Detailed Rationale

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

 

The rating continues to reflect an 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 considerable 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 fiscal 2022, the company witnessed healthy growth of 33% in sales vis-à-vis fiscal 2021, supported by improved recovery in the dine-in channel, with continued strong momentum in the delivery channel. Revenue per store increased to Rs 2.8 crore per store from Rs 2.4 crore per store owing to rise in sales. Fiscal 2022 saw record new store openings with a landmark 230 new Domino’s Pizza stores being opened. The company forayed into 48 new cities during the fourth quarter of fiscal 2022 and reached a total of 337 cities across India. Total store count increased to 1,567 in fiscal 2022 from 1,360 in fiscal 2021.

 

The Covid-19 pandemic accelerated the adoption of app-based ordering and delivery, which created a favourable structural shift. To further fortify its market position, the company is expanding its existing brand portfolio through a combination of own brands (Hong’s Kitchen and Ekdum!) and franchised brand (Popeyes). While the expansion enhances avenues for growth, scalability will remain a key monitorable. Additionally, with Domino’s contributing majorly to the sales of JFL, continued association with the Domino’s brand and timely renewal of the agreement, as and when due, remains critical.

 

Robust supply-chain network

The company operates various regional supply chain centres, which source and supply raw materials, thus helping to ensure consistent quality and timely delivery of these to its stores. Also, as company’s purchase function is centralised and it purchases large volume of ingredients such as cheese, sauce and pizza boxes, it allows it 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 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. As of March 2022, nearly 87.2 million people have downloaded its mobile ordering app. Online sales have maintained a healthy momentum and stood at 97.9% of the total delivery sales in fourth quarter of fiscal 2022 as compared to 98.2% in the corresponding quarter of fiscal 2021. Mobile ordering sales contribution to overall online ordering stood at more than 97% for fiscal 2022.  

 

Additionally, the company showed resilience during testing times, introduced delivery fees and took various cost measures to sustain profitability, reflected in earnings before interest, taxes, depreciation, and amortization margin of 25.5% in fiscal 2022. Further, 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 superior Return on Capital Employed (ROCE) of greater than 30% over past 5 years.

 

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 since the past three fiscals. Tangible networth was Rs 1,891 crore as on March 31, 2022, and is expected to increase further, backed by healthy accretion to reserve. Cash outflow on account of lease liability as on March 31, 2022 stood at Rs 310 crores. Overall long term lease liabilities as on March 31, 2022 stood at Rs. 1,787 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 Donuts, 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 the brand Hong’s Kitchen and introduction of the Ekdum!' brand. 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 investments of around Rs 663 crore as on March 31, 2022. 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

 

ESG highlights

• The company has inducted e-bikes into the fleet of motorbikes, to be used for food delivery, across multiple cities; this helps reduce Scope I/II emissions. Further, approx. 9.9 tonne of carbon dioxide emission has been reduced due to its solar heating plant.
• Gender diversity in JFL is ~16.8%; resolution rates for sexual harassment cases stands at 100% for the company.
• 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

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

About the Company

JFL is a part of the Jubilant Bhartia group and is one of India’s leading food service companies, with a network of 1,567 Domino’s Pizza restaurants across 337 cities (as on March 31, 2022). The company and its subsidiaries have the exclusive rights to develop and operate the Domino’s Pizza outlets in India, Sri Lanka, Bangladesh, and Nepal. The company also has exclusive rights for developing and operating Dunkin Donuts restaurants for India and had 28 restaurants under this brand across eight cities as on March 31, 2022.

 

JFL ventured into Chinese cuisine segment with its first owned restaurant brand, Hong’s Kitchen, which now has 11 restaurants across three cities. Recently, the company has added Indian cuisine of biryani, kebabs, breads and more to the portfolio by launching the brand, Ekdum!, which has seven restaurants across three cities.

Key Financial Indicators*

As on/for the period ended March 31	Unit	2022	2021
Revenue	Rs crore	4396	3312
Profit After Tax (PAT)	Rs crore	418	231
PAT Margin	%	9.5	7.0
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