Jubilant Foodworks - Unrelated (and hence low probability of long-term success) diversification - ICICI Securities

We view Jubi's entry into FMCG with the launch of "ChefBoss" ready to cook (RTC) sauces, gravies and pastes as a neutral event for stock's fair value.

We believe the success probability is low for a service business diversifying into FMCG and vice versa. Examples are Marico's Kaya clinics (it was incubated under Marico Limited and later spun off), HUL's ventures / baby steps in tea, coffee chain concepts. Similarly, ramping up the branded product business wasn't easy for Kaya.

- It's all about basics. The skillsets required to successfully manage a service business and FMCG are completely different. Importantly, the organisation's systems and processes are not typically fungible, in our opinion.

- Jubi's press release mentions that the RTC market is Rs5bn (and likely growing well, implying that it's a significant opportunity for it). For us, what's interesting to note is that large incumbents (in RTC) like ITC and HUL appears to have not made any renewed efforts (that's this analyst's observation as a consumer). Factually speaking, ITC's Kitchens of India was launched in 2001, whereas HUL's Knorr was launched in India in 1996.

- While the narrative of "huge opportunity in RTC" due to 'scarcity of time' and 'convenience' has always existed, access to cheap labor (part time cooks charge ~Rs5000 per month in Mumbai) and preference for natural ingredients has limited the opportunity for Ready to Eat and RTC categories. This trend may be potentially changing now, though we are unsure of it.

- New products in FMCG typically has very low success probability (during normal times), per our understanding.

- Four questions investors are likely to ask, in our view:

* Whether FMCG entry is an opportunistic one or a strategic one?
* Why diversify from core when we (analysts, investors) assume the food opportunity to be significantly bigger (penetration of organised QSR (quick service restaurant) is <10%).
* Is it a significant "size ambition" thought in a shorter span of time?
* Competencies required to succeed and complementarities of FMCG and Food service

- Valuations and risks: We increase our earnings estimates for FY21-22 to incorporate the delivery fee; modelling revenue / EBITDA / PAT CAGR of 9 / 14 / 29 (%) over FY20-22E. Maintain HOLD with DCF-based unchanged target price of Rs1,800. At our target price, the stock will trade at 48x P/E Mar-22E. Key upside risk includes faster-than-expected recovery post-COVID lockdown ends and downside risk includes raw material turning inflationary.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs.1871.05 as compared to the previous close of Rs. 1879.05. The total number of shares traded during the day was 25995 in over 2208 trades.

The stock hit an intraday high of Rs. 1895.3 and intraday low of 1862.4. The net turnover during the day was Rs. 48806595.

Source : Equity Bulls

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