Jubilant Foodworks - Buying in-the-money options - ICICI Securities

We believe that JUBI's recent acquisition of stakes in DP Eurasia (DPEU) and Barbeque Nation (BN) as well as the investments in new ventures (Hong's Kitchen and Ekdum!) are steps in the right direction. We like this utilisation of cash on balance sheet (Rs8.4bn as of Sep'20) to buy potentially in-the-money options. Some investors believe that the stakes in DPEU and BN are likely for trading purposes; however, we believe its strategic. Furthermore, we reckon there can be structural benefits - (1) turnaround of DPEU (replicating India execution) and (2) better dine-in experience in India ventures (using learnings from BN). That said, our biggest concern is limited management bandwidth to handle such diverse, multiple opportunities along with the expansion of the core (Domino's India), which in itself has the potential to be 3X by FY2030. Retain ADD.

- Utilising cash in balance sheet for buying in-the-money options: JUBI had Rs8.4bn of cash on Sep'20. We believe that with the recent acquisitions (32.81% stake in DP Eurasia and 10.96% stake in Barbeque Nation) as well as the investments behind new ventures (Hong's Kitchen and Ekdum!), JUBI is buying in-the-money options which could potentially be value accretive. We also note that there are potential structural benefits that the company could derive out of these acquisitions - turnaround the Eurasia business or gain knowledge on casual dining from Barbeque Nation. The diversification into different geographies and cuisines also makes the business less cyclical.

- Potential turnaround in DP Eurasia: JUBI's acquisition of stake in DP Eurasia is strategic, in our view, with the intent to turnaround the business. The business (CY19 turnover of TRY 980mn and operating profits of TRY 125mn) is operating Domino's stores in Turkey (which has a good opportunity to grow), Russia (intense competition), Georgia and Azerbaijan. We believe that Jubi has the potential to turnaround the business applying its learnings from India. With the acquisition, Jubi has become the largest shareholder in DP Eurasia. We ascribe a high probability for Jubi to have a controlling stake in DPEU eventually. Currency volatility risk may potentially be the most important risk. Further, if the business turnaround gets delayed, managing debt of ~TRY 494mn is another risk.

- Investment in Barbeque Nation may drive learnings for casual dining business and drive synergies in the medium term: We believe that investment in BN could also be strategic - Jubi could gain significant knowledge about casual dining and can apply that to drive better dine-in experience (and hence growth) for its core Domino's and the new ventures (Hong's Kitchen and Ekdum!). We further believe that, JUBI and BN can also drive synergies like better negotiating power with various stakeholders like suppliers, food aggregators etc.

- Turnaround of Dunkin Donuts: JUBI has been able to cut losses in Dunkin' Donuts franchise by closing its unprofitable stores (closed more than half of its stores; see chart 1), cutting back on store operating costs, changing the menu to faster moving products and focusing more towards small formats (like kiosks). If JUBI is able to achieve a right operating model for Dunkin' Donuts, this could also turnout to be a profitable business with growth.

- Hong's Kitchen: Chinese cuisine is the second largest segment in India (behind North Indian food) and is pegged at 19% of the total food service market (pizza is just 6% of the total market). Jubi's foray into Chinese cuisine with fast casual format with value-for-money positioning and learnings from Dunkin Donuts improves success probability for Hong's Kitchen, in our view.

- Ekdum!: Jubi's foray into Biryani cuisine with Ekdum! brand also adds another potential value driver. Biryani segment is the one of the largest cuisines in India (Biryani is India's most ordered dish in 2019; third year in a row) and is currently highly fragmented with no presence of a national brand. However, one of the most important success factors in the segment is the ability to cater to highly differentiated tastes of different varieties of Biryanis across the country. Currently, Jubi serves 20 varieties of Biryani. We believe if Jubi is able to deliver on taste and apply its learnings from other franchise stores, this business can turn profitable and add value.

- Turnaround and expansion of Bangladesh and Sri Lanka business: Jubi has been successful in turning around both of these geographies with both the countries becoming EBITDA positive in 3QFY21. Bangladesh and Sri Lanka in itself have growth opportunity as management believes that there is a potential to open 150+ stores in Bangladesh and Sri Lanka.

- Downside and concerns: We like the management intent to create potential in-the-money options by utilising cash for investments at a time when the economy is recovering and poised for faster growth. However, our biggest concern is the limited management bandwidth to drive these businesses along with the expansion of the core business (Domino's India franchise), which in itself has the potential to treble its footprint in long term.

- Valuations and risks: Our medium-term earnings estimates remain unchanged; modelling revenue / EBITDA / PAT CAGR of 10 / 17 / 30 (%) over FY20-23E. Maintain ADD with DCF-based revised target price of Rs3,300 (was Rs3,000). Key downside risk is raw material costs turning inflationary.

Shares of Jubilant FoodWorks Ltd was last trading in BSE at Rs.3037.85 as compared to the previous close of Rs. 2995.8. The total number of shares traded during the day was 27775 in over 3009 trades.

The stock hit an intraday high of Rs. 3049.95 and intraday low of 2970.5. The net turnover during the day was Rs. 83507708.

Source : Equity Bulls

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