>JUBILANT FOODWORKS: 'Pizza mania overdone'

We initiate coverage on Jubilant FoodWorks (JFW) with a Sell rating and a target price of Rs230 (implied P/E of 27.3x FY12E), indicating downside potential of 18.4% from current levels. Though we are confident regarding the company’s ability to cash in on the growing affluence and changing lifestyle of the Indian consumer, we consider the current valuations overstretched due to unrealistic market expectations of higher growth.

􀂁 Current valuations expensive: DCF valuation method suggests fair value of Rs230 (implied P/E of 35.2x FY11E and 27.3x FY12E). At CMP, the stock trades at a PE of 43.1x FY11E and 33.5x FY12E, which we believe is a huge premium primarily ascribed for higher-thanexpected
growth from the company’s existing operations and over-enthusiasm in anticipation of
earnings growth accretive tie-up. Our analysis suggests such run-up in prices is unwarranted and unsustainable and would result downward re-rating in stock prices.

■ Competition to intensify: Though we are positive on the company’s strategy to extend its reach in Tier 2 and Tier 3 cities, we remain a bit cautious on the competitive landscape that would emerge after another two to three years, since we expect a large number of organized
players to realize and tap this opportunity and compete for this market.

■ Market expectations of higher IRR from a possible QSR tie-up may be unrealistic. Our analysis suggests a tie-up with coffee (generating store IRR of 15.4%) and burger (IRR 25%) chains would be IRR decretive for the company, whereas a tie-up with a sandwich chain (IRR
of 33.2%--higher than JFW’s 29.9%) is the only option that would be IRR accretive.

■ Absence of free cash flow deployment to be ROE decretive: Free cash flows generated and not deployed would result in 1,516bps decline in ROE to 31.6% over FY10-12E.

■ Profitable and scalable business model: We believe the dual strategy of increased penetration in Tier 2 and Tier 3 cities and multiple price points (cheapest pizza at Rs39) would enable the company to clock 27.9% CAGR sales and achieve same-store-sales growth (SSSG) in the
higher single digits over FY10-12E.

■ Key risks: Upward: New tie-ups, if value accretive, would result in upward earnings revision.

To read the full report: JUBILANT FOODWORKS