Institutional Equities

Jubilant FoodWorks 10 December 2014

Reuters: JUBI.BO; Bloomberg: JUBI IN Immense Operating Leverage ‘In Store’ BUY We have assigned Buy rating to Jubilant FoodWorks. We like its business model with the strong emphasis on delivery in large cities which enables it to circumvent high lease Sector: rentals, a big barrier to profitability for food and retail players in . We also admire the consistent innovation, willingness to expand during slowdown and the investments in CMP: Rs1,341 advertisement and promotion (A&P) that the company has made in the past few years, Target price: Rs1,737 despite slowdown and its impact on margins, all of which will stand it in good stead during the recovery phase. While we expect the recovery to be slow owing to a gradual Upside: 30% recovery in disposable income (hence our FY15 and FY16 earnings estimates are below street expectations), we believe Jubilant FoodWorks is an extraordinarily impressive Krishnan Sambamoorthy

business that is likely to embark on a phenomenal earnings growth spree over FY15E- [email protected] FY18E, leading to tripling of EPS (EPS growth at 46%CAGR, with 35.1%, 58.1% and 46.7% +91-22-3926 8033 growth in FY16E, FY17E and FY18E) and near doubling of return ratios to over 35% in these three years. The stock trades at 60.3x one-year forward EPS for the past three years and 51.9x since its listing in FY10. Potential high earnings growth will sustain valuation. Aditya Joshi The stock trades at 34.7xFY17E and 23.8xFY18E EPS. Attributing 45x multiple on FY17E [email protected] EPS, we get a target price of Rs 1,737, up 30% from the CMP. Given the back-ended nature +91-22-3926 8028 of earnings growth, we believe that returns from a two-year perspective could be even higher at 68.3% (40xFY18E EPS gives a target price of Rs 2,257). Business strengths: Euromonitor reckons that the entire Quick Service (QSR) Key Data business in CY13 stood at around Rs130.1bn (US$2.1bn), around 2.3% of the Indian food Current Shares O/S (mn) 65.5 service market size of Rs5,620bn (US$90.6bn) and is expected to grow 2.5x to Rs 330.5bn (US$5.3bn) - a CAGR of 20.5% up to CY18. Rising urbanisation as well as disposable income Mkt Cap (Rsbn/US$bn) 87.9/1.4 over this period, new culinary habits, increased participation of women in the workforce and 52 Wk H / L (Rs) 1,498/938 favourable demographics bode well for these QSRs. Delivery-based players like Domino’s offer Daily Vol. (3M NSE Avg.) 280,600 the added advantage of convenience as well. Western brands are aspirational for a large

segment of the population. We find it remarkable that a high growth business like Domino’s, the InitiatingCoverage market leader in QSR with a 17% share, which has expanded from 180 stores in FY08 to around Share holding (%) 4QFY14 1QFY15 2QFY15 800 stores currently (in addition to 38 Dunkin’ Donut outlets) and is far ahead of other QSR Promoter 49.6 49.6 48.9

players, did not have the need to significant fresh equity or debt. This is a testament to the

business model and the management’s understanding of the business in India. FII 46.7 46.3 45.1 A play on urban recovery theme: None of the other potential plays on the urban recovery DII 0.1 1.3 1.7 theme like Nestlé, PVR or other retail players display the combination of potential sharp earnings Corporate 1.5 1.4 2.2 growth, healthy RoCE during slowdown and a potential sharp improvement in RoCE. Dunkin’ Donuts and Domino’s store visits: Our store visits to Dunkin’ Donuts gives us General Public 2.2 1.4 1.4 confidence that this business (which is currently impacting EBITDA margin by ~ 150-160 bps) is unlikely to take the sheen off potential earnings growth from the Domino’s franchise. We were One-Year Indexed Stock

impressed by the footfalls at Dunkin’ Donuts (despite competition), the quality of food and variety 150 of menu, average bill size and reasonable delivery proportion. We expect breakeven in 2-3 years for Dunkin’ Donuts and 1-2 years for Domino’s stores in smaller cities that we visited in Gujarat 130 and Maharashtra. Delivery proportion was higher than expected, at over 30% at Domino’s outlets in these regions and while the sales per store is not as high as those in Tier-1 cities, they have 110

the advantage of lower lease rentals. While these stores have also borne the brunt of ongoing 90 disposable income slowdown, long- term opportunity is immense, given the low penetration, aspiration level of the brand, convenience and hygiene. 70 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14

Y/E March (Rsmn) FY14 FY15E FY16E FY17E FY18E JUBILANT FOODWORKS NSE CNX NIFTY INDEX Revenue 17,363 20,436 25,484 33,231 44,131 YoY (%) 22.8 17.7 24.7 30.4 32.8 EBITDA 2,496 2,698 3,695 5,483 7,591 Price Performance (%) EBITDA (%) 14.4 13.2 14.5 16.5 17.2 1 M 6 M 1 Yr Adj. PAT 1,182 1,193 1,611 2,547 3,737 Jubilant FoodWorks 2.9 6.4 (0.9) YoY (%) (9.8) 0.9 35.0 58.1 46.7 FDEPS (Rs) 18.1 18.2 24.5 38.6 56.4 Nifty Index (0.0) 8.9 31.7 RoE (%) 24.1 19.8 21.9 29.1 37.3 Source: Bloomberg RoCE (%) 23.5 18.8 20.4 27.2 35.1 ROIC (%) 27.9 21.4 25.0 35.8 51.7 P/E (x) 74.2 73.7 54.7 34.7 23.8 Source: Company, Nirmal Bang Institutional Equities Research

Please refer to the disclaimer towards the end of the document.

Institutional Equities

Valuation The stock traded at 60.3x one-year forward P/E for the past three years and at an average of 51.9x since its listing in February 2010. Exhibit 1: Forward P/E

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Aug Sep Aug Sep May May Source: Company, Bloomberg, Nirmal Bang Institutional Equities Research After a rapid growth in the share price post listing, it has not moved up significantly for the past two-and-a-half years. Exhibit 2: Share price

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Aug Sep Aug Sep May May Source: Bloomberg Jubilant FoodWorks is an extraordinarily impressive business likely to embark on a phenomenal earnings growth spree over FY15E-FY18E, leading to tripling of EPS in these three years. No other FMCG company is likely to report anywhere close to this delta in terms of EPS growth.

2 Jubilant FoodWorks

Institutional Equities

Exhibit 3: EPS and EPS growth

(Rs) (%) 60 56 70 57.6 60 50 50 46.2 39 40 34.7 40 30 30 24 20 18 18 20 10

0.6 0 10 (11.1) (10) - (20) FY14 FY15E FY16E FY17E FY18E Source: Company, Nirmal Bang Institutional Equities Research RoE and RoCE are expected to nearly double from ~19.8% and 18.8%, respectively, in FY15E to 37.3% and 35.1%, respectively, in FY18E as a result. In fact, it is a testament to the business model as well as resilience of the balance sheet (continued negative working capital of 25-30 days and fixed asset turnover of 3x-4x despite the slowdown) that RoE and RoCE, even in the midst of a continued slowdown, is expected to be ~19% in FY15E, EPS decline restricted to 9.8% in FY14 and EPS expected to be flat in FY15E. This is unusual for ‘growth’ companies, and certainly for restaurants, QSR and retail-focused businesses in India. Exhibit 4: RoE Exhibit 5: RoCE Exhibit 6: RoIC

