Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Jubilant FoodWorks Ltd (JFL).

 

CRISIL Ratings has taken note of JFL’s announcement regarding Jubilant Foodworks Netherlands B.V.(JFN) (100% wholly owned subsidiary of JFL) now owning 54.67% of issued and outstanding share capital of DP Eurasia and its intention to acquire the balance stake up to 45.33%(DP Eurasia; JFL held 48.84% as on September 30, 2023) through a cash offer at a price of 0.95 GBp per share. 

 

DP Eurasia is a public company listed on the London Stock Exchange PLC and is the exclusive master franchisee of the Domino’s Pizza brand in Turkey, Azerbaijan and Georgia. DP Eurasia (together with its subsidiaries) offers pizza delivery and takeaway/eat-in facilities at its 694 stores (678 in Turkey, 10 in Azerbaijan and 6 in Georgia as on October 31, 2023) and operates an asset-light, scalable business through franchised stores contributing to 88% of the overall stores. For the six months ended June 30, 2023, the revenue of DP Eurasia stood at ~Rs 455 crore; Earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin was ~18.9%; Adjusted Net Income margin was 14.5%; debt was ~Rs 326 crore (inclusive of lease liabilities of Rs 23 crore) while cash and equivalent stood at ~Rs 106 crore.

 

The aggregate purchase consideration (if JFN is successful in acquiring 100% stake) shall be ~73.4 million euro, for which JFN has taken an incremental facility from HSBC UK.

 

Even with any additional debt to be undertaken for the acquisition, overall financial risk profile is expected to remain healthy with gearing remaining below 1 time and interest coverage remaining robust over the medium term.

 

During the first half of fiscal 2024, the company, on a consolidated basis, witnessed healthy growth of 6% in sales to Rs 2,703 crore vis-à-vis Rs 2,556 crore for the corresponding period previous fiscal. This was supported by new store additions (60) with continued strong momentum in the QSR (quick-service restaurant) segment. Over the medium term, revenue (excluding that of DP Eurasia) is expected to grow at 8% annually.

 

For the first half of fiscal 2024, Ebitda margin moderated to 20.5% from 24.1% same period previous fiscal because of increase in raw material (gross margin was 75.9% against 76.4%) and employee costs (18.9% against 17.1%). Even with the consolidation of DP Eurasia, margin is estimated to sustain at 20-20.5% over the medium term with accretion in PAT Margin. 

 

The rating continues to reflect the established market position of JFL in the QSR segment, robust supply-chain network, supportive changes in operating environment and strong financial risk profile. These strengths are partially offset by concentration of profitability, which is driven by Domino’s Pizza; and its susceptibility to competitive intensity and cost pressures.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of JFL and its subsidiaries, collectively known as JFL, as these entities have operational and financial linkages.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the QSR segment: The company is a market leader in the pizza segment through its exclusive rights to operate Domino’s Pizza outlets in India, Sri Lanka, Bangladesh, and Nepal. During the first half of fiscal 2024, JFL opened 60 new stores in India, resulting in a network of 1,949 stores across all brands. With the addition of 50 new Domino’s stores and entry in three new cities, Domino’s India expanded its network to 1,888 stores across 397 cities. The company also opened five new restaurant for Popeyes and entered two new cities, Hyderabad and Madurai, taking the network tally to 22 restaurants across six cities. In Hong’s Kitchen, four new stores enhanced the network to 18 stores across three cities. In Dunkin’, one new store was opened with entry into a new city. 11 out of 21 stores are now as per the brand’s coffee-first identify.

 

To further fortify its market position, the company has expanded its offerings under its brands: Popeyes, Dunkin’ and Hong’s Kitchen.

 

• Robust supply-chain network: The company operates through a unique commissary model, which provides it with a distinct competitive advantage. As its purchase function is centralised and it buys large volumes of ingredients (such as cheese, sauce and pizza boxes), JFL can maximise leverage and negotiate better prices with suppliers. Furthermore, centralised sourcing, warehousing and distribution of raw materials, as well as production of dough balls at commissaries reduce storage space, thereby enabling the company to minimise store operating costs. The Integrated Supply chain model helps JFL enjoys one of highest fill rates - 99.6% - globally.

 

Furthermore, JFL was the first food service company to launch online and mobile ordering across India. Online ordering sales have maintained a healthy momentum and stood at 98.2% of the total delivery sales in the second quarter of fiscal 2024. Mobile ordering sales contribution to overall online ordering stood at about 98.8% for the second quarter this fiscal.  

 

Working capital management has remained efficient with a traditionally negative working cycle, thus reducing dependence on external debt. Operating efficiency is also reflected in consistently superior return on capital employed.

