Stocks

Sweet deal for Jubilant Foodworks

Bhavana Acharya | Updated on February 24, 2011 Published on February 24, 2011

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Jubilant Foodworks, till now an exclusive franchisee for Dominos Pizza, has signed a master franchise agreement to bring in iconic US-based company, Dunkin Donuts to India. The stock of Jubilant hit a high of Rs 567, a 9 per cent jump from the day's opening price, but eventually settled at Rs 529.

Strengths

Dunkin Donuts has grown over the years to include a number of coffee variants, a wide array of donuts, besides other breads and baked goods, and has a presence in over 31 countries. The chain ranks high in customer loyalty on its home turf.

The franchise agreement requires Jubilant to develop at least 500 Dunkin Donuts outlets in a span of 15 years. The agreement does not cover ice-cream maker Baskin Robbins, owned by Dunkin Brands, parent of Dunkin Donuts.

Jubilant's success at the rapid ramping up of the Dominos chain — it went from an outlet count of 286 at the time of its public issue in January 2010 to 364 at the end of the year, across 87 cities. Besides metros, the company's market knowledge about consumer tastes and behaviour in smaller markets such as Bhopal and Patna will help in location identification.

While Jubilant's investment in this business was not disclosed, the company is comfortably placed to fund expansion. Having utilised its public offer proceeds to pay off debt, Jubilant operates on nil debt. As of March 2010, it had reserves of about Rs 53 crore. It also has warehousing and supply chains already in place to cater to its far-flung network of outlets.

Time lag

While the agreement does give Jubilant the ability to broaden its product portfolio, the stock's reaction to the agreement appears a tad unwarranted. For one, the first of the outlets are likely to become operational in early 2012, indicating revenue contributions only from FY13 onwards.

Further, according to reports, there are plans to open 25 to 30 outlets over three years. Given the massive network of Dominos stores, and also the healthy same-store sales growth of over 30 per cent that these enjoy, the Dunkin Donuts chain will take a couple of years at least to achieve the scale to make significant contributions to revenues and boost revenue growth.

Jubilant clocked revenue and profit growth of 61 and 133 per cent respectively for the first nine months of FY11 . But profit growth may slow as it loses benefits from interest cost savings from FY12 onwards. Three, while Dunkin Donuts does have a good brand standing internationally, it still has to compete and catch up with well-established national chains such as Café Coffee Day and Barista.

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Published on February 24, 2011
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