(%) (%) (%) 50 50 60 44.0 43.3 56.4 45 45 41.1 39.9 50 51.7 40 37.3 36.1 40 35.4 35.1 47.8 35 35 43.7 29.1 40 27.2 30 26.2 30 35.8 24.1 23.5 25 21.9 25 30 27.9 19.8 20.4 19.3 18.8 20 20 25.3 25.0 20 15 15 21.4 7.5 10 5.0 10 10 10.0 5 5 0 0 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E Source: Company, Nirmal Bang Institutional Equities Research As a result of the likely improvement in business outlook, OCF (operating cash flow) and FCF (free cash flow) are likely to expand substantially from their current levels. The cash flows and ability to fund incremental growth are a huge barrier to entry in favour of Jubilant FoodWorks at a time when competitors are likely to stretch themselves, despite being saddled with relatively inferior business models. Exhibit 7: Net operating cash flow Exhibit 8: Free cash flow for equity (FCFE)

(Rsmn) (Rsmn) 8,000 4,000

7,000 3,500 3,000 6,000 2,500 5,000 2,000 4,000 1,500 3,000 1,000

2,000 500 0 1,000 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E (500) 0 (1,000) FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

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Institutional Equities

Exhibit 9: Unimpeachable balance sheet FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E Inventory days 6 5 6 6 6 6 6 6 6 6 Debtor days 2 2 2 2 2 2 2 2 2 2 Creditors days 21 37 36 34 31 32 33 33 33 33 FATR (x) 2.4 3.0 3.7 3.8 3.5 3.1 2.7 2.8 3.2 3.8 Other assets to total assets (%) 43.7 32.4 24.5 14.8 12.7 15.8 12.8 10.4 8.8 7.3 Source: Company, Nirmal Bang Institutional Equities Research Impressive earnings growth expected over FY15-FY18E is, however, likely to be back-ended with a significant amount of growth likely to be in FY17E and FY18E. We think that disposable income recovery will take time, perhaps longer than street expectations. In fact, our forecasts are actually below street expectations for both FY15E and FY16E before converging for FY17E. We also expect extremely strong earnings growth in FY18E as well (Bloomberg consensus expectations are not available for that year). Exhibit 10: Our estimates and Bloomberg consensus estimates Our estimates Bloomberg mean Variance (%) (Rsmn) FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY15E FY16E FY17E Sales 20,436 25,484 33,231 44,131 21,426 27,688 35,288 (4.6) (8.0) (5.8) Sales growth (%) 17.7 24.7 30.4 32.8 23.4 29.2 27.4 - - - EBITDA 2,698 3,695 5,483 7,591 2,883 3,899 5,240 (6.4) (5.2) 4.6 EBITDA margin (%) 13.2 14.5 16.5 17.2 13.5 14.1 14.8 - - - EBITDA growth (%) 8.1 37.0 48.4 38.4 15.5 35.2 34.4 - - - PAT 1,193 1,612 2,548 3,737 1,332 1,811 2,564 (10.4) (11.0) (0.6) Net margin (%) 5.8 6.3 7.7 8.5 6.2 6.5 7.3 - - - PAT growth (%) 0.9 35.1 58.1 46.7 12.7 36.0 41.6 - - - Source: Company, Nirmal Bang Institutional Equities Research This view fits in with our internal GDP growth expectations, which assumes a gradual economic recovery. Exhibit 11: GDP growth estimates GDP estimates (%) FY15E FY16E FY17E NBIE 5.4 6.0 7.2 RBI (median estimates) 5.5 6.3 NA Professional forecasters (RBI survey) 5.5 6.5 NA International Monetary Fund 5.4 6.4 NA World Bank 5.6 6.4 NA Source: Reserve Bank of India (RBI) website, IMF, World Bank, MOSPI, Nirmal Bang Institutional Equities Research While our near-term forecasts are lower, we believe medium-term earnings growth and return ratios improvement opportunity is so immense that the historically high valuation metrics can sustain. Earnings growth potential is far superior compared to peers. As indicated earlier, the stock has traded at 60.2x one-year forward P/E for the past three years and at an average of 51.8x since its listing in February 2010. Valuation benchmarks will soon move towards FY17E numbers and a 45xFY17E EPS of Rs38.6 gives us an upside of 30% over the prevailing market price and a target of 40x FY18E EPS entails a 68% potential appreciation in the stock price from the current level.

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Institutional Equities

Key factors behind our Buy rating a) Business factors - high turnover, low area occupied, reasonable ticket size In India, the biggest barrier to profitability in the restaurant as well as retail businesses in urban areas, particularly in metros, is high lease rentals. Domino’s predominantly delivery-based model in these cities enables it to circumvent this problem. While the overall proportion of delivery to dine-in is 50:50, we reckon that particularly in metro cities, the delivery proportion could be around 65% or more. Consequently, the store size required is much smaller at around 900-1,500sq ft compared to predominantly dine-in restaurants and other QSR (at 2,500-3,000 sq ft). In addition, the average bill size for outlets like Domino’s is also higher than other QSRs like McDonalds, KFC and coffee shops like Café Coffee Day (CCD), Barista and Costa Coffee. are consumed during lunch and dinner and are not snacks like in the case of other outlets. A combination of delivery-based model and healthy bill size enables high sales per square feet and aids profitability. Domino’s business model also enables it to offset the problem faced by coffee shops where customers linger on to compound problems created by smaller bill size and higher area occupied. b) Great business model for top-tier as well as low-tier cities In smaller cities, the emphasis is more on creating a destination outlet and yet there is a healthy delivery proportion of well over 20%. In addition, lease rentals are much lower as well. Aspiration level of the brand, convenience and favourable demographics are also contributing factors to growth. In some cases, prices of the products are also 20% cheaper than in metros like Mumbai. The standard of hygiene is also a factor compared to other options. All of these contribute to healthy occupancy and healthy profitability in these outlets as well. c) Asset-light business For what is a high-growth story, the business is remarkably asset-light as a result of the characteristics stated above. Net working capital continues to be in excess of negative 25 days and fixed asset turnover continues to be in excess of 3x.Even in a subdued economic environment of the past two years, there was no worsening of working capital metrics. When the growth trajectory resumes on same-store sales, cash flow improvement will be significant. Exhibit 12: Key balance sheet metrics FY09 FY10 FY11 FY12 FY13 FY14

Inventory days 6 5 6 6 6 6 Debtor days 2 2 2 2 2 2 Creditor days 21 37 36 34 31 32 FATR (x) 2.4 3.0 3.7 3.8 3.5 3.1 Other assets to total assets (%) 43.7 32.4 24.5 14.8 12.7 15.8 Source: Company d) Hasn’t had a need to raise significant equity capital or avail significant debt It is remarkable that Jubilant FoodWorks, which runs a high-growth business like Domino’s, which expanded from 180 stores in FY08 to around 800 stores currently (in addition to 43 Dunkin’ Donuts outlets) did not have the need to raise fresh equity capital or avail significant amount of debt. This is a testament to the business model and the management’s understanding of the business in India. Exhibit 13: Growth business that did not have the need to raise equity capital or debt (Rsmn) FY09 FY10 FY11 FY12 FY13 FY14 Number of stores 241 306 378 465 586 752 Net operating cash flow 321 789 1,290 1,672 2,087 2,251 Free cash flow for equity (FCFE) (220) 269 573 368 173 (229) Issue of equity capital * - 605 22.5 22.2 15.5 14.7 Increase/(decrease) in debt 311 (194) (86) - - - Source: Company, * Issue of fresh shares in FY10 was a small portion of the IPO. Beyond FY10 issue is on account of ESOP conversion

