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More legs for growth; reflecting confidence on core

Jubilant FoodWorks (JFL) announced the acquisition of Fides Food Systems Coöperatief U.A., Netherlands (Fides) for GBP 24.8mn (INR 2.5bn). Fides is the beneficial owner of 32.81% of equity shares of DP Eurasia N.V. (DP Eurasia). DP Eurasia is the exclusive master franchisee of the Domino’s Pizza brand, having 771 stores in Turkey, Russia, Azerbaijan and Georgia. It is listed with London Stock Exchange PLC. DP Eurasia has weak financials (due to operational losses in ex-Turkey, financial leverage and currency impact) resulting in a crack in its stock price over the past 3 years (GBX 250 in 2018 to GBX 70 now). The deal is valued at 8x EV/EBITDA of CY19.

Although this deal seems to be financially neutral in the medium term, it offers more strategic rationale for JFL. The most interesting aspects of this deal are (1) attractive valuation, (2) potential to revive loss making business, (3) JFL’s expertise in running Domino’s vs. P/E player, (4) stronger global footprint (control of >2,000 Domino’s stores, second highest to Domino’s Australia), and (5) synergy in terms of technology, sourcing, etc. JFL management is consistently seeking an ‘out of the box’ approach to add growth levers. The company has already added more legs of growth in the existing business in terms of Hong’s, Domino’s Bangladesh, and Ekdum!, and is ambitious for a faster store opening for Domino’s. Considering its strong FCFs, reinvestment spree was always on cards, which is why the stock has seen this rerating. Capital allocation is a more critical aspect as we have noticed that many companies have de-rated after wrongly allocating capital. Considering DP Eurasia will continue with the existing management, it would not consume JFL’s management bandwidth for operations. We continue to believe that most near to medium term drivers are priced in. However, on account of expected aggressive store expansion in India, we increase our EPS by 3% for FY22/23. The stock is valued at 81 and 65 P/E on FY22/FY23 EPS. We increase our target multiple to 55x P/E (50x earlier) and derive TP of Rs 2,500. We maintain our REDUCE rating. JFL is a far superior company among QSR peers but we see earnings surprises more for other discretionary companies (driven by pent-up, market share gain, pricing, sourcing advantage, make in India etc).

* Robust Turkey with market leadership: Turkey contributes 74/68/>100% in DP Eurasia’s stores/revenue/EBIT. It clocked robust 17% group system sales during CY16-20 with 4% store CAGR. Company is number 1 player in Turkey with a huge gap from the number 2 player. Russia has 25/30% mix in stores/revenue of DP Eurasia. Turning around Russia will be a challenge for JFL as local brand Dodo Pizza is giving stiff competition. DP Eurasia is the number 3 player in Russia after Dodo and Papa Johns. Apart from SSSG, JFL would also require to plug the gaps to improve unit economics of Russia.

* Strengthening global footprint: With the addition of DP Eurasia, JFL’s total control Domino’s stores will be >2,000 which will be the second largest after Domino’s Australia. JFL already has plans to open stores aggressively in India, also DP Eurasia has potential to add many stores. JFL will continue to add its global presence in Domino’s network.

* Need to improve cash flows: DP Eurasia has debt of around INR 250mn (2x Net Debt/Equity); JFL would be needed to focus on operational cash flows to pay off this debt. It will need to focus on all fronts to improve unit economics and operating cash flow. Cumulative FCFs during CY16-19 is negligible at around INR 13mn.

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