Detailed Rationale

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

 

During fiscal 2023, the company, on a consolidated basis, witnessed healthy growth of 17.4% in sales vis-a-vis fiscal 2022, supported by improved recovery in the dine-in channel, with continued strong momentum in the delivery channel.

 

On a consolidated basis, Earnings before interest, taxes, depreciation, and amortization (EBITDA)  margins for fiscal 2023 moderated to 22.3% from 25.2% in fiscal 2022. This was primarily on account of inflationary pressures on raw material prices with prices of key input materials like cheese being at very high levels which also impacted its gross margins; that said overall operating margins still remained at healthy levels. Profit after tax for the period stood healthy at Rs.353 crores;

 

Financial risk profile continues to remain strong with healthy tangible networth of Rs.1900 crore and negligible debt levels. Same is expected to be sustained over the near to medium term.

 

The rating continues to reflect the company’s well established market position in the quick-service restaurant (QSR) segment, robust supply-chain network, supportive changes in operating environment and strong financial risk profile. These strengths are partially offset by the concentration of profitability driven by Domino’s Pizza and susceptibility of profitability 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. Fiscal 2023 saw record new store openings with a landmark of 250 new Domino’s Pizza stores being opened. The company forayed into 56 new cities during  fiscal 2023 and reached a total of 393 cities across India. Total store count increased to 1816 in fiscal 2023 from 1567 in fiscal 2022.

 

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

 

Robust supply-chain network

The company operates through unique commissary model which provides it with a distinct competitive advantage. As company’s purchase function is centralised and it purchases large volume of ingredients such as cheese, sauce and pizza boxes, which allows  the Company to maximise leverage and negotiate better prices with suppliers. Furthermore, as company has centralised its sourcing, warehousing and distribution of raw materials, as well as the production of dough balls at commissaries, this reduces the storage space required at its stores, thereby enabling it to minimise store operating costs, without incurring significant additional expenses at the commissary level.

 

Further, JFL was the first food service company to launch online and mobile ordering nationally in India. The delivery channel registered the growth of 8.4% in fiscal 23. Online ordering (OLO) sales have maintained a healthy momentum and stood at 97.9% of the total delivery sales in fourth quarter of fiscal 2023. Mobile ordering sales contribution to overall online ordering stood at more than 98.6% for the fourth quarter in fiscal 2023.  

 

Company has always managed its working capital efficiently and has traditionally had a negative working cycle thus reducing its dependence on external debt. Further, company’s operating efficiency is also reflected in its consistent and superior Return on Capital Employed (ROCE).

 

Strong financial risk profile

The financial risk profile is supported by a debt-free status, strong networth, and high financial flexibility. The company has been debt-free on standalone basis. However, there is negligible debt of Rs.183 Crores in its overseas subsidiary “Jubilant FoodWorks Netherland BV’. Tangible networth was Rs 1,900 crore as on March 31, 2023, and is expected to increase further, backed by healthy accretion to reserve. Overall long term lease liabilities as on March 31, 2023 stood at Rs. 2,132 crores.

 

Weaknesses

Concentration of profitability to Domino’s Pizza division

JFL derives most of its profits from the pizza division i.e. Domino’s Pizza, which leads to high concentration. 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 years, JFL has been focusing on diversifying its portfolio through expansion of own brand Hong’s Kitchen and have taken franchisee rights of 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 segment and the huge unorganised market), 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 the operating margin with sustained focus on cost optimisation, technology, low leverage, and economies of scale, remain key monitorables.

Liquidity: Strong

Liquidity is adequate and well supported by cash and cash equivalents including bank deposits and liquid investments of around Rs 381 crore as on March 31, 2023. Strong liquid surplus along with internal accruals 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 significant impact on the environment owing to high water consumption and waste generation and also greenhouse gas emission. The social impact of this sector is characterised by health hazards, leading to higher focus on employee safety and wellbeing and the impact on local community, given the nature of operations.

 

JFL has continuously focused on mitigating its environmental and social risks. Company has been improving its disclosure levels and is in the process of further strengthening the going forward

 

ESG highlights

1. The company has been increasing its share of electric bikes in its delivery fleet, to be used for food delivery, across multiple cities; this helps reduce Scope I/II emissions. With 7500+ EVs, the share of EV in fleet is now 33%.
2. Company is committed to reducing carbon di-oxide emissions and presently 11% electricity demand of commissaries is met by Solar PV.
3. Company is focusing on recycling waste generated and uses recyclable pizza boxes and offers lidless dine-in boxes to reduce paper consumption
4. The company continues to build a more diverse, inclusive and representative workforce with 31% of workforce being women.
5. Under responsible sourcing initiatives, the company offers antibiotic free chicken across brands. It also offers training and veterinary support to over 35,000 dairy farmers to enhance cattle productivity
6. JFL’s governance profile is marked by 50% of its board comprising independent directors, split chairman and CEO position and strong investor grievance redressal cell. It also has extensive disclosures.

 

 

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

Rating Sensitivity factors

Downward factors

1. Substantial decline in scale of revenues with operating margins falling below 20% (Post IND AS basis) impacting cash generation
2. Any large, debt-funded capex or acquisition, weakening the financial risk profile

About the Company

Jubilant FoodWorks Limited (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 a strong and extensive network of 1,816 Domino’s restaurants across 393 cities as of March 31, 2023. In Sri Lanka and Bangladesh, the Company operates through its 100% owned subsidiary which currently has 48 and 17 restaurants respectively. The Company 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 13 Popeyes restaurants in two cities.

 

In 2019, Jubilant FoodWorks launched its first owned-restaurant brand ‘Hong’s Kitchen’ in the Chinese cuisine segment which now has 13 restaurants across three cities

Key Financial Indicators

As on / for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	5158	4396
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