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e) Opportunity is huge, company has the business model and the ability to scale up The food services market in India was estimated at Rs.5,620bn (USD 90.6bn) in CY13 and is expected to post a 10.3% CAGR at Rs.9,174bn (USD147bn) by CY18, according to Euromonitor. Of this, the entire QSR business is estimated at around Rs.130.1bn (US$ 2.1bn), around 2.3% of the market size, and is expected to grow 2.5x to Rs.330.5bn (US$5.3bn - a CAGR of 20.5% up to CY18). Even after this strong growth up to CY18, QSR revenue to total food services industry revenue will still be only around 3.6%. Even in this miniscule QSR proportion currently, branded QSR is ~1% and accounts for ~1,800 stores. , a demographically similar country has 7,000 stores spread across just two international brands (Source: Westlife AR). Rising urbanisation as well as disposable income over this period, new culinary habits, increased participation of women in the workforce and favourable demographics bode well for these QSRs. Delivery- based players like Domino’s offer the added advantage of convenience. Western brands like Domino’s, McDonald’s, and etc are also aspirational for a large segment of the population. Even in cities like Mumbai, the proportion of eating out is less than half of the ASEAN benchmark (Source: Westlife annual report). For young professionals with professional commitments, daily commutes and domestic chores, QSR options are attractive and delivery-based players like Domino’s are even more so. QSR players also offer assurance of hygiene standards, a big worry when it comes to eating out at most places in India. But even more important than all of the above factors is the fact that India accounts for the largest 15-34 age population cluster of 435mn people. This is equivalent to the entire population of Singapore, Hong Kong, Australia, South Africa, Nigeria, Ghana, Angola Kenya and Zambia (fastest growing QSR markets in Africa) combined. Willingness to try out new cuisines is high in this chunk of students and professionals. Domino’s is the market leader in the QSR space in India with around 17% market share. While Jubilant FoodWorks’ (predominantly Domino’s) sales were around Rs17.4bn (US$280mn) in YE March FY14, the room to grow is immense given the low penetration of the QSR space. f) Scale advantages - Domino’s has scale advantages which are not reflected in the financials because of the SSG decline. The gap The gap between Domino’s and the rest is huge at 806 stores versus around 307 and 350 and 360 stores in case of Pizza Hut, McDonalds, and KFC, respectively. Exhibit 14: Number of stores – Domino’s and other leading QSRs

806

350 360 307

Pizza Hut McDonald's KFC Domino's

Source: Company, News reports

6 Jubilant FoodWorks

Institutional Equities

Exhibit 15: Number of stores – Domino’s and other pizza players

806

307

70 63 23 20

Domino's Pizza Hut Pizza Corner Smokin Joe's Neopolitan Papa John's Source: Company, news reports Gap between Domino’s and Pizza Hut is huge and then between Pizza Hut and the third and fourth-largest players is also extremely large. Within the pizza market, Domino’s has a share of more than 60%. Domino’s has consistently gained market share from pizza peers as well as other QSRs in the past few years. Business model and willingness to invest As stated earlier, Domino’s business model, with its significant focus on delivery, facilitates faster break-even. Jubilant FoodWorks has shown a willingness to invest even during a slowdown. Around half of its 932 stores (876 Domino’s and 56 Dunkin’ Donuts) likely by end of FY15E, i.e. 467 stores (including Dominos and Dunkin’ Donuts) are likely to be added over FY13-FY15E during a period of slowdown. When the recovery happens, the company will be a big beneficiary as these stores have been operating at sub-optimal capacity in this period. The stores added during slowdown are far more than the total stores of QSR peers. Unique city - learning ahead of others Over 50 cities and towns in India, Jubilant FoodWorks is unique in having an outlet where Pizza Hut, the second-largest player in pizzas in India, is not even present. Jubilant FoodWorks has the early-mover advantage in these cities, has the time to understand the market and products and locations that work in these places and identify scope for further expansion of stores in these cities. This creates a barrier to entry for other pizza players and QSRs. Jubilant FoodWorks has been ahead of the curve in experimenting with region-specific product innovations. Examples of region-specific innovations:  South Zesty veggie based on Andhra chili gravy and raw banana as topping,  South Indian chilli chicken cooked in a paste of green chilies,  Taco Mexicana based on Malabari Paratha,  Spicy baked chicken based on Tangdi kabab for North India,  Mexican wraps based on Kathi rolls,  Diwali sweet style Donuts based on Indian flavours like kesar badam, pistachio and milk cake among others. Expansion ahead of others obviously enables substantial interaction with customers and understanding preferences of customers in those regions. Other pizza chains are also likely to aggressively expand now at a time when lease rentals are likely to go up. It may be difficult for them to sustain both aggressive store expansion as well as promotion schemes.

7 Jubilant FoodWorks

Institutional Equities

Store expansion lower for others on store-wise basis, but higher on percentage to existing store basis Pizza Hut has disclosed plans to add 150 stores in the current year, about half of which will be mainly eating- out places and the others that focus on delivery as well. The management of Yum restaurants has been quoted as saying that it is looking to set up 2,000 outlets spread across Pizza Hut, KFC and Taco Bell in India by 2020. Westlife Development (franchisee for McDonald’s in West and South India) has disclosed plans to expand by a total of 175-250 stores in the next five years. On an absolute basis, these expansions per brand are lower than Jubilant FoodWorks’ expansion plan of adding around 150 Domino’s outlet every year with the latter’s business model making scale-up faster. Yet, on a percentage to existing stores basis, the ongoing expansion for pizza peers will put considerable pressure on competitors’ respective balance sheets (particularly Pizza Hut), on account of the higher size of stores, lower delivery proportion as well as the fact that they are now going aggressive on expansion at a time of economic revival, thereby dealing with relatively higher lease rentals as well. While Westlife is increasing its delivery proportion, for it delivery is a brand extension and not a key focus area. Domino’s store addition to existing stores is actually likely to come down sharply, despite higher expansion compared to peers. Exhibit 16: Store addition to existing stores likely to come down FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E

Existing

Domino’s stores 130 181 241 306 378 465 576 726 876 1,026 1,176 1,326 Dunkin’ Donuts stores ------10 26 56 76 96 116 Combined stores 130 181 241 306 378 465 586 752 932 1,102 1,272 1,442 New stores

Domino’s stores 51 60 65 72 87 111 150 150 150 150 150

Dunkin’ Donuts stores NA NA NA NA NA 10 16 30 20 20 20

Combined stores 51 60 65 72 87 121 166 180 170 170 170

% of New stores to existing stores 28% 25% 21% 19% 19% 19% 21% 17% 15% 13% 11%

Source: Company, Nirmal Bang Institutional Equities Research Domino’s in India has traditionally added (particularly in the past five years) new stores anywhere between 19%-22% of existing stores. For the past few years, store expansion has been at the higher end of this range and since this expansion has coincided with slowdown in the segment, these stores have also felt the effect of sub-optimal capacity utilisation. Going forward, while absolute store expansion will continue to be higher than peers, the proportion of new stores (including Dunkin’ Donuts) to existing stores is likely to reduce sharply. As new stores take time to break-even, the burden on overall profitability goes on reducing going forward.

