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Monday, March 13, 2017

CERA SANITARYWARE LIMITED: THE BEST ONE !!!

Scrip Code: 532443 CERA
CMP:  Rs. 2,532.50 ; Market Cap: Rs. 3,293.74 Cr; 52 Week High/Low: Rs. 2,780.00 / Rs. 1,709.95
Total Shares: 1,30,05,874 shares; Promoters : 71,20,639 shares –54.75 %; Total Public holding : 58,85,235 shares – 45.25 %; Book Value: Rs. 323.71; Face Value: Rs. 5.00; EPS: Rs. 75.98; Dividend: 180.00 % ; P/E: 33.46 times; Ind. P/E: 35.08; EV/EBITDA: 18.85.
Total Debt: Rs. 35.08 Cr; Enterprise Value: Rs. 3,269.43 Cr.

CERA SANITARYWARE LIMITED: Cera Sanitaryware Limited was incorporated in 1980, and is headquartered in Kadi, India. The company was formerly known as Madhusudan Oils and Fats Limited and changed its name to Cera Sanitaryware Limited in November 2002. Cera Sanitaryware Limited manufactures and sells sanitary ware and faucet ware products in India. The company offers sanitary ware products, including EWC’s, kids range products, wash basins, urinals, cisterns, seat covers, sensors, and bath accessories; special needs products consisting of cranes, shower chairs, wall mounted and U shaped rails, wall mounted inverted rails, and corner and wall mounted grab bars; and faucets, such as fittings, basin mixers, showers, bath tub spouts, flush valves and cocks, angle cocks, taps, and accessories. The company announced its bonus shares last July 2010 in ratio of 1:1. It also provides wellness products comprising steam shower rooms, shower rooms and cubicles, shower partitions, indoor swimming pools, bath tubs, shower panels, and pressure pumps; kitchen sinks and mirrors; and personal care products comprising hand dryers, perfume sprayers with remote control, automatic soap dispensers, and hair dryers, as well as wall and floor tiles. Cera has emerged as the third largest player in the sanitary ware industry in India. The company enjoys 24 % market share in the organised segment. It has installed manufacturing capacity of 2.7 mn pieces p.a. in sanitary ware and 2,500 pieces per day in faucet ware in Kadi (Gujarat). As of May 2016, Cera has 1,000 distributors - dealers, 14,000 retailers and 12 major stock points across India. CERA’s subsidiary includes Madhusudan Industries Ltd; Madhusudan Holdings Ltd; Madhusudan Fiscal Ltd; Vikram Investment Co. Ltd; Cera Foundation; Swadeshi Fan Ind. Ltd. CERA SANITARYWARE is locally compared with Kajaria Ceramics, Grindwell Norton, Acrysil India Ltd, La Opala RG,  Asian granite India Ltd, Euro Ceramics, Hindustan Sanitaryware India Ltd, Morganite Crucible India Ltd, Murudeshwar Ceramics, Nitco tiles Ltd, Orient Bell Ltd, Regency Ceramics, Restile Ceramics, Somany Ceramics, Kisan mouldings Ltd,  and Globally compared with China Ceramics Co Ltd of China, Ziyang Ceramics of China, Topps Tiles of China, China GengSheng Minerals Inc of China, INTL DE Ceramica Com of USA, EGE Seramik of Turkey, Dynasty Ceramics of Thailand, Ceramica San Lorenzo, CARBO Ceramics Inc of USA, Fairmount Santrol Holdings Inc. of USA, Compagnie De Saint Gobain SA of France, U.S. Silica Holdings, Inc of USA, Arab Ceramics Co of Saudi Arabia, Al Anwar Ceramic Tiles Co of Saudi Arabia, Saudi Ceramics Co of Saudi Arabia, Saudi Vitrified Clay Pipes Company of Saudi Arabia, General Comapany for Ceramic and Procelain Products SAE, Forage Orbit Garant Inc of Canada,Ceramika Nowa Gala Sa of Turkey, Usak Seramik Sanayi As of Turkey, Dvarcioniu Keramika AB of Lithuania, Goh Ban Huat Berhad of Malaysia, Chang Yih Ceramic JSC of Vietnam, Royal Ceramics Lanka Ltd of Sri Lanka, Konoshima Chemical Co Ltd of Japan, Roy Ceramics Se of Germany, Troax Corp Publ AB of Sweden, Expedit AS of Denmark, Exel Composites Oyi of Finland, Royal Ceramic Industry Public Co Ltd of Thailand, CMC Joint Stock Co of Vietnam, Shabir Tiles & Ceramics ltd of Pakistan, Onex Corporaion of Japan, Sapura Industrial Berhad of Malaysia, Nansin Company Ltd of Japan, Masonite International Corp of USA, Owens Corning of USA, Nci Building Systems Inc of New York, Masco Corp of USA.

