On August 2015, Jubilant traded at 1923 a share, thats a M.Cap of a whooping 12,610 cr.. Jubilant sold 2410 cr of pizzas(mostly) this year and made 114 cr after taxes. At 12,610 cr someone assumed that Jubilant is worthy to pay 110 years worth of current profits. 110 !!!!! I have something to say to those brave(read stupid) men.
“No one can forecast anything with accuracy for periods longer than the short term, leave alone 110 years !!!” Even fortune tellers can’t. The rate of change in the world is growing, steadily for now, but will grow at a pace at which you wont seem relevant anymore, very soon.
Here is what i think happened with Dominos. Its a simple story, but an interesting one at it.
Go back in time to about 5 years earlier. You are home and there’s no food and you are too damn tired or lazy to cook or get out for food. Dominoes to the rescue ! And they did it with these fantabulous ads. We almost felt privileged to receive a delivery, that to in time. Something that was almost novel to the entire country – getting something done in the prescribed TIME ! Kya idea hai sirjeee ! We loved the concept, we loved the accuracy, hell we were excited to even pick up the phone and order and we become consumers to the only DELIVERY MONOPOLY !
No one expected pizza to become a part of everyone’s lives. We thought we really liked it, but hey, we kinda were brain washed into it as we didn’t have too many other options.
Fast forward to 2015. Welcome Swiggy and Zomato. They started bringing us food home too, that too Indian.
Jokes apart, this is the simple law of diminishing marginal utility at play.
The thing about diminishing marginal utility is that it like any other law, has exceptions. It denote play with the same rate of change in the satisfaction level to things that are a part of our daily routine, diet, social circle etc. Just because you see your family everyday,it does not begin to derive negative utility.I’m using the same connotation to the difference between say Dal Makhani and a Margarita Pizza. I can easily have butter chicken 4-5 times a month, but not so much pizza, simply because butter Dal Makhani is a part of my core diet.
In the Q1 FY17 presentation the company talks about “muted consumer demand” and blames it for the negative same store growth. This metric of same store growth was what set the stock on fire. Same store growth simply means the extra sales that the company is able to make from the same store, basically getting out more bang for the buck from every rupee invested in infrastructure.
While Dominos has done as commendable a job as anyone in its supply chain efficiency as well as its easy of ordering, this cant go on forever. We as a nation are people who love Indian food and we don’t have a palate to have anything else consistently. Indian chinese comes a close no 2 but thats it.
With the ease of ordering online, Jubilant now has competition not from other Pizza chains, but simply put, from every food vendor. The proprietary logistics infrastructure that Dominos had a monopoly over now is for hire with Swiggy and Zomato.
Uber did this to Meru, Air BNB did it to the entire hotel industry and these guys are doing it to Jubiliant. Does this mean that Jubilant is at a fault for not having spotted this ? Not at all. The company has been spot on in moving into smaller towns in India and spreading the magic there. However, it did loose its mojo. It will continue to generate cash, good amount of cash over times to come, but the wow factor is G O N E. This is a time for enterprise without infrastructure and Dominos is 3 quarters infrastructure.
When you invest in a company that trades at about 100 times the earnings, it is much more difficult to know what to do when things don’t turn out as awesomely as you expect them to. If you begin doubt their performance at 100x or 70x or 50x, why should you then even trust them to multiply your money when they trade at 30x. 30x is still 30 years of profit ! Some companies will turn out to be worth buying even at extravagant valuations, however most of them will not.
Online ordering as a % of takeaways has gone up from 28% to 41%. Thats awesome, and with JIO everyone will have access to the internet. Great for Dominos but sadly, its the same advantage that the rest of the market will have.
Dominos will continue to be one with a delivery experience, whereas Dunkin on the other hand will probably be both a dine in as well as a take away.
Look up the share graph right on top of this blog. If you had bought Jubilant on August 19th 2011 and have held it till now, for 5 whole years and for some reason held on despite the peaks, you would have made 0 profit. Great company, loved by the market yada yada !
All valuations are slaves of earnings, and its about time that the market has acknowledged this in the case of Jubilant Foodworks. Brings the entire story to a simple law “great companies can turn out to be dud investments, if bought at the wrong price.”