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Institutional Equities

Scale advantages on costs Domino’s scale also gives advantages on procurement and G&A (general and administrative) expenses. These advantages are not visible during a slowdown, but as SSG recovers, some of these advantages will come to the fore. Exhibit 17: Other expenses to sales Expenses as % of sales FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E Stores and consumables 1.4 1.4 0.7 0.8 0.8 0.8 0.8 0.8 Packing material 3.9 4.0 4.0 4.1 4.1 4.0 4.0 4.0 Repairs 1.5 1.4 1.4 1.6 1.6 1.5 1.5 1.5 Power and fuel costs 5.0 4.7 5.2 6.0 6.0 6.0 5.9 5.8 Insurance 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Rates and taxes 0.6 0.7 0.7 0.7 0.7 0.7 0.7 0.7 Travelling and conveyance 0.8 0.7 0.7 0.7 0.7 0.6 0.6 0.6 Freight and delivery expenses 3.3 3.3 3.1 3.0 3.0 3.0 2.9 2.9 Postage, telephone expenses 0.9 0.9 0.9 0.9 0.9 0.9 0.8 0.8 Legal and prof. charges 0.6 0.7 0.4 0.5 0.5 0.5 0.4 0.4 Directors’ sitting fees 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sundry balances written off 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provision for doubtful debts 0.1 0.1 0.0 0.0 0.0 0.1 0.1 0.0 Loss on fixed assets 0.1 0.2 0.1 0.0 0.1 0.2 0.2 0.2 Political contribution 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 Misc. expenses 3.4 3.3 3.9 3.9 3.8 3.7 3.5 3.5 Total 21.9 21.6 21.4 22.5 22.3 22.1 21.5 21.3 Source: Company, Nirmal Bang Institutional Equities Research Has not stopped innovating, advertising or expansion in slowdown, ahead of peers Domino’s has maintained its pace of expansion despite the economic slowdown. This will place it in very good stead when the recovery happens. Exhibit 18: Time taken to add every 100 stores Time in quarters for 100 stores

800th store 3QFY14 3 700th store 4QFY14 3 600th store 1QFY14 3 500th store 2QFY13 4 400th store 2QFY12 2 300th store 4QFY11 4 Source: Company press release and presentation Exhibit 19: Store addition per quarter

50 47 47 45 40 37 35 36 35 30 30 26 26 24 25 20 15 10 6 4 5 5 5 5 2 3 2 2 0 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Domino's Pizza Dunkin' Donuts

Source: Company

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Institutional Equities

The company continues to be innovative during slowdown. Exhibit 20: Innovations FY12 FY13 FY14 FY15 Butterscotch Mousse Cake Cheesy Boloroni Pizza Fresh Pan Pizzas Junior Joy Box Mexican Wraps Taco Indiana Spicy Baked Chicken 10 New Pizzas Pasta Italiano Spicy Twistyz Lebanese Rolls Taco Mexicana Wheat Thin Crust Potato Smackers Calzone Pockets Subwich Cheesy Wonder Pizza

Cheese Burst Regular

Source: Company These innovations are essential for any consumer business and particularly during an early stage of operations compared to overall growth potential. While the weak sentiment meant that there has not been any huge impact in terms of overall volume (in fact new products actually cannibalise existing products during slowdown, as willingness to loosen the wallet remains limited) impact will be significant when there is a recovery. ‘Subwich’, launched about a month ago, has met with a phenomenal response in the initial period, according to our channel checks, contributing as high as ~15% of monthly sales in certain stores. Domino’s new products introduced in the past few years also includes Lebanese Rolls and Subwich, products that are snacks and thus can be ordered/consumed at the store any time and are complementary to other products that are consumed mainly during lunch and dinner. Similarly A&P spending increased sharply on YoY basis as well as a percentage-to-sales basis over FY12- FY15E. When sales growth picks up, there will be significant savings on a percentage-to-sale basis. Exhibit 21: Advertisement spending to sales increased during economic slowdown FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E Total A&P (Rs mn) 133 171 278 409 638 890 1,059 1,261 1,526 1,953 YoY growth (%) N/A 29.0 62.2 47.2 56.0 39.5 19.0 19.0 21.0 28.0 Advertisement/sales (%) 4.7 4.0 4.1 4.0 4.5 5.1 5.2 4.9 4.6 4.4 Source: Company, Nirmal Bang Institutional Equities Research We admire companies that have faith in their business model and the courage to invest in expansion, innovation and advertising during a slowdown. While investments on these worsen the metrics during slowdown, benefits of these investments will be visible in the medium to long-term. g) Product improvement In 2009, the global CEO, Patrick Doyle, actually went on record stating that the product was inferior to peers. http://www.annarbor.com/business-review/patrick-doyle-how-dominos-pizza-used-social-media-to-change-its- reputation/ Since then starting with the parent owned outlets in the US, there has been a process of improvement worldwide, across franchisees as well. Thus the gap, perceived or otherwise, in terms of quality compared to peers has all but disappeared. h) Dunkin’ Donuts business unlikely to be a drain on margins In addition to the Domino’s franchise, Jubilant FoodWorks in February 2011 also became the master franchisee of Dunkin’ Donuts & More in India. So far, it has opened around 43 outlets of Dunkin’ Donuts in India with around 25 of them in the NCR region, 6 in Punjab and Haryana and 3 each in Mumbai and Bengaluru. While Dunkin’ Donuts accounts for a small proportion of the overall business (currently 43 stores compared to 806 stores of Domino’s) and is likely remain small going forward as well (100-120 outlets compared to ~1,350 Domino’s outlets in the next four years), the worry was that poor business dynamics of Dunkin’ Donuts could take some sheen off the recovery in the Domino’s business that we expect going forward.

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Institutional Equities

We visited around 16 Dunkin’ Donuts outlets across the country and were pleasantly surprised by the results.  Healthy footfalls: Footfalls are largely healthy across these stores. This is particularly commendable because almost every store is located in close proximity to other international and Indian QSR brands and given that slowdown still persists in the QSR space. In Delhi, in particular, there are a significant number of outlets in South Delhi itself and most of these are still generating healthy occupancy even as some are over two years old. Store sizes largely range from 1,000- sq ft to 2,000 sq ft.  Product quality and variety: While the store is called Dunkin’ Donuts & More, a substantial chunk of sales (~70%) across these outlets comes from products other than donuts. This is partly because of lower pricing of Donuts (Rs40-Rs70) compared to burgers (Rs140-Rs230) and wraps (Rs150-Rs170), but also the great quality of food products, particularly burgers. In quite a few stores customers were raving about the quality of the burgers. Dunkin’ donuts has positioned itself as an adult QSR and thus while the pricing of the burger is higher compared to McDonalds or KFC, so is the size with two patties and a substantial amount of filling inside. We reckon that approximately 30%-35% of sales come from burgers, around 15% from wraps, ~30% from donuts and the rest largely from beverages and coffee. The relatively lower proportion of donuts in overall sales is also the case for the US-based parent for whom beverages and food (particularly sandwiches) are larger components. The variety of products also means that Dunkin’ Donuts is relatively more of an all-day dining outlet compared to Domino’s where business is more or less concentrated during lunch and dinner time. After more emphasis on Donuts in the earlier phase (the brand has been in India for less than three years), the menu has evolved over the past year with success.  Bill size: We reckon that average bill size is healthy across stores, ranging from Rs 350-Rs450 per head.  Delivery: Most of the stores also have delivery facility except stores that are located next to food courts (none of them are actually within food courts, which tend to cluttered) situated at higher levels in malls and the ones that are newly set up. Delivery proportion in other stores is ~20%, which is healthy and adds another avenue of growth. Minimum bill size for delivery is Rs150 and on an average a Dunkin’ Donuts store which has delivery facility has around 3 bikes compared to over 7 for Domino’s where the proportion of delivery is higher.  Decor: Décor is attractive with the seating arrangement being a mix of lounge chairs and functional wooden chairs and tables. Ambience is largely a mix of coffee shop, QSR restaurant and a pub.  Store break-even: We believe that store break-even could be achieved in two-three years. i) Commissary: Jubilant FoodWorks has been investing on commissaries in various regions across the country. Exhibit 22: Commissaries Current Upcoming New Commissaries Noida Greater Noida Mumbai Nagpur Mohali Kolkata Hyderabad

Bengaluru Guwahati Source: Company There has been an impact on overall corporate EBITDA because of the expenses on commissaries and impact on overall FATR as a result of capex on these commissaries (approximately Rs200mn- Rs250mn per commissary including cost of land). These commissaries are ready to serve a larger number of stores compared to the current count. Thus, when each caters to an optimum number of stores in future, the margins as well as return ratios at the corporate level improve.