Investment Rationale:
Cera Sanitaryware incorporated in the year 1998 is a pioneer in the sanitary ware segment in India. Cera Sanitaryware Limited, India’s fastest growing company in the sanitary ware segment in India. It has an extensive product portfolio that includes high end showers, steam cubicles, and whirlpools, besides sanitary-ware and faucets, such extensive product ranges has made CERA the primary choice of customers looking for stylish products in a contemporary lifestyle. It’s also the first sanitary ware company to use natural gas, for its commercial needs, Cera has been on the forefront of launching a new and versatile colour range and introducing the bath suite concept. CERA’s constant innovations have given several path breaking contributions to the industry. Some of its innovations have become benchmarks for the industry- like water-saving twin-flush coupled WCs, 4-litre flush WCs, and one-piece WCs. Advanced technology has been the forte of CERA. Its state-of-the-art manufacturing plant has been following the highest standards of quality with an emphasis on sustainability since its inception in 1980. The total size of the Indian sanitary ware and bathroom fittings industry is at Rs. 9,500 Cr in FY16, of which the sanitary ware accounts for roughly Rs. 3,500 Cr and is growing at an average rate of 20 %. The remaining Rs. 6,000 Cr is attributed to bathroom fittings, also growing at an average rate of 18 %. The outlook for the industry is robust on the back of country’s very low sanitation coverage, housing shortage and potential for the replacement market. The contribution from the replacement is very low at 8 % in comparison to 80 % in the developed economies. In the sanitary ware industry, the organized market is 65 % while the unorganized market is about 35 % and in the bathroom fittings, the organized market share is around 45 % and the unorganized market is about 55 %. According to the report on world health statistic by World Health Organization (WHO), the sanitation coverage in India is very low at 36 %. This in itself shows the growth potential for the industry in a country which has a population of over 121 Cr and is expected to grow to 135 Cr by 2021, as per census 2011. Further, the growth would be boosted by the government initiatives such as affordable housing, Swachh Bharat Abhiyan and development of 100 smart cities. In Union Budget for 2015-16, the finance minister has announced 100 % sanitation by October 2019 with a provisional amount of Rs. 3,625 Cr, including Rs. 1,000 Cr for urban sanitation. It has also allocated Rs. 10,025 Cr for rural housing and Rs. 4,150 Cr for Urban housing with an objective of providing housing for all by 2022. In the recent union cabinet meeting, the government has approved development of 100 smart cities along with the new urban renewal mission with a planned outlay of Rs. 100 lakh Cr. The Indian tile Industry is expected to witness better days over the medium-term. This optimism is based on important realities. Over the last two decades, India’s urban population increased from 21.7 Cr to 37.7 Cr and this is expected to reach 60 Cr, or 40 % of the population by 2031. By then, India is expected to have 68 cities with population of more than one million – driving housing demand. India is one of the few countries with a third-quartile median age of 27 years, which represents a younger, ambitious and forward-looking population. As the internet penetration deepens, consumption is seen to increase. The proportion of people employed in the country's workforce will continue to rise. By 2030, India is expected to constitute 28 % of the world's workforce with the worker-to-dependent ratio expected to be 2.1 (14 in 1990). Besides, steady urbanisation will graduate labour markets from low paying agricultural jobs to better-paying manufacturing and service engagements. India’s sanitaryware and bathroom fittings industry is undergoing a transition phase. The consumers are now moving from low-end basic product to middle and high end premium segments. This is in conjunction with the growing urbanization and ever increasing middle-income segment. As per the National Council for Applied Economic Research (NCAER), the middle-income segment has grown from 1.1 Cr households in 2001-02 to 3.1 Cr household by 2010-2011 and is expected to grow to 5.3 Cr by 2015-16 and 11.4 Cr by 2025-2026. This shift will benefit the industry players in terms of higher margin and ability to pass on the cost increase to the consumers. The recent reduction in interest rates augurs well for the housing sector. Beside, declining commodity prices are expected to reduce inflationary pressure on the Indian economy, creating a foundation for further interest rate reduction. This should improve housing demand. Reduction in international crude prices should optimise the energy bill strengthening business profitability. Cera in the sanitary ware segment has strong positioning and over the years has gradually increased its market share in the sanitary ware from 18 % in FY09 to 23 % in FY15. The company is also growing higher than most of its peers and industry. The company started the faucet business by trading activity and today it has built-up huge capacity to encash the opportunity in the under-penetrated faucet ware market. The revenue contribution from the faucet business has increased from 14 % in FY13 to 17 % in FY17E, with the increasing capacity the contribution is expected to increase further. Recently, the company has also expanded its business activities in the tiles business through contract manufacturing with the unorganized players. The products launched by the company in the tiles business have been widely accepted and as a result, the contribution from the tiles business has also increased from just 2 % in FY13 to 13 % in FY15. The diverse product offering has helped the company to achieve higher revenue growth, even when the economy and the industry were under pressure. Lately, the company is also evaluating opportunities for entering into a joint venture for the manufacturing of sanitary ware and Tiles. Faucet ware industry size at Rs. 6,000 Cr is double the size of sanitary ware, showing huge growth potential going forward. The contribution of the organized market is 45 % and is growing rapidly. The company already supplies to the industry in the mass segment through outsourcing but now the company is targeting the premium segment and in this direction, the company has increased its production capacity by 166 % to 24.3 Cr pcs p.a i.e approx. 6,658 pcs. per day from 91 lakhs pcs p.a i.e 2,500 pcs per day. The plant located at kadi, Gujarat is further expandable to 10,000 pcs per day. Currently, jaguar has dominating in this segment with almost 40 % market share. The company is going aggressively on branding and expects to garner 3 % market share in the near future. Meanwhile, CERA has also expanded the sanitary ware production capacity from 27 lakhs pcs p.a to 30 lakhs pcs p.a in FY15. The company is also planning to increase the sanitary ware capacity to 33 lakhs pcs by FY16E. In the last couple of years, the company has reported healthy growth in its sanitary ware business and has gained market share from 18 % in FY09 to 23 % at the end of FY15. The industry has huge opportunity as the organized sanitary ware market is growing faster than the unorganized market and now account for 65 % of the total industry size of Rs.3,500 Cr. For the additional capacity, for both faucet ware and sanitary ware, the total capex is approx Rs. 100.30 Cr, which would be funded from the amount raised through preferential issue and remaining from internal accruals. Recently, the company has raised Rs. 70.6 Cr by way of preferential allotment of 3,51,000 equity share at Rs. 2,011.5 per shares. The company has been using full utilization of its existing capacity and post expansion, and is expected that the company to make full utilization of its increased capacity in the due course. Company’s Brand loyalty and strategic marketing network have paid dividend to the company in terms of robust revenue growth of 36 % CAGR in the last four years. The company has strong pan India presence with 1400 dealers and 14000 retailers targeting both its retail and institutional customers. And to supplement its network the company also has 20 stock points across the country. The company has also initiated touch and feel experience to its customers by setting up bath studios. In order to target premium and luxury customers, the company has exclusive display centre, cera style studio which are located in the prime locations across the major cities. Cera style gallaries are the display and sales touch points owned and managed by its trading partners. Cera style centres are the display centres targeting smaller trade retail parners. The company has increased its Cera style studios from just one at Ahmedabad in FY06 to ten by the end of FY15. The company is also fast growing its Cera style gallaries and expects to touch 200 gallaries in the near future. With cera style centres, the company is penetrating into the tier 2 cities such as North-East and West Bengal. In South, the company has dominant position in Kerala and is now building up its positioning in Tamil Nadu and Andhra Pradesh. The Sanitary ware industry is generally growing at average rate of 14 % to 16 %, annually. The FY 2015-16 was exceptionally subdued due to various economic reasons more for the entire realty and construction industry across pan India with growth percentage coming down drastically. Despite this, 'CERA' during FY 2015-16 registered top line growths of around 13.63 % amidst subdued business conditions. The efforts are on not only to sustain CAGR last 3 years but also to improve upon. The industry structure remains unchanged viz. Indian manufacturers in organized and unorganized sectors; International brands with or without manufacturing in India and imports from countries like China. The growth of the Company has been much above the market growth and is largely on account of its continued efforts in leveraging the high brand value and product optimization besides deeper penetration in tier 2 markets. These efforts are further fortified by strong and structured marketing efforts, good product quality and after-sales service, and backed by a very loyal distribution network across India. CERA has been growing despite of the threats like international brands and slowdown in housing construction. The demand in mid-segment housing is less affected and the Company’s ability to pitch in the mid-segment will help maintain the growth rate. The announcement by Central Government about launch of 100 smart cities across India, can give a boost to construction industry and thereby for demand for sanitary ware. Another significant action plan by Central Government, "Swachh Bharat Abhiyan", can also be a booster to sanitary ware in general. Also, the newly introduced real estate regulatory authority bill is likely to help streamline the housing construction activities.

