Franchising Companies take the IPO road in India Is Dominos rightly valued? A study by Francorp!

Franchising Companies take the IPO road in India Is Dominos rightly valued? A study by Francorp!
http://www.indiaprwire.com/pressrelease/retail/2010011841530.htm

To understand the dynamics of the Franchising Companies releasing their Initial Public Offering (IPO) in India, Francorp carried out a study on the 'Dominos IPO'. The analysis reflects the major trends on Quick Service Restaurants, Operating Plans, Industry Analysis and Pricing of Dominos. Francorp has executed the research as an initiative to educate their readers and investors on the undertakings of the industry.

New Delhi, Delhi, January 18, 2010 /India PRwire/ -- To understand the dynamics of the Franchising Companies releasing their Initial Public Offering (IPO) in India, Francorp carried out a study on the 'Dominos IPO'. The analysis reflects the major trends on Quick Service Restaurants, Operating Plans, Industry Analysis and Pricing of Dominos. Francorp has executed the research as an initiative to educate their readers and investors on the undertakings of the industry. As a part of this initiative, Francorp also proposes to study other industries in detail and assessing their IPO plans. Francorp is a part of Franchise India Group, which is Asia's largest integrated Franchise and Retail Solutions Company that specializes in providing innovative solutions to its global clientele.

The report elaborates the background of Dominos, which is now known as Jubilant Foodworks Limited, which is 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 will continue 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, soon. The Company has 32% stake from JP Morgan and India Private Equity Fund (IPEF). Jubilant Foodworks had net sales of Rs. 2,806 mil in 2008 and Rs. 2,111 mil in 2007 whereas the profit after tax for the company was Rs. 67.5 mil and Rs. 77.5 mil in 2008 and 2007 respectively. The Company is going for Initial Public Offering and has filed DRHP with SEBI for approval.

A quick glance over the various parameters which have been 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% of their pocket expense on fast-foods every year and world's second largest growing consumer economy doesn't seem to alter their spending even if the food inflation might hit 15-20% high in the coming time. However, Domino's has not shown any intention of increasing their product prices in near future.

◦Domino's on the other hand 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 more future. The fast food restaurant business has seen rise of 7-20 percent in 2009 and Domino's itself claims to expand its base by 10% in 2010. The Company saw 30% increases in its sale to lower segment of the economy through the launch of its 'Pizza for Rs. 35'. Jubilant Group eyes 45% market share in the market which is expected to grow to Rs. 6-7 bil. Dominos currently owns 42% of the market share. Jubilant Foodworks is looking to raise Rs. 3 bil through IPO to settle around Rs. 840 mil debt whereas the investors are looking for a vaulation worth Rs. 1.65 bil for their share. According to the CEO of Jubilant Foodworks, Mr. Ajay Kaul, the Company is working on getting food brands other than pizza in India in forseeable 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 IPO in India. They do not own the Dominos brand and therefore, cannot bring the requisite changes in it if required, by them. On the 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 in Jan 18 and will close the books on Jan 20, 2010. The price band will be decided in the coming week. It is expected to be around Rs. 155.

To Understand the IPO strategy of Jubilant Foodworks (Master Franchisee of Domino's Pizza in India) in India, 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

◦To expand its operation through opening of more stores and therefore invest on marketing, advertising, training, etc of their franchisee business

◦To clear its present debts and improve its debt to equity ratio.

◦To expand the franchisee business in new territories

◦Undertaking strategic initiatives

◦To strengthen the market position of the brand they are promoting or franchising

◦Corporate purposes

Challenges aligned with IPO to Franchisee

The risk associated with the IPO release of any Franchisee, for the prospective investors can be summarized as under:

◦What happens if a franchisee loses its Master Franchisee status for a region or country? This could happen due to two reasons.

◦The franchisor closes its operation in that particular region,

◦The franchisor 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 either

◦Face competition from other franchisees of that region in the same product group/brand, or

◦Won't be having any business

◦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.

◦The franchisee/master franchisee will have to align its marketing, advertising and operation strategy in consent from franchisor and will find it difficult to introduce immediate changes to tackle new entrants in the particular market sector.

To justify the risks and advantages a franchisee company such as Jubilant Foodworks is undertaking 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

◦To make original owners or investors rich

The large sum of money against investments in franchisee business can be procured through following types of investors:

◦Venture Capitalists

◦Angel Investors

◦Investment Banks

◦Private Equity Firms

◦Releasing IPO

These investors always check the feasibility of the business, credentials of the person or group who wants to start the business and what other assistance in the growth of business such as marketing, legal and advertising will be required during the establishment of the business.

Our critical analysis of franchisee growth delivers following comments and propositions:

The reasons why a franchisee business does not start their business by raising funds through IPO or why a franchisee business cannot initiate procurement of funds through IPO are:

◦Limited requirement: A franchisee does not require huge funds to start the business

◦Limited Awareness: A franchisee may not have an idea about the process of releasing IPO to raise funds

◦No Corporate Identity: Franchisee may not incorporate themselves as 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 aggressive about expansion

◦Limited 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, PEs, VCs 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.

Notes to Editor

About Franchise India

Franchise India is Asia's largest integrated franchise solution company since 1999, with an absolute authority on Franchising, Licensing, Retailing, Real estate and Marketing. The company has consulted several major brands over these years like HCL, MGF, Quality Walls, Tata, Gitanjali, HSBC, Levis, JK Tyres, Lakme, D'damas, Adidas, Euro Kidz, The Apollo Clinic, Chhabra 555, Kidzee, Motilal Oswal, Rosebys, Next, Welhome and more, through media, advisory and exhibitions. With its strategically formed divisions, Franchise India has created its own niche as the pioneers of franchise industry and a small business authority.

For more details log on to http://news.franchiseindia.com

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