5 reasons why Jubilant Foodworks is still worth buying

Don’t get put off by the high stock valuations of Jubilant Foodworks’ shares, they still have the potential to hand in a 35 percent return. That’s according to Morgan Stanley, which initiated coverage on the stock.

Jubilant’s shares have gained a whopping 81 percent in the past one year. The company is the sole franchisee for popular pizza brand ‘Dominos’ in India.

The shares are currently trading at a steep 50 times expected earnings for 2012 at Rs 1,000. But Morgan Stanley believes the stock can still be a good investment bet and has a target price of Rs 1,280. There are five reasons for that.

[caption id=“attachment_239127” align=“alignright” width=“380” caption=“The brokerage expects strong same-store growth sales for Jubilant. Reuters”]  [/caption]

One, the brokerage expects strong same-store growth sales for Jubilant. While the consensus is growth of 12-15 percent over the next four years, Morgan Stanley is factoring in an 18 percent growth.

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Two, the report says the company could have almost 860 stores by the end of March 2016 and boast 1,200 stores by 2020. The consensus view, in comparison, is that Jubilant will have about 1,000 outlets by 2020. Given its more optimistic estimates, Morgan Stanley expects revenues to increase at a compounded annual rate of 34 percent over the next four years.

Three, the company has the potential to improve its revenue mix and margins. The report says revenues per pizza are up 20 percent in the current financial year. As people order more pizzas, the value of each order will rise. That will improve same-store sales and increase operating margins by 150 basis points (100 basis points = 1 percentage point) by 2020, says the brokerage.

Four, increasing consumption as a result of higher disposable incomes will keep growth buoyant in the industry. Morgan Stanley points out that over 70 percent of per capital consumption is funded by disposable incomes. It estimates the pizza business at Rs 5,000 crore by 2016.

As the market matures, Domino’s, being the market leader, will consolidate its position. Its market share could rise from 50 percent currently to nearly 70 percent, predicts the brokerage. Working in its favour will be its “delivery in 30 minutes or the pizza is free” promise, which provide an edge to its services that its rivals can’t currently match.

Five, its price compared to earnings might look high in absolute terms. Jubilant’s shares are trading at 37 times its estimated earnings for the financial year ending March 2013, which most market experts believe, makes it very difficult for the stock to outperform from these levels. But MS compares its the multiple of price to earnings (PE) to its growth potential. And PE compared to growth comes at 0.9. This means the valuations are still cheaper than the rate of growth.

There could be little space for negative news in the stock price. The brokerage says any dips in price must be taken as an opportunity to buy.