Outlook and Valuation:
Cera Sanitaryware is a complete building solution provider and have raised itself from a provider of single sanitaryware product in the 1980’s to now vast range of product portfolio and today it has become a complete building product solutions provider by offering products like sanitaryware, faucetware, wellness & allied products and tiles. In the sanitaryware segment, the company has strong positioning in the mass segment which accounts of almost 60 % of the organized sanitaryware market. The company has in-house manufacturing facility for sanitaryware and faucetware at Kadi, Gujarat. Launched in 1980, 'CERA' is a pioneer in the Sanitaryware segment in India. The first Sanitaryware Company to use natural gas, 'CERA' has been on the forefront of launching a versatile colour range and introducing the bath suite concept. It also launched innovative designs and water-saving products. In 2011-12, the company ventured into commissioning its state-of-the-art faucet ware manufacturing facility where only quality products, new designs and innovation are the focal points. During last quarter of FY 2012-13, 'CERA' forayed into ceramic, vitrified and digital tiles for floor as well as for walls. Company’s initiative to provide touch and feel experience to its customers through its CERA Style Studios, has paid off well. CERA Style Studios are located in up market locations in Ahmedabad, Mumbai, Kochi, Bengaluru, Hyderabad, Gurgaon, Chandigarh, Chennai, Thiruvananthapuram and Kolkata. CERA Style Galleries, display and sales touch points of CERA, owned and managed by its trade partners, are increasing month after month. For smaller trade retail partners, CERA encourages display in the form of CERA Style Centre. This will help further penetrate into smaller towns and outlets, thereby increasing the visibility of brand CERA. CERA also launched CERA Style Studios on Wheels, a novel concept to take CERA products to the doorsteps of key decision makers like architects, developers, etc. The Company also strengthened CERA Care, its after-sales division with induction of technicians for taking care of its services in all key cities of the country. Currently, the facility has an installed capacity to produce 3 million pcs of sanitaryware and 2.34 million pcs of faucetware. The company is also engaged in contract manufacturing for sanitaryware and faucetware and outsourcing activities for wellness & allied products, Vitrified and Ceramic Tiles. Over the years, the company has built-up strong marketing network to promote and sell its products. As on March 2015, it has 1400 dealers and 14000 retailers. All the products of the company are sold under single brand ‘CERA’, and it enjoys strong positioning in the mass segment. It has strong positioning in the southern market, with 40 % of its total revenue coming from south. Over the years, it has gradually increased its market share in the sanitaryware from 18 % in FY09 to 23 % in FY16. The company is also growing higher than most of its peers and industry. The company started the faucet business by trading activity and today it has built-up huge capacity to encash the opportunity in the under-penetrated faucetware market. India’s sanitaryware and bathroom fittings industry is undergoing a transition phase. The consumers are now moving from low-end basic product to middle and high end premium segments. This is in conjunction with the growing urbanization and ever increasing middle-income segment. As per the National Council for Applied Economic Research (NCAER), the middle-income segment has grown from 1.1 Cr households in 2001-02 to 3.1 Cr household by 2010-2011 and is expected to grow to 5.3 Cr by 2015-16 and 11.4 Cr by 2025-2026. This shift will benefit the industry players in terms of higher margin and ability to pass on the cost increase to the consumers. The total size of the Indian sanitaryware and bathroom fittings industry is at Rs. 9,500 Cr in FY15, of which the sanitaryware accounts for roughly Rs. 3,500 Cr and is growing at an average rate of 20 %. The remaining Rs. 6,000 Cr is attributed to bathroom fittings, also growing at an average rate of 18 %. The outlook for the industry is robust on the back of country’s very low sanitation coverage, housing shortage and potential for the replacement market. The contribution from the replacement in this sector in India is very low at 8 % in comparison to 80 % in the developed economies. In the sanitaryware industry, the organized market is 65 % while the unorganized market is about 35 % and in the bathroom fittings, the organized market share is around 45 % and the unorganized market is about 55 %. According to the report on world health statistic by World Health Organization (WHO), the sanitation coverage in India is very low at 36 %. This in itself shows the growth potential for the industry in a country which has a population of over 125 Cr and is expected to grow to 135 Cr by 2021, as per census 2011. Further, the growth would be boosted by the government initiatives such as affordable housing, Swachh Bharat Abhiyan and development of 100 smart cities. In Union Budget for 2015-16, the finance minister has announced 100 % sanitation by October 2019 with a provisional amount of Rs. 3,625 Cr, including Rs. 1,000 Cr for urban sanitation. It has also allocated Rs. 10,025 Cr for rural housing and Rs. 4,150 Cr for Urban housing with an objective of providing housing for all by 2022. In the recent union cabinet meeting, the government has approved development of 100 smart cities along with the new urban renewal mission with a planned outlay of Rs. 1 Trillion. Cera maintains a strong market position in the mass market segment, because of its ‘value for money’ proposition and a wide brand appeal. Currently, the company derives bulk of its sanitary ware revenue from these segments. Competitive intensity is also relatively lower in these segments because of the lower presence of foreign players. Led by various government schemes, such as affordable housing, and the shift in consumer sentiment towards organised players, and is expected this segment to grow at a steady pace. The company did not have a second brand to cater to the premium market, and