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j) Order placement online and through mobile phones Being a company that deals with a lot of tech-savvy youngsters, Domino’s has rightly been focusing on technology as a means of improving business and as a potential cost reduction alternative. Order placement through online and mobile phones now stands at ~30% of sales and downloading of Domino’s mobile order apps already stands at ~2mn. Order placement online and through mobile phones:  Offers a convenient way of placing an order.  Ensures accuracy, as there is no human interface which creates scope for confusion.  Enables generation of more orders during peak hours when customer executives may be otherwise busy and freeing up those who otherwise may be on calls with customers.  Saves time on explanations as the menu and prices are available to the customer who is placing the online or through mobile phone.  The mobile app saves the last ordered details of the customer.  While there are discounts on online order placement initially, once the customer is accustomed to the convenience of online order placement global experience suggests that there are cost savings and better throughput. Exhibit 23: Order placement online and through mobile phones

(%) 30 27

25 22 22 21 20 20 18 18 17 16 15 16 15 12 10 10 10

5

0 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Online Ordering (OLO) % Mobile Ordering of OLO Source: Company

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Institutional Equities

k) It’s all operating leverage Exhibit 24: SSG impact on yearly margins

(%) 40 37.0 35

30 29.7 25 23.0 22.0 20.0 20 16.2 15 10 5 6.0 1.6 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 PAT Margins SSG Ebitda Margins Source: Company Exhibit 25: SSG impact on quarterly margins

(%) 40 35.7 36.7 33.2 35 30.1 30 26.7 26.3 22.3 25 19.8 20 16.1 15 7.7 10 6.3 6.6 5 0 (5.3) (5) (2.6) (3.4) (2.4)

(10)

11 12 12 12 12 13 13 13 14 14 14 15 11 13 14 15

FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY

3 1 2 3 4 2 3 4 2 3 4 2 4 1 1 1

Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q EBITDA Margin Net Margin SSG Source: Company

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Institutional Equities

Reasons for SSG decline: 1) Food inflation Exhibit 26: Annualised trend in WPI food article inflation

(%) 18 15.8 15.2 16 14 12.8 12 9.6 9.9 10 9.1 8 7.1 5.4 6 7.4 3.3 4 3.0 2.6 1.8 1.3 2

-

01 02 03 04 06 07 08 09 11 12 13 14 05 10

FY FY FY FY FY FY FY FY FY FY FY FY FY FY Source: RBI website, Central Statistical Organisation, Nirmal Bang Institutional Equities Research Food inflation was very high in the past five years and is showing signs of trending down in the past few months. Exhibit 27: Monthly trend in Wholesale Price Index food article inflation

(%) 25

20 19.69 19.17

15 13.73 10.11 12.35 12.29 10 8.85 8.47 6.12 6.72 5 6.08 3.52

-

12 13

12 12 12 13 13 13 14 14

13 14 14

12 12 13 13 14

- -

------

- - -

- - - - -

Jul Jul

Apr

Oct Oct

Jan Jan Jun

Mar Mar

Feb

Sep Nov Aug Dec Aug May (5) May

Source: RBI Website, CSO, Nirmal Bang Institutional Equities Research Yet it is interesting that SSG decline is actually lower for Domino’s, despite being higher-priced compared to McDonalds, even in times like these, because of the delivery-based model and innovation.

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Exhibit 28: SSG Comparison

(%) 10 7.7 6.3 6.6

5 7.2

0.5 0 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 (2.6) (5.3) (5) (3.4) (2.4) (5.5) (10) (7.9) (9.0) (9.8) (10.5)

(15) Jubilant FoodWorks Westilfe Development

Source: Company, Nirmal Bang Institutional Equities Research 2) Slowdown in disposable income. Exhibit 29: GDP growth

(%) 12

9.6 10 9.1 8.7 8.2 7.6 8 7.0 6.5 5.8 5.7 6 5.2 4.5 4.6 4.4 4.4 4.7 4.6 4.6 4

2

0

Q1FY11 Q2FY11 Q4FY11 Q1FY12 Q2FY12 Q4FY12 Q1FY13 Q2FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q3FY12 Q3FY13 Q3FY11 Source: RBI website, MOSPI, Nirmal Bang Institutional Equities Research Exhibit 30: Moderating trend in MPC and PDI

(%) 0.70 25 21.3 0.64 0.65 0.64 20 0.60 0.57 15.5 0.54 0.53 0.54 19.6 0.55 0.52 15 14.7 0.50 14.3 9.6 12.7 0.50 0.45 12.2 12.4 10 0.40 5 0.35 0.36

0.30 0

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Marginal Propensity to Consume (LHS) Personal Disposable Income

Source: RBI website, MOSPI, Nirmal Bang Institutional Equities Research

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Institutional Equities

Food inflation has already shown signs of easing. Our food inflation assumptions going forward: Exhibit 31: WPI food inflation forecast Exhibit 32: CPI food inflation forecast (%) WPI food inflation (%) CPI food inflation FY15E 5.04 FY15E 7.81 FY16E 3.66 FY16E 6.04 FY17E 2.83 FY17E 5.68 Source: CSO, Nirmal Bang Institutional Equities Research Source: CSO, Nirmal Bang Institutional Equities Research Exhibit 33: GDP forecasts GDP estimates (%) FY15E FY16E FY17E NBIE 5.4 6.0 7.2 RBI (median estimate) 5.5 6.3 NA Professional forecasters (RBI survey) 5.5 6.5 NA IMF 5.4 6.4 NA World Bank 5.6 6.4 NA Source: RBI website, IMF, World Bank, MOSPI, Nirmal Bang Institutional Equities Research Substantial recovery in disposable consumption may take anywhere between four-eight quarters but the recovery, when it happens, will be very sharp. Exhibit 34: Base effect of SSG is also favourable

(%) 40 35.7 36.7 35 30.1 30 33.2 26.3 25 22.3 26.7 19.8 20 16.1 15 7.7 10 6.3 6.6 5 0 (5) (2.6) (2.4) (3.4) (5.3)

(10)

Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q1FY13 Q3FY13 Q1FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q2FY13 Q4FY13 Q2FY14 Q4FY12 Source: Company There have been four quarters of SSG decline up to 2QFY15 and thus the base is favourable from 3QFY15 onwards. Recovery in SSG will aid both top-line and margins, leading to strong EPS growth. This not only has a positive impact on new stores but also on 467 stores likely to be set up in FY13-FY15E during the slowdown. Some other concerns which the street has:  Cannibalisation- Cannibalistion has had an effect on SSG for the company, and the impact is particularly pronounced during slowdown when customer orders are anyway affected by lower disposable consumption. However, as the company is now able to serve both existing as well as incremental customers (owing to higher possible radius that can now be covered by two stores) more efficiently and dissuade him/her from moving to rivals, we are not too concerned about the overlap, particularly as the low-cost delivery-focused business model continues. The consistent innovation at Domino’s helps avoid product fatigue. While a sharp recovery in SSG may take time, all stores will benefit when that happens.  Domino’s Pizza theatres - Pizza theatre is a new form of store that the company has introduced in the past couple of years. At around 1,500 sq ft, these stores are larger than the typical 1,000-1,200 sq ft outlets in metro cities. These outlets provides a larger cooking area within the store which is visible to the customer so that he or she can see the pizzas being made and gets an assurance of freshness in case of dine-in customer. The emphasis is on both dine-in as well as delivery. While break-even may take longer compared to smaller stores, this is another example of the company innovating, not just in terms of new products, but also new formats.

