Jubilant Foodworks: High Valuation + Slower growth + Promoter selling

The Domino’s pizza operator, a hot stock and favourite of large investors is cooling off as growth rate slows down and higher costs squeeze margins

Every now and then, there comes a story which catches everyone's fancy, creates frenzy like there is no tomorrow. Jubilant Foodworks (JFL) is one such story. For the uninitiated (hardly anybody), the company runs a highly successful pizza store chain by the brand name, Domino’s. It has a particular focus on the home delivery business and has set new benchmarks there.

Rising disposable income, favourable demography and changing palates have helped create a story, which could not have been missed by any investor in the Indian markets, domestic or foreign. Fantastic growth, great profitability and a bull market have taken Jubilant Foodworks to dizzying heights in terms of valuations and expectations. Often when there is a consensus among market players, especially at high valuation levels, disappointment cannot be far behind. How could JFL possibly disappoint? Well, there are some cracks in the JFL story which is worth paying attention to.


Exorbitant Rent?

Domino’s specialises in home delivery and thus its stores are small. While checking out all the stores is not possible, size of stores in a city like Mumbai seems of the order of 700-800 sq. ft. (but is still an approximation). JFL has indicated that the stores in the Tier II/III towns are larger and average size would probably be more in the range of 1,200 sq. ft. The company paid a rent of about Rs116 crore for FY13. Even if we take the average number of stores calculated above, average size of 1,300 sq. ft., then some arithmetic would lead us to conclude that the average rent paid per sq. ft per month is around Rs143! This is when half the stores are NOT in Tier I cities and this number has been increasing over years even as incrementally more stores are coming up in the Tier III ones.           

Surprisingly High Rental Cost













per store area






Average No. of Stores






Total Area






Rent per sft pa






Rent per sft pm







The assumption of the per-store area could be off the mark. So let us look at the stores and rent paid. While the average number of operational stores has increased from FY09 to FY13 by 147% (about 25% pa), rent has gone up by 334% (44% pa).

Galloping Store Rent















growth p.a







No. of stores







Growth p.a








Exorbitant Cost of Interiors?

The interiors of a Domino’s Pizza stores are modest. Looking at the gross block, let us focus only on the “Leasehold Improvements” bit. FY13 has an entry of Rs192 crore. Assuming 20% of it has gone into commissaries or what company calls “factories”, we would still be left with around Rs150 crore. Again if we take 1,300 sq ft as the average size, it would work out to around Rs1,900-2,000 per sq ft of expenses. And furniture/fixtures and plant/machinery are not included here.


Let’s compare this with Shopper’s Stop. As of March FY13, Shoppers’ Stop had 3.4 mn sq ft of retail space and the gross block was Rs683 crore. So it seems like they spend around Rs2,000 per sq ft in terms of capex. And out of that “Leasehold Improvements” account for around 35% (Rs 700 per sq ft) of that, less than 40% of Domino’s.


The nature of operations within the premises of these two retail businesses is different and thus obviously would require different store interior setups. Just thought the cost difference in setting up the two stores was interesting enough to share.


The other thing with this “Leasehold Improvement” part is that, everything spent under this head is treated as revenue expenditure in the Income Tax books. Thus a deferred tax liability is created in accounting books and obviously is cash savings to that extent.


As per FY13 Annual Report, deferred tax liability created on this account was Rs15.57 crore. Assuming tax rate of 33%, it would roughly mean that reported PBT for Income Tax purposes would be lesser by about Rs47 crore. PBT was 197.4 crore. for FY13. This change in treatment happened first in FY12 (Rs10 crore Deferred Tax Liability) and was followed up in FY13. For an asset which is going to last a few years, to be “depreciated” in one year is little odd, but as per Annual Report they have relied on expert advice.



For FY13, EBITDA for JFL was about Rs250 crore. Taking the average number of stores operational for the year at 521, EBITDA per store comes out to about Rs48.5 lakh. From 9 months FY14, similar calculation would lead to an approximate annualised EBITDA per store of Rs42-43 lakh per store. Not a surprising result given that EBITDA in FY14 has grown slower than the number of stores. I happened to come across the latest presentation by Domino’s US, where they have stated that, their US per-store EBITDA is near the top end of historic range around $75,000 annually. The same number for JFL for FY13 would be $80,000+ and for FY14 closer to $70,000 or Rs44 lakh per store.


US pizza market is likely to be a lot more competitive than India and also has 1/4th the population. But then per capita GDP is also something like 30x of India. So while there may not be a strict apple-to-apple comparison between these two EBITDA per-store numbers, it’s a data point, which catches the eye.

And let us not forget JFL pays “Franchisee Fee” for using the “Domino’s” brand name. That number was Rs47.6 crore for FY13. Domino’s US, one would assume, will have no such expense.


So what we have here is that a retail consumption story in developing economy having same or higher $ profitability than in a developed, consumption crazy nation. And this is after a big “Franchisee Fee” being borne in the developing nation.


