Top-performing IPO Jubilant Food expensive, says Kotak

Jubilant has been one of the top 10 performing IPOs of this year. However, in its latest report to institutional investors, Kotak says that it is not comfortable with its valuations. Incidentally, JFL shares hit an all-time high yesterday

In a report dated 8 November 2010, Kotak told its institutional investors that although it likes the Jubilant Foodworks business model, has strong conviction in the management, and sees huge growth opportunities for the company driven by changing demographic and socio-economic factors, it finds it difficult to justify the current valuation of the company.

Kotak points out that the stock is trading at 42 times its expected FY12 EPS of Rs13 (Kotak's estimates) - one of the highest among the stocks it covers. This implies that the market has limited concerns about the sustainability of the company's margins over the next few years, says the brokerage. "This looks like a classic case of the market ascribing peak multiples to peak margins, leaving no room for execution risk," the report concludes.

Top performing issues of 2010

Clearly, Kotak's main discomfort (besides high valuations) is about margins. "During 1HFY11, the company reported average EBITDA margin of 18.4% (18.5% in 1QFY11 and 18.2% in 2QFY11). This is likely one of the highest, since it began operations, in our view," it says in its report. JFL's operating margin was only 13% between FY07 and FY09 but improved to 16% in FY10 because of cost controls. However, strangely, despite its concerns about margins, Kotak expects margins to expand to 19% in FY12 and 20% in FY 13 (see estimates below).

Jubilant operates the Domino's Pizza chain in India through an exclusive franchise agreement with Domino's International, which was renewed early this year for another 15 years. It operates 339 outlets across 79 cities and as per its agreement with Domino's International, it has to open at least 25 stores a year. The pizzas that it sells are definitely not on the affordable side but the brand recall for Domino's Pizza is pretty high in India.

Commenting on its 2Q results, Kotak says that high sales growth of 67% was probably due to a weak base, high same-store growth (44%) and price increase of around 5%. Same-store sales are sales from stores of a retail chain that have been open for a year or more. In JFL's case, same-store growth of 44% in this quarter and 37% in 1QFY11 is significantly higher than the average of 20% in the last six years, points out Kotak.

The company has more than 50% single-store cities. In 2QFY11 it entered new cities such as Jalgaon, Jamnagar and Trichy. Kotak says while these regions present huge opportunity for penetration-led growth, success of the product in these cities would be a key factor to watch out for in FY11E and FY12. Currently around 65% of JFL's sales come from top seven cities and around 50% of its stores are in Maharashtra, New Delhi, and Karnataka.

JFL's EBITDA margins have risen considerably as a result of flat material cost as a percentage of sales was flat (scale benefits) and a decline in rent as a percentage of sales. In the quarter the company introduced two new products - 'Pasta Italiano' and 'Mexican Wrap'. Kotak says it is worth watching if these new launches cannibalise pizza sales.

Kotak estimates

In August, JFL had said that it plans to hire about 2,000 people this year (slightly more than it hired last year). It currently employs 9,700 people. It has aggressive expansion plans - its target is to open 375 outlets by the end of March 2011 (versus 339 at the end of September) at a cost of Rs600 million-Rs700 million.

Jubilant Foodworks promoters (the Bhartia family) hold 61% stake in the company, FIIs hold 21%, and DIIs hold a little more than 7%. Large holders (more than 1%) include HDFC MF, T Rowe Price, Arisaig Partners, Amundi Funds India, and Quantum World Fund Inc. The shares hit an all-time high of Rs634 yesterday.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).



k a prasanna

7 years ago

Stock price is manipulated, hence it is quoting at very high level. Fundamentally the stock is not worth even Rs 200/-

NSE starts mobile trading for registered clients

New Delhi: The National Stock Exchange (NSE) today said it has started mobile trading for registered clients, a move that would make trading simpler for the customers, reports PTI.

The service will enable member brokers to only go through the regular compliance before facilitating their clients for mobile trading, NSE said in a statement.