the mass-market perception associated with the CERA brand limited its ability to compete with the leading domestic and premium brands. Although the segment accounts for only 10 % of the sanitary ware market, it is one of the fastest growing. The company has addressed this concern through its marketing-and-distribution agreement with the Italian company, ECE Banyo, manufacturer of the luxury sanitary ware brand, ISVEA. Cera is currently in the process of a pan-India launch of ISVEA’s products, the company’s ability to gain a substantial market share in this highly competitive segment characterised by the presence of several domestic (HSIL and Parryware) and international players (Kohler, ToTo, Duravit and American Standard) - is a monitorable. Apart from the tie-up, Cera has also consciously taken efforts to premiumise its product portfolio, by gradually launching products with innovative designs and importing high-end products. This has reflected in the steady increase in the company’s realisations of self-manufactured products and share of imports. We believe premiumisation of its product portfolio is a key positive, as it is expected to provide a fillip to revenue and aid margin expansion. The government plans to make the Goods and Service Tax (GST) effective from June 2017. The Ministry of Finance has finalised a four-tier rate structure – 5 %, 12 %, 18 % and 28 %. Mass consumption goods are expected to fall in 5 %, and luxury goods, tobacco, etc. to fall in 28 %, whereas most other goods and services are expected to fall in the 18 % category. Some of the key benefits of GST for building products players are highlighted below: The current effective indirect tax rate for most building product companies is in the range of 22 %-29 %, and it does not allow a set-off of tax paid on services. After GST implementation, the effective tax for these companies is expected to go down to 18 % to 20 %, as the base rate comes down and also as companies will be entitled for set off benefits. This is to be margin accretive for building product players. Currently, building product companies set up additional depots, employ more C&F agents in different states to bypass CST. With GST, it is expected that there will be rationalisation of warehouses and an effective inventory/supply chain management. This is also expected to reduce the logistics cost for companies owing to better turnaround time and consolidation of warehouses. Currently, the unorganised sector accounts for 30 % to 35 % of the industry. The GST is expected to accelerate the shift towards the organised segment, as the law is expected to reduce/eliminate tax sops enjoyed by unorganised players, leading to higher compliance. This will create a level-playing field and benefit organised players such as Cera. The company’s balance sheet quality is robust, driven by an efficient working capital management, low leverage and a healthy cash balance. Working capital days remained at 45-55 days during FY11-16, one of the best in the industry. The efficient working capital management has enabled it to consistently generate positive cash flow from operations and maintain a cash-rich balance sheet. Its leverage declined to 0.1 times in FY16 from 0.3 times in FY11; making Cera almost debt-free. A strong balance sheet provides additional headroom for growth and makes the company less vulnerable to external shocks. While soaring aspirations has been an important ingredient for increasing offtake, the primary trigger has been the significantly enhanced tile availability. This has worked towards making the product more affordable. Hence, what was once considered a rich man's foot-step luxury has now transcended into an Indian's regular wall and flooring solution. While this change remained concentrated in metros and urban India in earlier years, this transformation is currently sweeping Tier II and Tier III towns in India. The Indian tile industry is poised to experience significant growth over the coming year. This optimism stems from the important realities that are expected to catalyse tile demand pan-India. Going ahead, the business landscape appears promising because of passing of GST Bill. OROP; Normal monsoon; a 25 bps cut in interest rates by the RBI are expected to increase disposable income in the hands of the average Indian leading to increased discretionary spending. And this is just the beginning. India's 'Housing for All' programme proposes to build six crore houses by 2022 - four crore of them in rural and two crore in urban India. On financial side, Revenue is estimated to increase at a CAGR of 19.3 % over FY16-19 to Rs. 15.2 bn, driven by the faucet and tiles segments. Tiles segment is expected to grow 30 % over FY16-19E, followed by the faucet (20% CAGR) and the sanitary ware (18 %) segments. Consequently, the share of the sanitary ware segment is expected to decline to 57.9 % in FY19 from 62.3 % in FY14. EBITDA margin is expected to expand 110 bps to 16.5 % over FY16-19, driven by: a higher share of in-house manufacturing facility for tiles; premiumisation of the product portfolio, post-marketing arrangement with ECE Banyo and launch of high-end faucets; lower power and fuel costs, following the installation of solar panels and wind turbines, as well as lower crude oil prices; and growth in realisation, once demand recovers in FY18. Adjusted PAT is expected to grow at a three-year CAGR of 26 %. Sturdy growth is expected to stem from healthy revenue and EBITDA growth. RoCE is expected to improve to 33.6 % in FY19 from 29.1 % in FY16, driven by healthy EBITDA and low leverage. RoE is expected to increase to 24.0 % in FY19 from 21.1 % in FY16, because of strong PAT margin and faster asset turnover. At the current market price of Rs. 2532.50, the stock is trading at a PE of 31.57 x FY17E and 25.29 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 80.20 in FY17E and Rs. 100.10 in FY18E. CERA is confident of sustaining its growth in coming years with its business strategies of continuously upgrading product basket, leveraging on strong brand image, optimizing product potential capacity utilization and distribution network with all backed up by well-structured sales & marketing plans. 

