Rating Rationale
August 28, 2018 | Mumbai
Jubilant FoodWorks Limited
'CRISIL A1+' assigned to CP 
 
Rating Action
Rs.200 Crore Commercial Paper CRISIL A1+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A1+' rating to the commercial paper programme of Jubilant FoodWorks Limited (JFL).
 
The rating reflects an established market position in the quick service restaurant (QSR) segment, healthy operating efficiency driven by a robust supply chain network, and a strong financial risk profile. These rating strengths are partially offset by suboptimal performance of the donuts division and susceptibility of profitability to intense competition and cost pressures.

Analytical Approach

For arriving at its rating, CRISIL has combined the business and financial risk profiles of JFL and its subsidiaries, together referred to as JFL, as all these companies have considerable operational and financial linkages.

Key Rating Drivers & Detailed Description
Strengths
* Established market position in the QSR segment
The company is a market leader in the pizza segment, the largest sub-segment in the QSR space. The QSR segment is expected to grow at more than 15% per fiscal over the medium term driven by increase in the inclination of consumers to eat out, rising disposable incomes, a greater need for convenience, and an increase in the women workforce.
 
The company has the exclusive rights to develop and operate the Domino's Pizza brand in India, Sri Lanka, Bangladesh, and Nepal. It thus had a diversified geographical presence at over 268 cities through 1,144 outlets as of June 2018. A healthy brand recall for the brand in the pizza market has contributed to the steady market share and robust revenue growth, at a compound annual rate of over 25% over the eight fiscals through 2018.
 
* Healthy operating efficiency, driven by a strong supply chain network
The company operates 10 regional supply chain centres, which source and supply primary raw materials used in the preparation of pizzas, such as cheese, vegetables, and meat. It has centralised its sourcing, warehousing, and distribution of raw materials, as well as the production of dough at commissaries, which reduces the storage space required at its stores, resulting in minimising of store operating costs. Further, store start-up requires lesser capital and space than other QSR chains and standardised furnishing. This enables the store to break even faster.
 
Benefits are also derived from higher share of home deliveries through online orders. These aid profitability as they eliminate staff required to take down orders and have a higher ticket size. Over the 18 months through June 2018, the share of online order has increased to 65% from 51%, of which contribution from mobile (application-based) orders remained high at 83%.
 
* Robust financial risk profile
The financial risk profile is supported by a debt-free status, a strong networth, and high financial flexibility arising from large investments. The company has been debt-free since the past three fiscals. The adjusted networth was Rs 929 crore as on March 31, 2018, and is expected to increase further, backed by healthy accretion to reserves. The investment portfolio comprises mutual funds (Rs 263 crore as on March 31, 2018) and a cash and bank balance (Rs 129 crore). Expansion and dividend pay-outs are expected to be prudent, as indicated by recent additions being done through own funds and dividend of Rs 20 crore paid during fiscal 2018. The capital structure is thus likely to remain robust.  
 
Weakness
* Suboptimal performance of Dunkin' Donuts, resulting in higher dependence on pizaa
The Dunkin' Donuts division was started in fiscal 2012, but its share remains low. Moreover, the division had incurred losses in the past, resulting dilution in the overall profitability. The number of Dunkin' Donuts stores has been reduced to 37 as on June 30, 2018, from 55 as on June 30, 2017. The focus is to turnaround this division, losses has been reducing over past two fiscals and it is expected to break even by fiscal 2019. Nevertheless, in the absence of profitable expansion of the division, reliance on the pizaa division should remain high.
 
* Susceptibility to intense competition and to cost pressures
The Indian QSR market is highly competitive, where players compete through core offerings and product variations not just among the organised segment but also among the un-organised market. Increasing competition between QSRs and growing share of online food aggregators, also pose a challenge to maintaining market share. Fixed costs (mainly lease rentals for store premises, employee cost, and utility charges) form a significant portion of the operating cost for a QSR and hence results in a relatively high operating leverage. Hence, growth in same-store sales is essential to boost profitability. During fiscals 2015-2017, the rental expenditure and employee cost of the company increased as new stores were opened. This, coupled with a dip in same-store sales growth-partly owning to a constrained economic environment'impacted the operating margin, which dropped to 9.6% in fiscal 2017 from 14.3% in fiscal 2014; however, the margin improved to 14.8% in fiscal 2018. Expansion of the operational network to generate revenue from new locations while continuing to grow same-store sales effectively, in a timely manner and without cost overrun, and improvement in the margin with sustained focus on cost optimisation, technology leverage, and economies of scale, remain key monitorables.
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 1,144 Domino's Pizza restaurants across 268 cities (as of June 30, 2018). The company and its subsidiary have the exclusive rights to develop and operate Domino's Pizza brand in India, Sri Lanka, Bangladesh, and Nepal. At present, it operates in India, Sri Lanka (through subsidiary Jubilant Food Works Lanka Pvt Ltd), and plan to operate in Bangladesh (through Jubilant Golden Harvest Ltd, a joint venture between JFL and Golden Harvest QSR Ltd, a part of the Golden Harvest group of Bangladesh). The company also has exclusive rights for developing and operating Dunkin' Donuts restaurants in India and had 37 such establishments across 10 cities in the country as of June 30, 2018.

Key Financial Indicators*
As on / for the period ended March 31 Unit 2018 2017
Revenue Rs crore 3033 2601
Profit after tax (PAT) Rs crore 196 58
PAT margin % 6.5 2.2
Adjusted debt/adjusted networth^ % NA NA
Interest coverage^ Times NA NA
*Crisil adjusted consolidated financials, ^company is debt free

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs  crore)
Rating assigned 
with outlook
NA Commercial Paper NA NA 7-365 days 200 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  200.00  CRISIL A1+    --    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Bank Loan Ratings
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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