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Institutional Equities

Feedback from stores outside Tier-1 cities We visited around 20 stores outside Tier-1 cities in Gujarat and Maharashtra. Store size and location - Average store size ranges from 1,500-1,800 sq ft. In some small single-store cities, the stores are bigger than the average store size. Average costs of setting up the store is around Rs11mn (including dining, delivery and kitchen set-up) on set-up costs. The focus is to set up the stores in the heart of the city. Proximity to colleges and offices is taken into consideration while deciding the location. Delivery - While the aim is largely to make the outlets in these cities as destination outlets, the focus is also there on delivery opportunity. Stores are situated so as to reach target households in 10 minutes. In both the states, the delivery proportion, even in small cities, is apparently at least 20%-25% except some outlets located in malls which do not deliver (mall outlets comprise 10% of all Domino’s stores in India and the proportion is likely to remain the same). Pricing- Interestingly, stores in Gujarat have lower pricing of ~15%-20% compared to Mumbai, with the price differential applying to almost all products barring dips. In the rest of Maharashtra, prices do not seem to be different from Mumbai among the stores that we visited. Menu- Understandably, in the stores that we visited in Gujarat, the proportion of vegetarian orders was high - ranging from 60% to as high as 85%. In some cases, the outlets witnessed order placement of the minimum permissible quantity of chicken. In Maharashtra, the proportion of vegetarian to non-vegetarian orders was around 55:45. Decor- In Gujarat, the new pizza theatre concept is quite appealing among consumers and also the décor is unique and different from traditional outlets. In Maharashtra, in the region that we visited, we did not come across pizza theatres. Slowdown- Disposable income slowdown has hit the stores in Gujarat. All QSRs and restaurants seem to have taken a hit. There are a few local pizzerias as well in Gujarat. Cannibalisation has had an effect in some stores in the state. In Maharashtra, on the other hand, in the stores that we visited, slowdown and cannibalisation effect has been less pronounced, with a few stores performing far above expectations. New products- Subwich seems to be doing well across the stores that we visited in these two states. In Maharashtra, new promotions like Cheesy Wonder and Cheese Burst -which have been introduced in regular size - are also doing very well. Lease rentals In Gujarat, lease rentals were very low as compared to Mumbai and Delhi. Average lease rentals stood at Rs150,000 to Rs200,000 for an average 1,500-2,000 sq ft area. This amounts to Rs.100 per sq ft per month, which is quite competitive and low. In Maharashtra, lease rentals are very low compared to Mumbai. Average lease rentals were Rs125,000 to Rs250,000 for an average 1,500-2,000 sq ft area. In tourist places, the rentals may be high. Fuel costs are also less. Electricity costs come to around Rs20,000-Rs25,000 per for a 1,000 -1,500 sq ft store. Average bill size - Average bill size on weekdays was Rs250 and on weekends it was Rs350 in Gujarat. In Maharashtra, average bill size on weekdays was Rs200-Rs250 and on weekend it was Rs300-Rs400. Breakeven appears likely in one-two years.

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Institutional Equities

Exhibit 35: Performance so far in FY15 Y/E March (Rsmn) 2QFY14 1QFY15 2QFY15 YoY (%) QoQ (%) 1HFY14 1HFY15 YoY (%) Net sales 4,367 4,768 5,012 14.8 5.1 8,332 9,780 17.4 Net raw material & purchase of finished goods 1,172 1,210 1,269 8.3 4.9 2,200 2,479 12.7 % of sales 26.8 25.4 25.3 - - 26.4 25.4 - Rent 367 469 498 35.9 6.1 715 968 35.3 % of sales 8.4 9.8 9.9 - - 8.6 9.9 - Staff costs 853 991 1,067 25.0 7.7 1,606 2,058 28.1 % of sales 19.5 20.8 21.3 - - 19.3 21.0 - Other expenses 1,322 1,508 1,567 18.5 3.9 2,491 3,075 23.4 % of sales 30.3 31.6 31.3 - - 29.9 31.4 - Operating profit 653 590 611 (6.5) 3.5 1,320 1,200 (9.1) OPM (%) 15.0 12.4 12.2 - - 15.8 12.3 - Depreciation 179 223 236 31.8 5.8 358 459 28.1 Other income 24 17 21 (10.8) 25.1 46 39 (16.7) PBT 498 384 396 (20.5) 3.2 1,008 780 (22.6) Tax 165 106 106 (35.9) (0.5) 335 212 (36.7) Effective tax rate (%) 33.2 27.7 26.7 - - 33.3 27.2 - Reported PAT 332 277 290 (12.8) 4.6 672 567 (15.6) Adjusted PAT 332 277 290 (12.8) 4.6 672 567 (15.6) NPM (%) 7.6 5.8 5.8 - - 8.1 5.8 - EPS (Rs) 5.1 4.4 4.4 (13.0) 0.1 10.7 9.1 (15.6)

Source: Company  Net sales were up 14.8% YoY at Rs5,012mn, 2% above expectations.  Same-store sales declined 5.3% YoY. 2QFY14 was the last quarter of positive SSG at 6.6% because of a Buy One Get One’ scheme and the base going forward is not challenging.  As expected, EBITDA declined YoY. EBITDA fell to Rs611mn (down 6.5% YoY). EBITDA was, however, above our expectations by 1%. Gross margin was up 150bps YoY, aided by lower proportion of special schemes in 2QFY15, EBITDA margin was down 280bps YoY owing to SSG decline. Ongoing expansion (including Dunkin’ Donuts) meant that staff costs and rent cost increase as a percentage of sales was unabated.  The management stated that in FY15, there will be a 150bps-160bps impact on margins because of Dunkin’ Donuts rollout.  Lower-than- expected tax rate of 26.7% for 2QFY15 meant that PAT decline was restricted to 12.8% as against our expectation of a 25.0% fall YoY. The management has given guidance of a lower tax rate this year.  Working capital requirement remained under control. At the end of H1FY15, 22% YoY inventory increase was offset by a 2% YoY increase in debtors and a 16% YoY rise in creditors. This compares to a 17.4% YoY increase in sales for the first-half of the year (SSG decline is 3.9%).  Increase in net fixed assets stood at Rs1,160mn. We expect capex of Rs3bn for the full year.  Number of Dominos outlets touched 797 (spread across 167 cities) at the end of September 2014 quarter and 806 at the end of October 2014. The company, which added 80 Domino’s stores in 1HFY15, is on target to add 150 by the end of the year. Dunkin’ Donuts outlets were 38 at the end of October 2014. So far, the company has set up 12 out of 30 restaurants targeted for the full year.  New commissaries at Guwahati, Nagpur and Hyderabad are expected to commence operations in 2HFY15.  The management stated that it has not lost market share to other pizza players or other QSRs and is confident of industry growth potential and the company’s own brands. Market share in the organised QSR space actually increased from 6%-7% five years ago to 14%-15% in FY13 and 16&-17% in FY14.

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Our forecasts Going forward, even after our assumption that recovery momentum will be the strongest in FY17 and FY18, we are not assuming EBITDA margin anywhere close to either FY11 or FY12 levels. SSG is also expected to peak at ~20% level, far below earlier levels. The 20% SSG that we are assuming in FY18 is not sustainable, but given the base of weak sentiment and negative SSG growth in preceding years, it looks achievable. Exhibit 36: Key component analysis of EBITDA (Rsmn) FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E Net sales 2,806 4,239 6,783 10,189 14,143 17,363 20,436 25,484 33,231 44,131 Growth (%) 32.9 51.1 60.0 50.2 38.8 22.8 17.7 24.7 30.4 32.8

SSG (%) 6.0 22.0 37.0 29.7 16.2 1.6 (1.0) 9.0 16.0 20.0 Total raw materials costs 718 1,050 1,706 2,617 3,700 4,534 5,197 6,392 8,309 11,051 Total RM costs growth (%) 53.6 46.1 62.5 53.4 41.4 22.6 14.6 23.0 30.0 33.0 RM costs/ sales (%) 25.6 24.8 25.1 25.7 26.2 26.1 25.4 25.1 25.0 25.0 Gross margin (%) 74.4 75.2 74.9 74.3 73.8 73.9 74.6 74.9 75.0 75.0