KEY FINANCIALSFY16FY17EFY18EFY19E
SALES ( Crs)935.801,026.501,236.001,522.00
NET PROFIT (₹ Cr)81.50104.30130.10163.00
EPS ()62.7080.20100.10125.40
PE (x)38.6030.2024.2019.30
P/BV (x)7.506.205.104.20
EV/EBITDA (x)21.4017.8014.5011.90
ROE (%)21.1022.5023.2024.00
ROCE (%)29.1031.6033.0033.60

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*As the author of this blog I disclose that I do hold  CERA SANITARYWARE Ltd in my investment portfolio.


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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 

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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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Friday, March 3, 2017

JUBILANT FOODWORKS LTD : IT's PIZZA TIME !!!

Scrip Code: 534804 JUBLFOOD
CMP:  Rs. 1031.10; Market Cap: Rs. 6,800.00 Cr; 52 Week High/Low: Rs. 1348.75 / Rs. 760.50
Total Shares: 6,59,49,070 shares; Promoters : 2,96,52,784 shares – 44.96 %; Total Public holding : 3,62,96,286 shares – 55.04 %; Book Value: Rs. 116.49; Face Value: Rs. 10.00; EPS: Rs. 13.40; Dividend: 25.00 %; P/E: 76.94 times; Ind P/E: 50.12; EV/EBITDA: 24.95.
Total Debt: ZERO; Enterprise Value: Rs. 6,768.62 Cr.

