Why Jubilant does not deserve such a high valuation

Jubilant Foodworks, just like its brand Dominos promises, has been successful in “khushiyon ke home delivery” with the stock rising from Rs 461 in February to Rs 1,021 in September this year. Though it has come down to Rs 791 levels, returns for the past nine months have been around 60 percent.

However, if one looks at Jubilant’s second quarter results, the sales growth for each store has been disappointing. It is true that it has introduced a new product, the butterscotch mousse, and reintroduced pastas on its menu, but competition is also catching up. Pizza Hut is already planning to increase its delivery centres from the present 27 to 300 by the end of 2015.

With Jubilant wanting to bring Dunkin Donuts to India, the cost of advertising will also surge. Motilal Oswal expects these costs to increase, as it looks to open its first store in the first half of calendar year 2012. Firstpost factors net operating costs at Rs 3 crore in this financial year and Rs 4.5 crore in financial year 2013 for the Dunkin Donuts foray.

But is Jubilant Foodworks worth the valuations it claims? For UBS estimates the price is 50 times its 2012 earnings and 34 times its 2013 earnings. Compare this now to the parent that has a valuation of 30 times for 2011 earnings and factoring in a 10 percent growth, it will be 27 times for next year. So Jubilant’s valulations are almost double of that of its parent. The market cap for Dominos is Rs 10,000 crore while that for Jubilant is around Rs 5,000 crore.

If you look at the value of company, enterprise value for Jubilant comes to around Rs 4,940 crore. Taking historic operating profits (ebitda) of Rs 120 crore, the ev/ebitda ratio ( the ratio which compares the value of a business, free of debt, to earnings before interest) usually calculated to see how cheap or expensive a company is, comes to more than 40 times. This basically means if you set up the same business, you will spend 40 years to recover the cost. This is too expensive as most of the other companies have the ratio at around 10-12 times.

One can understand that the stock deserves a premium because of revenue growth of 25 percent that is factored in. But still, the stock is way too expensive.