Investor fad for the Indian consumption story is captured in Jubilant Foodworks, a Domino’s pizzas franchisee, being valued at almost the same as the US owner of the brand with ten times the revenues, raises concerns of irrational exuberance over growth.
Last week the stock market value of Jubilant touched a peak of $1.4 billion or Rs 6,190 crores, making it the most expensive popular consumer goods stocks at more than 50 times its future earnings. This compares with a market value of $1.5 billion for the New York Stock Exchange listed Domino’s Pizza Inc. that owns the eponymous brand. Jubilant’s market value was $890 million on December 31, 2010.
“Jubilant’s current valuations are exorbitant,” said A. K. Prabhakar, senior vice president-equity research, Anand Rathi Financial Services. “Even if the company adds two or three more brands, these valuations will still be expensive.”
Jubilant’s sales in fiscal 2011 was $150 million and net profit was $15.94 million. Domino’s revenue last year was $1570 million and net profit $87.9 million. The key differentiator between the companies is the zero debt status of Jubilant and a long term debt of $1.5 billion for Domino’s, according to Bloomberg data.
An email sent to Jubilant’s chief financial officer Ravi S. Gupta seeking the company’s comment for the story was not answered.
Consumer focused companies such as Jubilant are targeting India’s growing food services market, which is estimated at around Rs70,000 crore, of which organized food chains form 10 per cent of the business. Investors are betting that organized food chains would capture 20-25 per cent of this market over the next five years as urbanisation gains momentum and income levels rise.
Jubilant, which sold shares at Rs. 145 apiece in an initial offering in February 2010, had 378 stores on March 31. It is a leader in the organized pizza market with a 50 per cent share, and 70 per cent share in the Pizza home delivery segment in India, according to its website. It has exclusive rights in Sri Lanka, Nepal and Bangladesh.
The company, which currently sells Domino’s pizzas and add Dunkin’ Donuts from next year, is valued at over 51 times 2011-12 estimated earnings of Rs16.9 per share compared, with consumer goods sector’s price to earnings of 26 times. Jubilant shares have gained almost 40% this year compared with an 8.6% drop in the benchmark Sensex.
“There is no logic to such valuations even though India’s consumption story remains robust,” says SP Tulsian, a Mumbai-based independent investment advisor. “The cost of setting up an outlet is about Rs. 60 lakh and at the current sales volumes, the company should not be valued more than Rs3 to 4 crore per store.” Current valuation works out to Rs. 16.37 crore a store.
Reports of the company adding more international brands, including coffee-chain Starbucks , for distribution in India have also helped the stock outperform.
Although consumer goods companies are weathering the interest rate storm for now, they may not be able to maintain their profitability if food products prices continue to rise. Furthermore, their valuations leave little scope for returns.
Citigroup , Goldman Sachs and Standard Chartered are among brokerages that have turned negative on the consumer goods stocks after them outperforming in a difficult market.
“The recent outperformance leaves little on the table,” Standard Chartered said in a recent report on consumer goods stocks.
Goldman Sachs said, “relative to MSCI India, the sector is trading at a premium of more than 89%, the highest since early-2004.”
Some technical factors such as `break-out’ in price by themselves may be helping the stock, say analysts.
“Many FMCG stocks including Jubilant have given an all-time high breakout and traders are riding on the momentum that can go on for some more time,” said Prabhakar. “In such a situation, there is no point worrying about valuations, but once this momentum breaks, it will be difficult to assess the bottom.”
Source : Economic Times