JUBILANT FOODWORKS LTD: The Company was founded on 16th March, 1995 and is based in Noida, India. The company was formerly known as Dominos’s Pizza India Limited and changed its name to Jubilant FoodWorks Limited in 2009. Jubilant FoodWorks Limited operates as a food services company. The company holds the rights to develop and operate Domino's pizza brand in India, Sri Lanka, Bangladesh, and Nepal and Dunkin’ Donuts brands & restaurants in India. Its Dunkin’ Donuts restaurants offer donuts, drip coffee, cappuccino and latte, milkshakes, smoothies, and iced teas, as well as a range of burgers, wraps, sandwiches, and side-bites. In addition, the company sells its products online. The company came with an IPO of 2,26,70,447 equity shares of Rs. 10 each at Rs. 145.00 per share to the general public in January, 2010. The purpose of the issue was to achieve the benefits of listing on the exchanges and for the pre-payment of loans & other general corporate purposes. It got listed at Rs. 160.00 per share making a high of Rs. 240.90 on listing day. Domino's Pizza India has grown into a countrywide network of stores, with a team of over 6,000 people. Jubilant FoodWorks has the sole master franchisee for Domino’s Pizza & Dunkin Donuts in India. It also has, the product profile which are complementary to Domino’s and are run separately from Domino’s outlets. Dunkin’ Donuts is owned globally by Dunkin’ brands, which also owns Baskin Robbins worldwide. Dunkin’ Donuts has over 11,000 outlets worldwide in over 30 countries. As of February 6, 2017, Jubilant FoodWorks Ltd operated 1,111 Domino’s Pizza restaurants in across 260 cities; and 68 Dunkin’ Donuts restaurants in 19 cities in India. Jubilant Foodworks Ltd is locally compared with Westlife Development Ltd (who runs McDonalds in India), Speciality Restaurants (which runs Mainland China & Ohh Calcutta in India), Tata Global Beverages (which runs StarBucks in India) and Globally with Sato Restaurant Systems Co., Ltd of Japan, Hiday Hidaka Corp of Japan, Faurwood Holdings Ltd of Hong Kong, Ajisen (China) Holdings Ltd of Hong Kong, Cafe` de Coral Holdings Ltd of Hong Kong, Jollibee Foods Corporation of Philippiness, Matsuya Foods Co., ltd of Japan, MOS Food Services Inc of Japan, BJ’s Restaurants Inc of California, Bob Evans Farms Inc of Ohio, Carnival Corporation Ltd of Florida, Dunkin’ Brands Group Inc of Massachusetts, The Wendy’s Company of Ohio, Domino’s Pizza Group of UK, McDonald’s Corporation of Illinios, Compass Group PLC of UK, Lowe’s Companies Inc of North Carolina, Starbucks Corporation of Washington, YUM! Brands Inc of Kentucky, Zoe’s Kitchen Inc of Texas

