Can a Master Franchisee Be Valued As Much As the Parent Company Itself

6th July 2011, By

In most conventional cases where logic might prevail, the parent company will be valued a lot more than their franchisee partner. Merely because, the parent company owns the brand as well as the other intellectual property that is lent to the master franchisee.

When it comes to India, convention is not convention anymore. Dominos Inc. Master Franchisee for the Indian Subcontinent (includes India, Sri Lanka, Bangladesh and Nepal) except Pakistan, Jubilant Food Works has been enjoying a considerable amount of attention from investors and various funds that have pumped in. Its IPO was overall oversubscribed by over 31.11X.

Investor fad for the Indian consumption story is captured in Jubilant Foodworks, a Domino’s pizza franchise, which is being valued almost the same as the US owner of the brand with 10 times the revenue, raising concerns of irrational exuberance over growth.

Last week, the stock market value of Jubilant touched a peak of $1.4 billion, or Rs. 6,190 crore, making it the most-expensive popular consumer goods stock at more than 50 times its future earnings. (Source: Economic Times). This compares to teh market value of $1.5 billion for the New York Stock Exchange-listed Domino’s Pizza Inc that owns the eponymous brand. Jubilant’s market value was $890 million on December 31, 2010.

“Jubilant’s current valuations are exorbitant,” said AK Prabhakar, senior vice-president-equity research, Anand Rathi Financial Services. “Even if the company adds two or three more brands, these valuations will still be expensive.”

Jubilant’s sales in fiscal 2011 were $150 million and net profit was $15.94 million. Domino’s revenue last year was $1,570 million and net profit $87.9 million. The key differentiator between the companies is the zero debt status of Jubilant and a long-term debt of $1.5 billion for Domino’s, according to Bloomberg data. Jubilant shares rose 2% on Tuesday to Rs 834. The IPO proceeds for Jubilant allowed them to clear all their short term and long term debt.

Consumer-focused companies such as Jubilant are targeting India’s growing food services market, which is estimated at around Rs. 70,000 crores, of which organised food chains form 10% of the business. Investors are betting that organised food chains would capture 20-25% of this market over the next five years as urbanisation gains momentum and income levels rise.

Jubilant, which sold shares at Rs 145 a piece in an initial offering in February 2010, had 378 stores as on March 31. It is a leader in the organised pizza market with a 50% share, and a 70% share in the pizza home delivery segment in India, according to its website. It has exclusive rights in Sri Lanka, Nepal and Bangladesh.

The company, which currently sells Domino’s pizzas and will add Dunkin’ Donuts franchise to its portfolio from next year, is valued at over 51X 2011-12 estimated earnings of Rs. 16.9 per share compared with consumer goods sector’s price to earnings of 26 times. Jubilant shares have gained almost 40% this year against an 8.6% drop in the benchmark Sensex.

“There is no logic to such valuations even though India’s consumption story remains robust,” says SP Tulsian, a Mumbai-based independent investment advisor.

What can you expect if you are an entrepreneur running a food franchise company?
If you are an entrepreneur in the food business, you can enjoy the considerable amount of attention that the organised food business is currently receiving.

For Franchisors
Better prospects for getting listed on the stock markets, if a master franchisee can get listed, why can’t the franchisor do the same? Franchisors like Timbor Home have recently enjoyed enormous success.

As a Master Franchisee
Most master franchises are not able to get listed on the capital markets simply because there is a high amount of risk of non renewal of the franchise agreement, as well as the brand and the system is owned by a different corporation. JFW has defied this trend and could well open up new horizons for other successful master franchisees, not just in food but other segment as well.