"This is another facility the exchange is providing to the large universe of investors, to make trading simpler and easily accessible to clients on the move. We expect that nearly five million investors would benefit from this move," NSE CEO and MD Ravi Narain said.

NSE claimed that for the first time an Indian exchange would provide such facility free of cost to its clients, through the brokers who have enrolled for "NOW" (the software which is being used by a majority of the NSE brokers).

Earlier, just a few member brokers had the option of providing this facility to the clients at their own cost, it added.

In September, the country's oldest stock exchange BSE had also launched mobile-based trading.

With NSE's new service, clients will be able to trade in the cash, derivatives or currency market through their mobile phones, while travelling anywhere in the country or abroad.

The clients' mobile phone will be connected to the Internet, then to the NOW platform, which is connected to the exchange, it added.

The service will provide a wide range of facilities to the investors where they can see the "Market Watch" page on his or her mobile screen. This will display all the available indices and constituents of these indices.



Dilip kumar Mahato

6 years ago

Please start mobile trading

CLSA report says free cash in 1H FY11 down to just 25% of 1H FY10

With the earnings season almost behind us, CLSA is one of the first to come out with a strategy report. It says India Inc is moving out of the early stage of the growth cycle and that with a sharp rise in working capital and pickup in capex, free cash flow is getting squeezed

In its report to clients dated 8 November 2010, independent brokerage firm CLSA says that with mid-year disclosure of balance sheets available for the first time, it analysed trends based on data for 75 companies that make up 85% of BSE 500 assets. "Over half these companies saw a rise in net working capital days in 1H. While this could be partly attributable to seasonality, even on a y-o-y basis, growth was 42%. As a result, cash flow from operations has fallen 26% y-o-y."

Another squeeze on cash flow seems to be a pick-up in investment. "Investment is turning up, with capex rising 20% y-o-y for our universe. As a result, free cash flow has been squeezed to just 25% of that in 1H FY10."

Not only has accretion to cash significantly lagged overall balance sheet growth, there is also strong evidence of re-leveraging too, says CLSA and points out that in the first half gross debt (of the 75 companies it analysed) rose 22%.

However, it is not time to worry yet. The brokerage believes that return on capital will remain healthy as asset turnover ratios have not peaked yet. Even so, the pressures on margins and the higher balance sheet growth show that the Indian growth cycle is moving out of the early phase of recovery.

In the second phase, says the report, which is near the top of the boom, profits begin to struggle. The labour market tightens, interest rates tend to move up and demand stagnates. This in turn leads to margins being squeezed and profits tumbling (stage 3). Eventually, firms reduce capital expenditures and a downturn begins.

CLSA believes that growth will moderate in the second half. "While we see +30% y-o-y in consolidated earnings for the Sensex in 1H FY11, growth will moderate in 2H (our full year forecast is c.27%) and FY12-13 (18-2% Sensex EPS growth)."

The report points out that in the quarter gone by, it saw strong performances from oil & gas, banks, and capital goods and that there was an even spread of positive surprises and disappointments. Rising wage costs were something that stood out in 2Q results. "One can see acceleration in employee cost (up 23% y-o-y in 2QFY11, versus 2%-3% during FY10)."

Zee, Bharat Forge, BEL and Dr Reddy's stand out on free cash generation, said the report. Companies where cash flow from operations has substantially lagged profit in the last 12 months include United Spirits, Godrej Consumer, Sterlite Industries, Voltas, Tech Mahindra, and Wipro. Companies with biggest increase in capital expenditure during 1HFY11 include Thermax, Grasim, Bharat Forge, Sun Pharma, Exide, TVS, and Sintex. Companies with biggest fall in capital expenditures during 1HFY11 include Sesa Goa, Asian Paints, DRL, Petronet LNG, Ashok Leyland, and Hindustan Unilever. Companies with negative FCF included SAIL, MRPL, Power Grid, Idea, United Spirits, Ultratech, and Indiabulls Real Estate. Companies where debt levels went up substantially were Hindustan Zinc, Sesa Goa, Godrej Consumer, Tata Chemicals, Sun Pharma, BHEL, Idea, and Jindal Steel. 

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


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