Investment Rationale:
Jubilant FoodWorks was incorporated in 1995 but started its operations in 1996. It is the sole master franchisee for both Domino’s Pizza Brand since 1996 as well as Dunkin’ Donuts Brand since 2011 in India. The company is part of the Bhartia group, which owns a 48.9 % stake in Jubilant FoodWorks Ltd. With over 1,100 Domino’s restaurants in India, starting from the first outlet opened in 1996, Jubilant FoodWorks is in charge of the second-largest chain of restaurants for Domino’s worldwide, overtaking UK in the current year but it’s still behind the US which is Domino’s home country, headquartered in Michigan, US. In terms of number of stores as well as sales, Jubilant FoodWorks is the largest player in the Quick Service Restaurants (QSR) market, which is still in nascent stage in India with about 17 % market share whereas there’s more than 60 % market share is of pizza and in excess of 70 % in pizza delivery. QSR’s in India accounts for slightly 2 % of the overall food service market in India and this is expected to grow much faster at 20 % compared to 10 % food service industry’s growth. The Indian food industry is poised for huge growth, increasing its contribution to world food trade every year. In India, the food sector has emerged as a high-growth and high-profit sector due to its immense potential for value addition, particularly within the food processing industry. The food industry, which is currently valued at US$ 39.71 billion, is expected to grow at a Compounded Annual Growth Rate (CAGR) of 11 % to US$ 65.4 billion by 2018. Food and grocery account for around 31 % of India’s consumption basket. Indian food service industry is expected to reach US$ 78 billion by 2018.The Indian gourmet food market is currently valued at US$ 1.3 billion and is growing at a Compound Annual Growth Rate (CAGR) of 20 %. India's organic food market is expected to increase by three times by 2020. The online food ordering business in India is in its nascent stage, but witnessing exponential growth. The organised food business in India is worth US$ 48 billion, of which food delivery is valued at US$ 15 billion. With online food delivery players like FoodPanda, Zomato, TinyOwl and Swiggy building scale through partnerships, the organised food business has a huge potential and a promising future. The online food delivery industry grew at 150 per cent year-on-year with an estimated Gross Merchandise Value (GMV) of US$ 300 million in 2016. Also as a help for QSR industry, there are many business factors such as high turnover, low area occupied; reasonable ticket size matters. In India, the biggest barrier to profitability in the restaurant as well as retail businesses in urban areas, particularly in metros, is high lease rentals. Domino’s predominantly delivery-based model in these cities enables it to circumvent this problem. While the overall proportion of delivery to dine-in is 50:50. Consequently, the store size required is much smaller at around 900-1,500 sq.ft compared to predominantly dine-in restaurants and other QSR (at 2,500-3,000 sq.ft). In addition, the average bill size for pizza outlets like Domino’s is also higher than other QSRs like McDonalds, KFC and coffee shops like Café Coffee Day (CCD), Barista and Costa Coffee. Jubilant FoodWorks has focused on its less competitive intensity delivery start-ups focusing more on profitability and will also focus on Same Stores Sales Growth over store expansion via store opening rationalisation. The demonetization drive was dampening on JFL’s performance in 2HFY17E, but with gradual recovery in consumer confidence, increased promotions, moderation in competition from food aggregators and success of new products could take SSSG to higher levels, going forward. While JFL’s operating cash generation has fallen from 15 % to 10 % of sales in past four years, it still remains strong as the Company generates operating cash in the excess of Rs. 2500 Cr annually. Notably, in past four years JFL has doubled its store count from 550 to 1,100 and added several commissaries without adding any debt on its books, which is impressive. JFL has maintained solid control over its costs. While overall expenditure witnessed 4 % CAGR through FY12-17E, JFL has remarkably been able to maintain its total expenditure per store constant in the last four years. Around half of Dominos’ sales are through the delivery platform with the average online ordering as a percentage of delivery sales has been increasing rapidly, which now accounts for 47 % of delivery sales. Most of these customers are using alternative payment options i.e. credit-debit cards, mobile wallets and net banking for paying the bill. JFL has now also offered cashless payment facilities for all home deliveries ordered through the phone. JFL did witnessed fall in revenues in initial days of demonetization, but gradually it improved as new currency started floating in hence marking improvement in sales. Not with standing significant material impact on revenues in last 4 years owing to dismal SSS growth with additional impact of Dunkin Donuts, JFL has impressively contained its costs. While overall expenditure increased at 24 % CAGR through FY12-17E, it has been able to maintain its total expenditure per store constant in the last 4 years. Despite steady rise in overall cost, JFL has been able to maintain average operating cost per store constant at Rs. 2.2 Cr calculated based on average number of stores per year. Company reduced employee strength per store without hampering efficiency and has also rationalized its power supply expenditure by implementing Wipro’s energy management services. Company have increased its share of online ordering and is renegotiating rentals and increasingly entering into rental contracts based on % of revenue rather than flat structure. The company is reducing the capex costs per store and increasing its emphasis on launching new products, JFL has introduced several new products especially in non-pizza segment like Pizza Mania Extreme & Burger Pizza. While through Pizza Mania Extreme, JFL intends to provide value-added offerings at reasonably lower price points vs. regular pizza, it introduced Burger Pizza to cash in the rising opportunity in Burgers segment with an all-day menu option, unlike Pizza which is more of a meal replacement category. With both these products getting encouraging response from the consumers, they would permanently feature on Dominos’ menu, going forward. In the pizza segment, the company has recently launched Quattro Formaggi Burst Pizza and Choco Pizza. JFL’s new state of the art commissary is expected to be commissioned in Noida by March’17, which is expected to not only manufacture the conventional dough, but also other products such as buns, breads and some types of desserts. This is anticipated to accentuate new product development and increase JFL’s ability to introduce new products at a faster rate. However, only very few of them contributed meaningfully to its growth in past few years, which is evident from share of Pizzas to its overall sales remaining more or less stagnant in past four years. Jubilant’s core business comes from Dominos Pizzas, and Pizzas are consumed during lunch and dinner and are not snacks like in the case of other outlets. A combination of delivery-based model and healthy bill size enables high sales per square feet and aids profitability. Jubilants’s Asset-light business model boosts its high-growth story, the business is remarkably asset-light as a result lease rentals are much lower which helps profitability of the store. Net working capital continues to be in excess of negative 25 days and fixed asset turnover continues to be in excess of 3 times. Even in a subdued economic environment of the past two years, there was no worsening of working capital metrics. When the growth trajectory resumes on same-store sales, cash flow improvement will be significant. It is remarkable that Jubilant FoodWorks, which runs a high-growth business like Domino’s, which expanded from 180 stores in FY08 to around 1,100 stores currently including 68 Dunkin’ Donuts outlets did not have the need to raise fresh equity capital or avail significant amount of debt. This is a testament to strong business model and a kind of proof about the abilities and expertise of management which also shows their understandings about their business in India.  