Employee costs 556 805 1,357 1,975 2,715 3,411 4,245 5,179 6,577 8,681 Growth (%) 30.8 44.8 68.6 45.6 37.5 25.7 24.5 22.0 27.0 32.0 Employee costs/ sales (%) 19.8 19.0 20.0 19.4 19.2 19.6 20.8 20.3 19.8 19.7

A&P expenses 133 171 278 409 638 890 1,059 1,261 1,526 1,953 Growth (%) - 29.0 62.2 47.2 56.0 39.5 19.0 19.0 21.0 28.0 Advertisement expenses/ sales (%) 4.7 4.0 4.1 4.0 4.5 5.1 5.2 4.9 4.6 4.4

Rent 268 392 536 775 1,171 1,565 2,035 2,520 3,124 4,062 Growth (%) - 46.7 36.5 44.7 51.1 33.7 30.0 23.9 24.0 30.0 Other expenditure/ sales 9.5 9.3 7.9 7.6 8.3 9.0 10.0 9.9 9.4 9.2

Franchise charges 95 140 225 338 478 563 648 803 1,052 1,400 Growth (%) - 48.5 60.6 50.2 41.4 17.8 15.0 24.0 31.0 33.0 Other expenditure/ sales 3.4 3.3 3.3 3.3 3.4 3.2 3.2 3.2 3.2 3.2

Other expenditure 702 1,015 1,483 2,196 3,025 3,904 4,556 5,635 7,160 9,393 Growth (%) (20.9) 44.7 46.1 48.1 37.8 29.0 16.7 23.7 27.1 31.2 Other expenditure/ sales 25.0 23.9 21.9 21.6 21.4 22.5 22.3 22.1 21.5 21.3

EBITDA (%) 336 666 1,198 1,879 2,417 2,496 2,698 3,695 5,483 7,591 EBITDA margin (%) 12.0 15.7 17.7 18.4 17.1 14.4 13.2 14.5 16.5 17.2 Source: Company, Nirmal Bang Institutional Equities Research

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Exhibit 37: Factors behind EBITDA margin decline… Exhibit 38: …..and why we expect improvement

20% 1.0% 20% 18.4% 0.25% 1.39% 0.8% 17.2% 18% 1.17% 2.35% 1.1% 0.8% 16% 0.15% 0.74% 15% 0.4% 14% 13.20% 13.2% 12% 10% 10% 8% 6% 4% 5% 2% 0% 0.0%

E 0%

12

E E

15

FY

15 18

FY

FY FY

Rent/Sales -5%

Rent/Sales

RM Costs/Sales RM

RM Costs/Sales RM

Advertisement/Sales

Franchisefees/ Sales

EmployeeCosts/Sales

Advertisement/Sales

Franchisefees/ Sales

OtherExpenditure/ Sales EmployeeCosts/Sales

OtherExpenditure/ Sales Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

SSG improvement will result in better utilization rates and thus savings on operating costs, mainly on employee costs to sales, A&P to sales, lease rentals to sales and other expenses to sales. Comparison to other urban recovery plays We looked at other potential plays on the urban recovery theme and none of them display the combination of potential sharp earnings growth, healthy RoCE even during slowdown and potential sharp improvement in RoCE. We have Nestlé India under our coverage and while the economic recovery will facilitate better overall volume growth which has been languishing between 0%-2% over CY12-CY14E, the top-line story gets muddled by Nestlé India’s pricing strategy which resulted in price hikes far above the commodity cost inflation basket and sustained loss of market share to peers in some categories. Gross margin and EBITDA margin were both at a 10-year high in CY13 and A&P spending to sales have been unsustainably low at ~4.3%-4.4% in the past few years, much below peers and Nestlé India’s earlier average. Despite slowdown, Nestlé India did not really suffer on the margins front and there could in fact be a downside risk to margins, as is being witnessed in the current year. Multiplex companies like PVR have attractive top-line growth opportunities, but the business is extremely capital-intensive. Screens that are operational for over three years have RoCE of over 20%, but new screens have single-digit return ratios, dragging down overall RoCE to mid-single digit. Industry consolidation will take many years and put significant pressure on the balance sheet. Even the largest multiplex player, PVR, has less than 500 screens, less than one-fourth of the 2,000 odd multiplex screens which in turn are a small proportion of the 7,000-odd screens in India. The consolidation and low RoCE will also lead to frequent equity dilution, as has been the case in the past for PVR. Retail players are also still evolving in terms of business model and are likely to witness low margin and low RoCE for many years. What lies beyond FY18? We believe Jubilant FoodWorks can easily set up 2,000 Domino’s stores in India. Its business model, scale and ability to innovate are creating significant barriers to entry to competitors. Most important is the learning from its experience of being at the forefront of expansion in unchartered territories. As demonstrated by the improvement in Dunkin’ Donuts business after the menu makeover, the management has demonstrated its ability to innovate and think out of the box and use the learning that it has developed in the food business in India. A learning organisation will find new levers of growth. We reckon that the company will eventually venture into other food businesses within the QSR space in India and the healthy return ratios in the Domino’s business because of the business model and ability to innovate will enable it to fund growth in other categories and the experience will aid significantly on the execution front.

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Risks  Delay in economic recovery: Consumption of QSR products and eating of food not cooked at home in general, whether in restaurants or home is dependent on increase in disposable income as a result of economic growth. Our rationale behind Jubilant FoodWorks call depends on economic recovery. While Jubilant FoodWorks has displayed remarkable resilience at the bottom-line level, despite the slowdown, economic recovery appears imminent as of now and any substantial delay in GDP growth revival will adversely affect the anticipated growth potential.  Royalty: Jubilant pays Domino’s around 3.2% of sales as royalty. Our projections for the next three years do not show any steep increase in royalty rate. Domino’s is India is the second-largest business worldwide for the parent in terms of number of stores, and has still a long way to go in terms of growth. Jubilant FoodWorks’ innovation has played a big part in Domino’s growth in India. Therefore, the parent may not want to upset the apple cart in terms of profitability of an important master franchisee, particularly the one that is emerging off a slowdown. Exhibit 39: Royalty (Rsmn) FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E Franchise charges 95 140 225 338 478 563 648 803 1,052 1,400 % of sales 3.4 3.3 3.3 3.3 3.4 3.2 3.2 3.2 3.2 3.2 Source: Company, Nirmal Bang Institutional Equities Research  Huge aggression in store expansion: A material part of our margin expansion forecast is led by store expansion expectation (public guidance given by the management). If the recovery sparks aggressive store expansion far above our expectations, then overall margins will take a longer time to improve.  Health factor: is considered to be relatively less healthy, but consumption of QSR/ eating out is extremely low in India. The number of times an average customer consumes a pizza is apparently four times a year. This is extremely low and should not spark concerns. Any government regulations against the QSR segment, while highly unlikely, could affect the segment’s growth.  Incident involving product quality: While we are given to understand that Jubilant FoodWorks follows high quality standards, being in the foods space, any significant incident similar to Cadbury India incident involving worms in chocolates or the food safety scare that McDonalds is facing in China could have an adverse impact on the growth prospects.

