Manoj Menon believes this brand will deliver the dough

Nothing can capture the consumption high of India in the nineties like a pizza slice dripping with melted cheese. It was in the middle of this liberalisation decade that American fast-food giant Domino’s set shop in the country. The brand grew along with disposable income of the middle-class and became synonymous with the term ‘pizza’, and even great pizza. What made its offering truly great, and not just good, was its base, which came from its partner and master franchisee Jubilant FoodWorks.

Jubilant FoodWorks is part of the Jubilant Bhartia group, a well-diversified group from the northern part of India with over 95% of its revenue coming from Domino’s.

The company currently operates over 1,300 outlets of Domino’s in about 285 cities in India and also manages some outlets in neighbouring Sri Lanka and Bangladesh. These numbers are important because there isn’t a single other restaurant brand in India that can boast of a four-digit number—be it McDonald’s, KFC or Subway — none of them have more than a thousand outlets. To put things into perspective, Starbucks has around 250 currently while CCD had 1,500 at one point in time but the number is far lower today.

Who can say no to a warm slice of goodness? So there is an inherent organic growth opportunity for Domino’s in India and Jubilant has delivered on the expansion. As per our estimates, the opportunity for Domino’s in India is at least 3,000 outlets as of today and, as India urbanises, as more opportunities, more highways get built and more opportunities for consumption happen over the next five to ten years, today’s opportunity number of 3,000 could well expand into a much higher number.

While Domino’s is generous with the cheese, it is careful with its capex. The company has the lowest capex per store at around Rs 15 million, compared with Rs 25 million-plus of most other brands. The lower investment requirements in the store give much better returns, making it a classic case of good growth with good Economic Value Added (EVA) which indicates better profitability and positive return ratios with the ROCE being 25.9% and the ROE standing at 25.1% in FY20 (See: Generous with cheese, careful with capex).

The other advantage the company has is that it has a professional running the show, unlike peers in the restaurant industry. Jubliant FoodWorks is headed by CEO Pratik Pota, who has held top posts at PepsiCo India, another non-promoter-driven company. In contrast, restaurants in India are usually family-managed establishments.

Spreading its wings

Jubilant FoodWorks is currently in diversification mode. It recently acquired a small stake in DP Eurasia, a London-listed company that is the master franchisee of Domino’s in Turkey, Russia, Azerbaijan and Georgia, giving the company some exposure in the region as there is a ramp-up opportunity there. It is a low-hanging turnaround opportunity for Jubilant FoodWorks, which could achieve a much larger market cap over the next five to 10 years.

Besides venturing into new geographies, the company has been including highly popular food categories into its portfolio. Food-aggregator polls have time and again placed biryani as the most popular food in the country. In fact, one poll estimated that there is one plate of it being ordered every second. Therefore, it seems like Jubilant’s biryani venture called Ekdum!, launched about a year ago, also has significant ramp-up potential. A similar trajectory can be expected for its Chinese cuisine venture called Hong’s Kitchen. Not content with one winning franchise, Jubilant FoodWorks also recently bagged the India franchise rights for the Popeyes brand under Restaurant Brands International, which also owns the Burger King brand.

In terms of its misses, its Dunkin Donuts decision was seen as a failure because the brand couldn’t capture a niche for itself in the country. But Jubilant seems to be mopping up this spill pretty well — over the years, it has shut down close to 50 unprofitable Dunkin Donuts stores to cut losses, while focusing on bringing down the store operating costs, adding faster moving products to the menu and looking at smaller formats like kiosks (See: Junking ‘do-nots’).

So, from the capital allocation point of view, there are a lot of other things that the company is currently doing right. Even while considering any new business, Jubilant looks at it through a strategic business unit (SBU) lens. All its businesses usually have a similar supply chain, accounts or marketing teams. Therefore, any new venture only calls for incremental investments.

The productivity improvement that the company gets or is likely to get through Domino’s will get reinvested in building the other brands. That said, many of its brands are not expected to see any decline in margins in the next couple of years, because front-end investment in them such as with ads and marketing have already been done in the initial months. With food aggregators such as Swiggy and Zomato bringing in 20-25% of their orders, a growth in the foodtech industry also means market expansion for Domino’s. On its own, the brand has an impressive delivery fleet with approximately 30,000 feet on street.

COVID-19 whiplash

Like most companies, Domino’s was also affected by the onslaught of COVID-19, with the ensuing lockdowns changing its revenue proportions significantly. Before the pandemic, 60% of its sales came from home delivery, 35% from dine-in and 5% from takeaways. Post it, and with restricted dine-ins, the share of deliveries and takeaway in sales has increased (See: Out of lockdown blues).

Having said that, the following year looks like a promising one for the brand. In the last six-nine months, there has been no revenue loss since brands with strong in-home consumption such as Pizza Hut have benefitted from people being confined indoors.

The company used the pandemic to bring further capital efficiency to its operations. In July 2020, it initiated variabilisation of employee cost. At 20% of the total cost, the employee cost is the second-largest expense for the company, and a substantial component of it goes to the delivery-employee fleet. Cost of goods sold — materials such as wheat, chicken, vegetables, cheese and so on — is Jubilant’s largest expense at around 25% of the total. It also brought down its real-estate costs by renegotiating its rental agreements at various locations, and shutting down or relocating to lower-cost areas in case of about 100 outlets.

As a result of these measures, as long as the revenue trajectory does not surprise negatively and they get new growth, the company should be able to deliver higher ROCEs for like-for-like revenue versus FY19’s revenue figures. Assuming that Jubilant’s cost of capital would remain 12% over ten years, taking FY20 as the base year, its EBITDA CAGR is expected to be 23% till FY30. After which, the terminal growth of the company is likely to be 6%.

When it has such tempting numbers and a healthy attitude to capex, who can turn down a slice?

Disclosure: ICICI Securities Limited is a SEBI registered Research Analyst having registration no. INH000000990. It is confirmed that the Research Analyst or his relatives or I-Sec do not have actual/beneficial ownership of 1% or more securities of the subject company, at the end of 22/07/2021 or have no other financial interest and do not have any material conflict of interest. I-Sec or its associates might have received any compensation towards merchant banking/ broking services from the subject companies mentioned as clients in preceeding 12 months.