Outlook and Valuation:

Jubilant FoodWorks Limited is India’s largest food service company. JFL operates Domino’s Pizza & Dunkin Donuts brand with the exclusive rights for India, Sri Lanka, Bangladesh and Nepal. The company have recently launched Pizza Mania Extreme & Burger Pizza and launched Quattro Formaggi Burst Pizza and Choco Pizza, Navratra Pizza and these products are receiving positive response from its customers. It has launched its Online Mobile ordering site in July, 2013 and it is seen as important platform to reach a wider audience base. Till present there are over 62 lakh downloads of the Domino’s Pizza mobile ordering app across various smart phones & the Average Online ordering contributes to 49 % of delivery sales in Q3 FY17 and Mobile Ordering sales contributes to 56 % during the quarter. There are total 68 Dunkin’ Donuts Restaurants as on February 06, 2017 in 19 Cities and offers a wide variety of western menu including donuts, coffee, burgers, sandwiches, snacks, and more. It has introduced Big Joy Paneer Delight, Munchkins, Donut Cakes which is 100 % eggless, DunkyDoos, Big Joy Burger which are gaining popularity amongst kids and youngsters. Within the pizza market, Domino’s has a share of more than 60 %. Domino’s has consistently gained its market share from its pizza peers as well as other QSRs in the past few years. The average bill size of Domino’s Pizza is healthy across stores which range from Rs. 350 to Rs. 450 per head. And most of the stores also have delivery facility except stores that are located next to food courts situated at higher levels in malls and the ones that are newly set up. Delivery proportion in other stores is 20 %, which is healthy and adds another avenue of growth. Delivery portion has minimum bill size of Rs. 150 and has on an average 7 bikes to facilitate that delivery. Looking at these factors it can be easily believed that the break-even of its store could be achieved in two-three years. Company will focus more on Same Store Sales Growth rather than focusing on opening on new stores and expected that SSS growth could be around 8-9 %. Growth in SSS will depend on a mix of company-related and macro factors, like Increase traction in new products, faster growth in value-added offerings, Revival in consumer confidence, especially post demonetization, Level of discounting and promotions, Uptick in job creation, and Extent of price hikes which JFL could pass on to the consumers. The growth in SSS is likely to recover in FY18E on the back of positive improvement in afore-mentioned areas and it could be around 8 %. JFL plans to open over 100 stores annually in next few years. While the number of Dominos outlets stood at 1,100 at Feb 17 end, Dominos International has projected the potential store count for Dominos in India at 1,800. However, with the decline in percentage of new stores opened vis-à-vis extant stores, JFL’s margins would improve at a faster pace as higher number of stores would have attained breakeven. Based on current SSS growth trends, calculation suggests a new Dominos store would typically achieve cash breakeven in 4 years. On financial side Jubilant Foodworks Q3FY17 performance was good, it reported Revenues of Rs. 660 Cr, up 3.9 % YOY; SSG was at -3.3 %, EBITDA at Rs. 64 Cr, down 12 % YOY, gross margin declined 2 % YOY to 74.9 %, impacted by promotional activity and change in mix; EBITDA margin declined 1.80 % YOY to 9.7 %, impacted by higher rent cost, however lower employee cost and controlled other expenditure curtailed decline in EBITDA margins. Home delivery sales through phone has also been impacted due to cash crunch and has been not compensated by online sale, company is working on getting card machines for home delivery. New product launches like Pizza Mania extremes and Burger Pizza are seeing healthy traction and aiding growth. Delivery sales continue to grow faster than dine-in sales as company is aggressive on driving sales through OLO (online ordering) and in long term it expects to be 70 % to 80 % which is the average seen in developed markets. SSSG uptick, GST and break-even in Dunkin are levers to margin expansion. JFL’s operating cash generation has fallen from 15 % to 10% of sales in past four years, yet it still remains strong as the company generates operating cash in the excess of Rs. 250Cr annually. Notably, in past four years JFL has doubled its store count from 550 to 1,100 and added several commissaries without adding any debt on its books, which is impressive. JFL’s gross block increased by >2.5x to Rs. 900 Cr in the last 4 years, while the resultant higher depreciation impacted its earnings as well. This is evident from JFL’s cash profit of Rs. 220 Cr was almost double than the reported net profit Rs. 110 Cr in FY16. The growth shown by Jubilant FoodWorks Ltd is consistently based on the robust operational foundation on which it stands. In the current economic environment, demonetization and slowdown in consumer spending, especially in discretionary expenditure, the company continues to pursue excellence in key areas such as cost management, restaurant selection processes, and continual re-investment in strengthening the supply chain, connecting deeply with consumers, and investing in innovations. This approach is complemented by a robust training apparatus and high operational efficiency standards that allow growing the business in line with the potential. Domino’s Pizza mobile ordering (Online Ordering (OLO)) remains an important platform to reach a wider audience base serving around 63 lakh pizzas every month with its new ad campaign on Order 1 pizza online and get 1 pizza free. This enables to drive higher levels of optimization and supply chain systems into the hinterland, to serve tier 2 and 3 cities. At the current market price of Rs. 1031.10, the stock is trading at a PE of 80.55 x FY17E and 44.83 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 12.80 in FY17E and Rs. 23.00 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.   

KEY FINANCIALSFY16FY17EFY18EFY19E
SALES ( Crs) 2,410.202,608.003,116.003,788.50
NET PROFIT (₹ Cr)106.6084.40151.20229.70
EPS () 16.2012.8023.0034.90
PE (x) 62.20 78.60 43.90 28.90
P/BV (x) 8.70 7.90 7.00 5.90
EV/EBITDA (x)24.30 25.90 17.90 12.90
ROE (%) 14.90 10.6016.9022.00
ROCE (%)20.4014.3023.1030.40

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 


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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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