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Institutional Equities

Background Jubilant FoodWorks was incorporated in 1995 and it started operations in 1996. It is the sole master franchisee for both Domino’s (since 1996) as well as Dunkin’ Donuts (since 2011) in India. The company is part of the Bhartia group, which owns a 48.9% stake in the company. Jubilant FoodWorks was listed on the bourses in February 2010 and its share price has appreciated by nearly 10 times since the initial public offer (IPO). With over 800 Domino’s restaurants in India, starting from the first outlet opened in 1996, Jubilant FoodWorks is in charge of the second-largest chain of restaurants for Domino’s worldwide, overtaking UK in the current year and only behind the US, Domino’s home country (headquartered in Michigan, US). In terms of number of stores as well as sales, Jubilant FoodWorks is the largest player in the nascent QSR market in India with about 17% market share (more than a 60% market share in pizza and in excess of 70% in pizza delivery). QSR in India accounts for slightly 2% of the overall food service market in India and is expected to grow much faster at 20% compared to 10% food service industry’s growth, according to Euromonitor. Domino’s is globally owned by Bain Capital and has more than 10,000 stores worldwide. Dunkin’ Donuts, headquartered in Boston, is another US-based fast food outlet chain which forayed into India in 2011 with Jubilant FoodWorks as the sole master franchisee. With products like donuts, coffee and other beverages, burgers, salads, wraps and sandwiches, the product profile is complementary to Domino’s and is obviously run separately from Domino’s outlets. Dunkin’ Donuts is owned globally by Dunkin’ brands, which also owns Baskin Robbins worldwide. Dunkin’ Donuts has over 11,000 outlets worldwide in over 30 countries. Management Mr. Shyam Bhartia and Mr. Hari Bhartia are the promoter-directors on Jubilant FoodWorks’ board. They are designated chairman and co-chairman, respectively, and the directorship is non-executive by nature. The company is professionally run by Chief Executive Officer Mr. Ajay Kaul, who has been in this post and executive member of the board since 2005. He brings in experience from the field of express distribution, logistics, food retail, financial services and airlines. His job prior to taking over as CEO of Jubilant FoodWorks was country head in Indonesia of TNT Express division. He also worked earlier in TNT India, ModiLuft, and American Express TRS. Mr. Ravi Shankar Gupta is the chief financial officer, who has been associated with the company since April 2002. The auditors are SR Batliboi and Company, an associate of Ernst & Young in India.

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Institutional Equities

Financials Exhibit 40: Income statement Exhibit 41: Cash flow Y/E March (Rsmn) FY13 FY14 FY15E FY16E FY17E Y/E March (Rsmn) FY13 FY14 FY15E FY16E FY17E Net sales 14,143 17,363 20,436 25,484 33,231 EBIT 1,861 1,709 1,609 2,278 3,721 % growth 38.8 22.8 17.7 24.7 30.4 (Inc.)/dec. in working capital 144 132 167 524 537 Raw material costs 3,700 4,534 5,197 6,392 8,309 Cash flow from operations 2,005 1,841 1,776 2,802 4,258 Staff costs 2,715 3,411 4,245 5,179 6,577 Advertisement costs 638 890 1,059 1,261 1,526 Other income 1 9 12 13 15 Royalty costs 478 563 648 803 1,052 Depreciation 556 787 1,089 1,417 1,761 Rent 1,171 1,565 2,035 2,520 3,124 Deffered Tax Liability 130 174 (375) - - Other expenses 3,025 3,904 4,556 5,635 7,160 Interest paid (-) 77 85 67 78 123 Total expenditure 11,727 14,867 17,739 21,790 27,749 Tax paid (-) (628) (620) (494) (758) (1,312) EBITDA 2,417 2,496 2,698 3,695 5,483 Dividends paid (-) - - - - (1,330) % growth 28.6 3.3 8.1 37.0 48.4 Net cash from operations 2,142 2,275 2,075 3,552 3,516 EBITDA margin (%) 17.1 14.4 13.2 14.5 16.5 Capital expenditure (-) (1,930) (2,479) (3,000) (2,800) (3,300) Other income 1 9 12 13 15 Net interest costs (77) (85) (67) (78) (123) Net cash after capex 212 (204) (925) 752 216 Depreciation 556 787 1,089 1,417 1,761 Cash from financial activities 2 2 452 2 2 Profit before tax 1,939 1,803 1,688 2,370 3,859 Others (213) 203 474 (754) (218) % growth 24.1 (7.0) (6.4) 40.4 62.9 Opening cash 1,052 1,315 1,180 1,181 2,131 Tax 628 620 494 758 1,312 Closing cash 1,315 1,180 1,181 2,131 2,752 Effective tax rate (%) 32.4 34.4 29.3 32.0 34.0 Change in cash 263 (135) 1 950 621 Net profit 1,311 1,182 1,193 1,611 2,547 % growth 22.1 (9.8) 0.9 35.0 58.1 Source: Company, Nirmal Bang Institutional Equities Research Adjusted net profit 1,311 1,182 1,193 1,611 2,547 Exhibit 43: Key ratios Extra-ordinary items - - - - - Reported net profit 1,311 1,182 1,193 1,611 2,547 Y/E March (Rsmn) FY13 FY14 FY15E FY16E FY17E % growth 27 (9.8) 0.9 35.0 58.1 Per share (Rs) Source: Company, Nirmal Bang Institutional Equities Research EPS 20.3 18.1 18.2 24.5 38.6 DPS - - - - 17.4 Exhibit 42: Balance sheet Book value 66.6 84.1 99.8 123.7 142.1 Y/E March (Rsmn) FY13 FY14 FY15E FY16E FY17E Valuation (x) Equity 653 654 656 658 660 P/E 66.0 74.2 73.7 54.7 34.7 Reserves 3,645 4,846 5,891 7,484 8,714 P/BV 20.1 16.0 13.4 10.8 9.4 EV/EBITDA 35.3 34.7 32.3 23.4 15.7 Net worth 4,298 5,501 6,547 8,142 9,374 EV/sales 6.0 5.0 4.3 3.4 2.6 Total loans - - 450 450 450 Return ratios (%) Total liabilities 4,499 5,875 6,997 8,592 9,824 RoCE 35.4 23.5 18.8 20.4 27.2 Gross block 5,814 8,137 11,137 13,937 17,237 RoE 36.1 24.1 19.8 21.9 29.1 Depreciation 1,762 2,477 3,566 4,983 6,744 Margins (%) Net block 4,052 5,660 7,571 8,954 10,493 Gross margin 73.8 73.9 74.6 74.9 75.0 Inventories 240 331 341 497 596 EBITDA margin 17.1 14.4 13.2 14.5 16.5 Debtors 81 90 134 146 218 PBT margin 13.7 10.4 8.3 9.3 11.6 PAT margin 9.3 6.8 5.8 6.3 7.7 Cash 1,315 1,180 1,181 2,131 2,752 Turnover ratio Other current assets 830 1,359 1,359 1,359 1,359 Asset turnover ratio (x) 3.8 3.3 3.2 3.3 3.6 Total current assets 2,466 2,960 3,014 4,132 4,925 Avg. inventory period (days) 6 6 6 6 6 Creditors 1,325 1,737 1,958 2,650 3,359 Avg. collection period (days) 2 2 2 2 2 Other current liabilities 694 1,007 1,630 1,844 2,235 Avg. payment period (days) 31 32 33 33 33 Total current liabilities 2,020 2,745 3,588 4,494 5,594 Solvency ratios (x) Net current assets 446 215 (574) (362) (669) Debt-equity (0.3) (0.2) (0.1) (0.2) (0.2) Total assets 4,499 5,875 6,997 8,592 9,824 Interest Coverage (0.0) (0.0) (0.0) (0.0) (0.0) Dividend yield (%) - - - - 1.3 Source: Company, Nirmal Bang Institutional Equities Research Growth (%) Sales 38.8 22.8 17.7 24.7 30.4 EBITDA 28.6 3.3 8.1 37.0 48.4 PAT 22.1 (9.8) 0.9 35.0 58.1 Source: Company, Nirmal Bang Institutional Equities Research

23 Jubilant FoodWorks

Institutional Equities

Disclaimer Stock Ratings Absolute Returns

BUY > 15%

ACCUMULATE -5% to15%

SELL < -5%

This report is published by Nirmal Bang’s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.

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24 Jubilant FoodWorks