Realisation and Volumes

Domino’s had 465 stores as of March 2012 and ended March 2013 at 576 stores, so roughly 521 stores were operational for the year FY13 on an average. If we go by the number of pizzas that were sold, as per the information in the Annual Report (66 lac per month), it roughly comes out to a number of 417 pizzas sold per store per day.


I think it would be reasonable to assume that the mature stores in cities like Mumbai, Bangalore and Delhi etc. would be clocking closer to 500-550 pizzas per day on an average, with stores in smaller towns clocking lower volumes. The stores are open from 11am to 11pm. Out of these 12 hours, some early morning and late afternoon time would be really slow, so most business would be kind of concentrated in around 10 hours.


That roughly means around 50 pizzas in an hour. The company has indicated that roughly 50% of the volumes are towards home delivery and the remaining are dine-in orders. Going by that it looks like a pizza is delivered every 2-3 minutes. So a bike moves out of the store every 2-3 minutes. If there are 2 pizzas per order, it would be 5 minutes. It is surely a very frenetic place! And store volumes are expected to keep growing!


While we are on the number of pizzas sold, have a look at the following table.

Realisation Per Pizza     





Pizzas Sold crore (nos)








Value (Rs crore)




Per Pizza realisation





This indicates that the realisation per pizza seems to be cooling off, even as prices have been increased to counter raw material inflation. It could also partly be a result of customers “downtrading” to lower value/size pizzas. But the menu card as of now has only one kind of pizza below this average price of Rs135 and two others which kind of roughly match it. Or maybe I have erred in interpreting the data.


The Cheesy Bit

The other small interesting part is the consumption of cheese, the largest part of raw material consumption.


Cheese Cost is Surprisingly Stable  







Cheese consumed kgs






growth in volumes






Value (Rs)






growth in value






per kg cost (Rs)







Raw material inflation has been one of the big cost drivers for the company. If one analyses the cost of cheese for FY09-11, it looks like there was hardly any inflation. Quantitative information on cheese consumption is not available from FY12. So we don’t know the exact cost trend for the past two years. But broadly, the value of cheese consumed has grown in sync with the growth in the number of pizzas sold. So would that mean, inflation in cheese is very minimal?


Promoters are Bailing Out?

Meanwhile on the shareholding front, since March 2012, promoter shareholding has gone down by about 43 lac shares. Looking at the price during this time, the sell value should be Rs450-500 crore, if not more. Promoter shareholding has been coming down consistently from 62.07% in March 2010 to 49.9% in December 2013. December 2013 pattern shows about 20 lakh shares in the “pledged” category.


Given the sluggish financial performance in recent quarters, the JFL stock price has cooled off from its highs. But the valuation still remains “stiff” at 50+ P/E FY14. The potential store count for Domino’s Pizza in India is put at 1,200. The number of stores is nearing 700 and clearly the growth in store numbers will taper off at this huge base. Turnover growth will likely follow the same path, even though company will try and counter that with new products and schemes.


But there are other consumption stocks which are also richly valued in the face of slowdown. Investors obviously are betting that the longer-term picture is much better than what is painted by the present slowdown. Enjoy while it lasts.




3 years ago

I know about rent cost... They do long term rent agreement at 8% increase per year. So rent for them increases only at 8 %. I hope I am correct.

Milind Chitnis

3 years ago

Wonderful article !!!

Do we read in between the lines that figures are hiding something fishy?

Yerram Raju Behara

3 years ago

Good that the junk food manufacturer is facing the heat. World will gain a lot if he winds up or takes to better lines of production.

nagesh kini

3 years ago

The analysis is in deed great.
Comparing this with Shoppers Stop that belongs to an entirely different genre as chalk is from cheese and therefore tantamounts comparing an apple with an orange. Now there are more kids like Subway in addition to KFC and Pizza Hut. A comparison with these two would have been more enlightening.

Alok Gupta

3 years ago

Great, Please Give Comparable Data with Pizza Hut to understand Market Dynamics.

Jaideep singh

3 years ago

Thanks for such a detail analysis on company from every angle. Hats up for your analysis and looking forward for much more.

Sunny Arora

3 years ago

Detailed and explanatory article.
Really good.
Thanks for the outstanding reporting.

Cipla Q3 net profit falls 17% on higher costs

During the December quarter, Cipla’s net profit fell to Rs284 crore despite growth in its sales and exports

Cipla Ltd, a pharmaceutical company said, its third quarter net profit fell 17% on higher expenditure, especially on staff,  material costs, changes in product mix and research & development (R&D).

For the quarter to end-December, the pharmaceutical company said its net profit fell to Rs284 crore from Rs340 crore, while total revenues, including sales increased 22% to Rs2,581 crore from Rs2,111 crore, a year ago period.

During the quarter, Cipla’s total expenditure increased 32% at Rs2,205 crore from Rs1,675 crore, same period last year. Material cost of the company during the December quarter stood at 39.1% of net sales as compared to 37.8%, in a same period a year ago.

“Material cost has increased by about 2% mainly on account of changes in product mix, staff cost due to increase in manpower. The operating margins have decreased due to higher R&D and other expenditures,” Cipla said in regulatory filing.

