Nation
US ambassador Nancy Powell meets Narendra Modi

Decks were cleared for an end to the boycott imposed on Modi by the US in the aftermath of the 2002 post-Godhra riots when, Nancy Powell sought an appointment with the Gujarat chief minister

 

Ending a nine-year boycott, US ambassador Nancy Powell on Thursday met Gujarat chief minister Narendra Modi.

 

She said her country looks forward to working closely with the government India chooses after the Lok Sabha elections, an indication that it has no reservations of doing business with him if he becomes Prime Minister.

 

"US-India partnership is important and strategic, and that the US looks forward to working closely with the government that the Indian people choose in the upcoming elections," a statement quoting the envoy said after the nearly one-hour meeting.

 

Official sources said Powell praised the good model of governance in Gujarat, which she felt could be taken to other parts of the world.

 

They said the US envoy told Modi that there was an 'excellent investment climate' in Gujarat which she was visiting after 20 years.

 

Powell was quoted as saying that she was highly impressed with the progress the state has made over the last two decades.

 

The sources said Modi raised the issue of Indian diplomat Devyani Khobragade and was assured by her that the US was committed to speedy resolution of the matter.

 

"This meeting was part of the US Mission's outreach to senior leaders of India's major political parties in advance of the upcoming national elections," the US statement said.

 

"Her discussions focus on the importance of the US-India relationship, regional security issues, human rights, and American trade and investment in India," it said, adding, "The US and India are moving forward with a strategic partnership that is broad and deep."

 

Decks were cleared for an end to the boycott imposed in the aftermath of the 2002 post-Godhra riots when, in a sudden U-turn, the US Ambassador sought an appointment with the Gujarat Chief Minister which was granted.

 

US had revoked Modi's visa in 2005 under a domestic law over "serious violations of religious freedom".

 

Describing the meeting as warm and cordial, the sources said all facets of Indo-US relations as also global issues came up for discussion during which Powell briefed Modi on G8, G20, WTO, counter-terrorism and security cooperation.

 

Modi raised the issue of the need for terrorists being brought to justice, the sources said.

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COMMENTS

MOHAN

3 years ago

Actually, the denial of Visa to Modi has got nothing to do with Gurjarat riots/human rights. It is because of pressure from all powerful American church groups USA denied visa to him.

Vinay Joshi

3 years ago

If the meeting was warm & cordial including discussion on issues like 'human rights', what was the [outcome[ conclusion? As US reaches out to major political leaders - what the Ambassador has to say about Delhi!

LET US ANNOUNCE IMMEDIATELY - that ban on MODI TRAVEL IS LIFTED!

It's not so & not much to be read into this meet. Howsoever it was a wrong game plan as US understands now esp; when EU ended boycott. Washington is trying to gain points in this rigmarole.

Nancy Powell, who reaches out to Modi should clarify Washington's stand. Obviously she has initiated steps at the behest of certain directives over last two months. [Deviyani episode had put a dampener.]

However Washington can't openly state esp; when India in election mode that it is revoking visa ban, be it diplomatic or B1-B2 granted earlier. It does amount to influencing domestic policies but the outreach is unmistakable.

TODAY MODI VISA BAN OR REVOKE IS INSIGNIFICANT - as India stares at US sanction threat, multiple.

India's trade policies viz Indian Patents Act 2005, as amended is the coz.US co's have firmly taken up the issues with its Govt.

Regards,

Telangana stir: 18 MPs from Andhra Pradesh suspended

Those suspended include L Rajagopal, expelled Congress member who sprayed pepper gas from a canister in the House, causing chaos. TDP member M Venugopala Reddy, who broke the mike, was also among the 18 MPs suspended

 

Cracking the whip, Lok Sabha Speaker Meira Kumar on Thursday suspended 18 members of Parliament (MPs) from Andhra Pradesh for rest of the session after unprecedented pandemonium broke out in the House over the Telangana issue.

 

The Speaker announced the decision soon after the House met at 2pm after being adjourned in the wake of the ruckus created at noon by pepper spraying and fisticuffs among members opposing and supporting Telangana.

 

She named the members and said they had been suspended under Rule 374 A which says that a member can “be suspended from the service of the House for a period not exceeding the remainder of the session” for disregarding “the authority of the Chair or abusing the rules of the House by persistently and wilfully obstructing business”.

 

“They may forthwith withdraw from the precincts of the House,” Kumar said.

 

Those suspended include L Rajagopal, expelled Congress member who had earlier sprayed pepper gas from a canister in the House, causing chaos. TDP member M Venugopala Reddy, who broke the mike, was also among the MPs suspended.

 

Others suspended are Sabbam Hari, Anantha Venkatarami Reddy, Rayapati Sambasiva Rao, SPY Reddy, M Sreenivasulu Reddy, V Aruna Kumar, A Sai Prathap, Suresh Kumar Shetkar, KRG Reddy, Bapi Raju Kanumuri and G Sukhender Reddy (all Congress), Niramalli Sivaprasad, Nimmala Kristappa, K Narayana Rao (all TDP), and YS Jaganmohan Reddy and M Rajamohan Reddy (both YSR Cong).

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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
    

FY

2013

2012

2011

2010

2009

Rent

116.0

77.1

53.6

39.2

26.7

per store area

1300

1200

1100

1000

1000

Average No. of Stores

521

422

342

274

211

Total Area

676,650

505,800

376,200

273,500

211,000

Rent per sft pa

1,714.3

1,524.3

1,423.4

1,433.3

1,265.4

Rent per sft pm

142.9

127.0

118.6

119.4

105.5

 

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
 

FY

2013

2012

2011

2010

2009

CAGR

Rent

116.0

77.1

53.6

39.2

26.7

44.4%

growth p.a

50.5%

44.0%

36.6%

46.8%

 

 

No. of stores

521

422

342

274

211

25.3%

Growth p.a

23.5%

23.2%

25.0%

29.6%

 

 

 

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.

 

Profitability
 

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     
    

FY

2013

2012

2011

Pizzas Sold crore (nos)

7.92

5.76

3.74

 

37.5%

54.0%

38.0%

Value (Rs crore)

1,066

793

535

Per Pizza realisation

135

138

143

           

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  
                  

 

2013

2012

2011

2010

2009

Cheese consumed kgs

 

 

37,62,023

25,48,351

13,57,435

growth in volumes

 

 

47.6%

87.7%

 

Value (Rs)

143

107

70

44

26

growth in value

33.6%

53.3%

57.9%

73.3%

 

per kg cost (Rs)

 

 

186

173

188

 

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.

User

COMMENTS

Yogesh

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.

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