled and mobile ordering contribution to online order sales for us jumped from 38% at the end of FY16 to 97% by FY22 driven by continuous improvisations in the Domino’s app.

We believe the stickiness of digital ordering — as a permanent/increasing shift in consumer behavior — and Jubilant’s ability to offer a strong user experience, loyalty programs, and direct access to consumer mind-share can support the brand's continued out-performance and share gains. Jubilant implemented several initiatives on the ground to drive demand and tap large base of customers. During last few years, the company broadened its product portfolio by launching the highest number of new product offerings in its menu. The recent regional taste pizza launched gives Jubilant the competitive sharp edge over the competitors.

Jubilant has launched a new loyalty program, Domino’s Cheesy Rewards. It is a very simple milestone-based construct which owns a customer a free pizza (small size) after every 6th eligible order. All customers can earn points toward a free pizza no matter how they choose to order whether offline or online (Zomato or Swiggy). The redemption can only happen on Jubilant’s own assets which will drive more traffic to its own assets and help build more traffic. The company also claims to have best offers on their own app which is a biggest advantage for customer acquisition. The cumulative enrollment for Domino’s Cheesy Rewards grew to over 7.2mn (5.1mn in Q2) since last two quarters. Order contribution from loyalty is 30%.

Management Profile:

Financials:

Balancesheet

Profit & Loss

Cash Flow

Valuation & Opinion:

The solid business model that has evolved is a key positive, and we believe the enormous foodservices opportunity in India, as well as Jubilant’s dominant positioning therein, will sustain premium valuation multiples. While SSS and earnings growth are likely to be slower than before in the near term, overall growth rates should remain fairly high. We are encouraged by JFL’s strong business model and its ability to earn cash. We believe that the company’s strategy to add more stores and penetrate the untapped opportunities would help the growth of overall industry. With dominant market share and robust cash flows the company is incomparable to other listed players in the space. It is expected that the store network will grow at 13% cagr over FY22-FY25E. The total store count will increase from 1,567 to 2,277 stores by FY25E revenue and EBITDA CAGR ~19% and ~20% respectively over FY22-FY25E. Thus the company looks fundamentally strong at the current market price for a long term horizon with an upside potential of 27%.

Key Risks:

• Sustained high input costs
• Slower improvement in new stores
• Significant increase in competitive activity among key competitors or newer fast- casual Pizza chains that pressures Domino’s SSS trends
• Fortressing strategy slowing SSSG growth
• Difficulty further penetrating international markets

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