 

• Strong financial risk profile: As of March 2023, total debt was Rs 183 crore, excluding lease liabilities of Rs 2,371 crore as against tangible networth of Rs. 1900 crore. Even though, debt might go up with the company increasing its stake in DP Eurasia, overall gearing is expected to remain below 1 times. The exact quantum of increase in debt would depend upon the extent to which stake is increased by JFL in DP Eurasia. However, in-spite of additional debt, interest coverage (pre-IND AS basis) is expected to remain healthy at over 5-6 times.

 

Weaknesses:

• Concentration of profitability in the Domino’s Pizza division: JFL derives most of its profits from Domino’s Pizza. Although the company has taken franchise of another major brand, Dunkin’, it is yet to achieve comparative profitability and store economics. Additionally, over the past two fiscals, JFL has been focusing on diversifying its portfolio through expansion of own brand, Hong’s Kitchen, and has taken franchisee rights of Popeyes.

 

In the medium term, the Company in India, expects to reach 250 stores for Popeyes.

 

However, scalability and contribution of these brands to overall profitability are yet to be seen.

 

• Susceptibility of profitability to competitive intensity and cost pressures: The Indian QSR market is highly competitive (with players in the organised and the huge unorganised markets), which may result in loss of market share and reduced profitability. Fixed costs (mainly lease rentals for store premises, employee cost, and electricity charges) form a significant portion of the operating cost for a QSR, resulting in high operating leverage. Thus, growth in same-store sales is essential to boost profitability. Hence, timely execution of the growth plan without any cost overrun, and improvement in operating margin with sustained focus on cost optimisation, technology, low leverage, and economies of scale remain monitorable.

Liquidity: Strong

Liquidity is supported by cash and equivalent, including bank deposits and liquid investments of around Rs 147 crore as on September 30, 2024. Healthy liquid surplus along with internal accrual should be sufficient to fund expansion plans.

 

Environment, social and governance (ESG) profile

The ESG profile of JFL supports its already strong credit risk profile.

 

The food retail sector has a significant impact on the environment owing to high water consumption and waste generation, apart from greenhouse gas emission. Its social impact is characterised by health hazards, leading to higher focus on employee safety and well-being; and the impact on local community given the nature of operations.

 

JFL has continuously focused on mitigating its environmental and social risks. The company has been improving its disclosure levels and is further strengthening it going forward.

 

ESG highlights

1. JFL has been increasing the share of electric bikes in its delivery fleet across multiple cities; this helps reduce Scope I/II emissions. With 7,500+ electric vehicles (EVs), the share of EV in fleet is now 33%.
2. The company is committed to reducing carbon dioxide emissions: 11% of the electricity demand of its commissaries is currently met by solar PV.
3. As part of its focus on recycling waste generated, the company uses recyclable pizza boxes and offers lidless dine-in boxes to reduce paper consumption.
4. It continues to build a more diverse, inclusive and representative workforce, with 31% of its employees being women.
5. Under responsible sourcing initiatives, the company introduced India’s first – “No Antibiotics Ever" policy and offers antibiotic-free chicken across brands. It also offers training and veterinary support to over 35,000 dairy farmers to enhance cattle productivity.
6. Governance profile is marked by 50% of its board comprising independent directors, split chairman and CEO positions, and strong investor grievance redressal cell. It also has extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of JFL to ESG principles will play a key role in enhancing stakeholder confidence and ensuring ease of raising capital from markets where ESG compliance is a key factor.

Rating Sensitivity Factors

Downward factors

• Substantial decline in revenue and fall in operating margin below 20% (post-IND AS basis) impacting cash generation.
• Any large, debt-funded capital expenditure or acquisition weakening financial risk profile.

About the Company

JFL (NSE, BSE: JUBLFOOD) is India’s largest foodservice company and is part of the Jubilant Bhartia group. Incorporated in 1995, the company holds the exclusive master franchise rights from Domino’s Pizza Inc to develop and operate the Domino’s Pizza brand in India, Sri Lanka, Bangladesh and Nepal.

 

In India, it has an extensive network of 1,888 Domino’s restaurants across 397 cities (as of September 2023). In Sri Lanka and Bangladesh, the company operates through its fully owned subsidiary, which currently has 50 and 23 restaurants, respectively. JFL also has exclusive rights to develop and operate Dunkin’ restaurants in India; and Popeyes restaurants in India, Bangladesh, Nepal and Bhutan. The company currently operates 21 Dunkin’ restaurants across six Indian cities and 22 Popeyes restaurants in two cities.

 

In 2019, JFL launched its first own restaurant brand, Hong’s Kitchen, that now serves Chinese cuisine across three cities through its 13 restaurants.

Key Financial Indicators

As on/for the period ended March 31	Unit	2023	2022
Revenue	Rs.Crore	5162	4398
Profit After Tax (PAT)	Rs.Crore	353	418
PAT Margin	%	6.8	9.5
Adjusted debt/adjusted networth^	%	NA	NA
Interest coverage^	Times	NA	NA

*CRISIL Ratings-adjusted consolidated financials

^The company is debt-free

Any other information: Not Applicable