Taking the IPO road: Boon or bane
To understand the dynamics of franchise companies, releasing their Initial Public Offerings (IPO) and to educate the masses and investors on the undertakings of the franchise industry, Francorp has carried out a detailed study. Read on to know more.
By Franchise India Consulting January 18, 2010
http://www.franchiseindia.com/articles/Financial/Taking-the-IPO-road-Boon-or-bane-237/
Francorp, a part of Franchise India Group, Asia’s largest integrated Franchise and Retail Solutions Company conducted a study on the major trends in Quick Service Restaurants (QSRs), operating plans, industry analysis and pricing of Domino’s. The report elaborates on the background of Domino’s, which is now known as Jubilant Foodworks Limited, the Master Franchise for Domino’s pizza stores across India and Sri Lanka. The company changed its name from Domino’s Pizza India Ltd. to Jubilant Foodworks Ltd. in September, 2009. However, the company still continues to use the brand name of ‘Domino’s Pizza’ for marketing and other related purposes. Jubilant Foodworks has opened 274 stores in 55 cities in India and is looking forward to extend this number to 450. The Company has 32 per cent stake from JP Morgan and India Private Equity Fund (IPEF). Jubilant Foodworks had net sales of Rs 2,806 million in 2008 and Rs 2,111 million in 2007 whereas the profit after tax for the company was Rs 67.5 million and Rs 77.5 million in both the years. The Company is now going for an Initial Public Offering and has filed a DRHP with SEBI for an approval.
A quick glance over the various parameters that are covered in the analysis of the IPO are:
Industry analysis on Quick Service Restaurants (QSR) category reveals that almost 25,000 pizzas are sold per day and offering such as ‘Pizza in less than 30 minutes or no-charge’ by Domino’s make it one of the top players in this category. Consumers spend almost 11 per cent of their pocket expense on fast-food every year. However, Domino’s has not shown any intention of increasing their product prices in near future.
Domino’s has 274 stores operating in Indian market out of which 70 stores went operative by August, 2009 itself. The Company plans to expand this number to 310 by March, 2010 and to 440-450 in the future. The fast food restaurant business has seen a rise of 7-20 per cent in 2009 and Domino’s itself claims to expand its base by 10 per cent in 2010. Domino’s currently owns 42 per cent of the market share. Jubilant Foodworks is looking to raise Rs 3 billion through IPO to settle around Rs 840 million debts whereas the investors are looking for a valuation worth Rs 1.65 billion for their share. According to Ajay Kaul, CEO of Jubilant Foodworks, “The Company is working on getting food brands other than pizza in India in the foreseeable future. In the meantime, addition of 38 Dominos stores before March 31, 2010 is the primary target that the Company is handling.”
Jubilant Foodworks is the first Master Franchisee to go for releasing an IPO in India. They do not own the Domino’s brand and therefore, cannot bring the requisite changes in it if required. On similar lines, the changes in market performance especially pertaining to the fast food service industry will directly affect the price of Equity shares of Jubilant Foodworks.
Jubilant Foodworks has planned to open its IPO on Jan 18 and will close it by Jan 20, 2010. The price band has not been decided but it is expected to be around Rs155.
To understand the IPO strategy of Jubilant Foodworks, we did the following analysis on risks and advantages associated with an investor making investment into a franchise company’s IPO.
Advantages of IPO route to Franchisee
To provide exit funds to PE investors who have stake in the franchisee’s business.
Expanding its operation through opening of more stores and therefore investing on marketing, advertising, training, etc of their franchisee business.
Clear its present debts.
Expansion of the franchise business in new territories.
Undertaking strategic initiatives.
To strengthen the market position of the brand they are promoting or franchising.
Challenges aligned with IPO to Franchisee
What would happen if a franchisee loses its master franchisee status for a region or country? This could happen due to two reasons. Either the franchisor closes its operation in that particular region or he decides not to give one master franchisee for any particular market but fragment it into several regional franchisees or individual franchisees.
Under both the conditions, the franchisee will:
Face competition from other franchisees of that region in the same product group/brand.
Any change in the brand introduced by the franchisor shall generate a response among the customers which cannot be controlled by franchisee/master franchisee.
Franchisee/master franchisee is not in a position to bring requisite changes in the brand even if the market demands so, as they are only the promoters of franchisor’s brand.
To justify the risks and advantages being undertaken by a franchisee company such as Jubilant Foodworks while releasing its IPO, it is important that we understand the course of development of a franchisee company that primarily effects the company’s decision to take the IPO road.
A group of franchisees or master/regional franchisee may require large amount of money. This could be for the following reasons:
To buy new equipments or to upgrade the old ones.
To expand into a new region or to establish a new kind of business related to new franchisee.
To pay back old debts in order to avoid paying interests on them
To provide ‘exit strategy’ for the owner or existing investors
The large sum of money against investments in franchise business can be procured through following types of investors:
Venture Capitalists
Angel Investors
Investment Banks
Private Equity Firms
Releasing IPO
The reasons why a franchisee does not start the business by raising funds through IPO are:
Limited requirement: A franchisee does not require huge funds to start the business
Lack of awareness : A franchisee may not have an idea about the process of releasing IPO to raise funds
No Corporate Identity: Franchisee may not incorporate them as a corporate identity and run the business as single entity throughout.
No Aggressiveness: At initial phases, a franchisee is interested in establishing the business and may not be very aggressive about expansion.
Difficulty in raising capital: A franchisee can find it possible to raise the required capital to initiate the business process without much hassle through friends, family, financial institutions, or Angels Investors.
Stringent Regulations: SEBI imposes strict regulations which a Company must comply in the process of application to release IPO.
High Cost of Eligibility: A franchisee company looking for releasing IPO must have good financial record, credit history, corporate governance and several other parameters, which already require high input cost to maintain. Thus, not all companies become eligible for releasing IPO.
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