Domestic sales grew by 12.6% in its December quarter to Rs1,044 crore from Rs927 crore while international sales grew 32% to Rs1,508 crore from Rs1,143.49 crore, a year ago period.

Exports of active pharmaceutical ingredients (APIs) grew by 14% in its December quarter to Rs157 crore from Rs137 crore, in a same period year ago.

“The growth in domestic revenues was largely on account of growth in respiratory, anti-infectives and cardiology, while growth in export revenues was primarily due to growth in anti-retroviral, anti-cancer, anti-allergic and anti-biotic segments,” the company said.

Cipla closed Thursday 7.7% down at Rs381 on the BSE, while the 30-share Sensex also ended the day 1.3% down at 20,193.

For more stock results, check out this page


Should India keep off shale oil & gas?

There is grim shale news from the US, due to water issues. India too needs to rethink on this new fuel source which requires large volume of water for hydraulic fracturing

The US took the lead, a few years ago, in the discovery and the development of shale oil and gas resources which resulted in the country becoming a net exporter from being the largest energy importer.


As a result, the great American shale boom began due to availability of land and water, pipeline network, fracking and horizontal drilling specialists and competitive prices of the gas thus obtained. According to Energy Information Administration, US shale gas output jumped from 1,293 billion cubic feet in 2007 to 7,994 billion cubic feet in 2011. In 2012, shale accounted for 39% of all natural gas produced in the US, compared to 15% in Canada and 1% in China!


At the current rate of production, the US will be top shale oil producer in the world and by 2015 surpass Russia, as per International Energy Agency, who estimates that, by 2035, crude prices may advance to $135 a barrel and a continued 16% increase in consumption!


Extracting of shale gas or oil is considered as unconventional oil and gas drilling, from "fracking" because it requires large amounts of water and chemicals being pumped into the earth at high pressure, so as to release gas or oil from shale rocks. This "dirty" water remains and reportedly causes contamination of ground water in the area. Because of this, both France and Bulgaria have banned the technology!


Because of this, the European Union wants common rules for shale gas "fracking" and wants its 28 member states to accept common environment and health rules if they use this "controversial fracking" to develop shale gas resources! They further contend that shale gas extraction leads to higher "cumulative" environmental risks and impacts, compared to conventional gas extraction.


What has all this got to do with India? Top Indian firms, such Reliance Industries, GAIL, Oil India and Indian Oil have joint ventures abroad with Carrizo, a Houston, Texas-based company, in the shale acreages in the USA. Carrizo is also reported to be exploring shale opportunities in India. The International Energy Agency projects that India's shale gas production might be able to reach 35 billion cubic metres by 2035 if basic resources are made available.


Currently India does not have a policy regime in place for simultaneous extraction of coal bed methane and coal, and in the meantime, the developments in shale (gas/oil) have to be also considered when a final policy is drawn up. However, Vivek Rao, Oil Secretary, Petroleum and Natural Gas, has acknowledged that India has better coal bed methane opportunities than shale.


In the meantime it was ONGC that took the lead in striking shale gas in a pilot project at Itchapur in West Bengal couple of years ago. However, it was in Cambay Basin, ONGC dedicated its shale discovery, duly assisted by ConoCo Phillips of USA. ConoCo Phillips are studying the shale prospects in Cambay, KG, Cauvery and Damodar basins. India's shale gas reserves are estimated to be 96 trillion cubic feet, as per US Energy Information Administration.


The NELP X is around the corner and participants can explore all fuel resources including shale. Before the Government embarks on this venture, they need to recognize the latest information that has been detailed in the Financial Times last week, on the shale scene in the USA,


According to this report, water shortages have put the US oil and gas industry on a "collision course" with other users because of the large volume needed for hydraulic fracturing, a group of leading investors has warned.


Almost 40% of the oil and gas wells drilled since 2011 are in areas in "extremely high" water stress, according to Ceres, a network of investors on environmental and social issues. It has been stated that a little more than 2 million gallons of water per well is required, which is mixed with sand and chemicals before being pumped under pressure at high speed for opening cracks in the shale rocks so that oil and gas flow more freely. They also admit that fracking accounts for a relatively small proportion of water demand, less than 1% even in Texas, according to a University of Texas study compared to 56% for irrigation, but protracted drought conditions can cause undue harm to the agriculture industry!


As far as India is concerned, we are a Monsoon based agricultural country.

Sometimes heavy rains cause untold misery and floods, completely wiping out our agriculture; at other times, drought conditions result in millions suffering, leading to food imports! While admitting that our MOEF (Ministry of Environment and Forests) are already over burdened and understaffed in dealing with our mining issues, we do not think for a moment that they have technology and resources to take the additional burden of handling Shale!


Before anyone else is encouraged to jump into the band wagon and start investing on shale discovery, a thorough report on what is really happening with the present ONGC discovery needs to be analysed by a competent technical group.


For the time being, let India keep off shale! We have no water to drink in thousands of villages, where people have to walk for miles to get a pot or two!


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)



Nalin Patel

3 years ago

very true be forewarned than repent later.

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