Re: Jubilant Industries -FY12e 850 cr. Revenues -US$ 3 bn. Group Backing-World-Leader
-------------Some of the contents of the Note reproduced for quick Readability---------
Why Jubilant Industries Ltd. deserves to be a part of one's core portfolio ? :
Clean & Credible Management led by Mr. Hari Bhartia [ current President of Confederation of Indian Industry (CII) ] and backing of a strong US$ 3 bn. Jubilant Bhartia Group ( promoters of Jubilant Foodworks, Jubilant Lifesciences & Jubilant Energy-AIM Listed ) are the first and foremost factors that go in favour of Jubilant Industries Ltd.
High Corporate Governance followed by the company, which is evident from the fact that it is one of the few top-notch Indian & MNC companies which has voluntarily chosen to publish comprehensive annual Corporate Sustainability Report (CSR) as per Global Reporting Initiative (GRI) standards and its CSR2011 has attained the highest rating A+ and is audited by Ernst & Young.
Leadership Position (not only domestic but a world-leadership ) in each of the Operational Segment is the other highlight of the company. Before going into its details lets briefly analyse company's positioning in each of the operational segment :
2nd Largest Brand ( Jivanjor ) next to Pidilite's Fevicol in Indian Consumer Adhesives Segment
1st position in India ( 90 % share ) and 3rd position Globally in Food Polymer Segment (Solid PVA)
1st Position in India & 3rd Position Globally in Vinyl Pyridine Latex (VP Latex)
4th Largest Brand (Ramban) in Indian SSP Fertilizer Segment
2nd Largest Hypermarket Chain with 20 % marketshare in Bangalore
Revenues of Performance Polymer Segment (which includes Consumer Products-Jivanjor Brand, Food Polymer & Latex Business) has grown over last five years at a CAGR of 17.8 % backed by a 8.3 % CAGR in actual volumes. If we exclude here the low-margin Application Polymer business, which the company has disposed off in FY11, then, the actual volume and sales performance of Consumer Products, Food Polymer and Latex Business is really heartening and signals robust demand for company's products in each of the segment.
Now, we will go into slight detail of each of the operational segment of Jubilant Industries Ltd. starting with Consumer Products Segment.
Consumer Products Segment ( Jivanjor Brand ) contributed ~Rs. 120 cr. to FY11 revenues of the company. Under this segment, company manufactures and sells consumer & woodworking adhesives, footwear adhesives, epoxy sealants and wood finishes. Its Jivanjor Brand in adhesives segment, which, the company has built over last many years, has withstood the pressure from the likes of Pidilite and Huntsman and progressed to become 2nd Largest Brand after Pidilite's Fevicol in Organised Indian Consumer Adhesives Market.
Company has renewed the thrust on R&D and considerably strengthened distributor network in last few months to aggressively penetrate further deep into the Indian Market so as to make Jivanjor an even stronger No.2 Brand and capture some marketshare out of the peers. A case in point here is its recent launch of its super premium category adhesive 'Lamino', which is first of its kind adhesive launched by any company in India designed specifically for laminates. Its recent launch in Delhi, Mumbai, Hyderabad, Chandigarh and other major towns of India met with tremendous positive response and this product is expected to contribute handsomely in second half of FY12.
To move to the second operational segment, viz., Food Polymers, under which company manufactures and is a global supplier of Solid PVA which is used to make gum base of chewing gum and bubble gum. It is the only manufacturer in India commanding ~ 90 % marketshare domestically and is the 3rd largest supplier to global chewing gum and bubble gum industry.
It is worthwhile to note here that Gum Industry worldwide is highly concentrated with top 6 players accounting for ~85 % market. Jubilant counts amongst its international clients, Wrigley's, Perffetti and GumLink which together account for ~50 % of the world gum market.
Also, the Solid PVA market itself is a very concentrated one with top 4 manufacturers supplying 75 % of the global demand. Jubilant atpresent occupies 3rd largest position in global Solid PVA suppliers list and with the recent doubling of capacity of its plant, the company is set to become the 2nd largest Solid PVA manufacturer of the world after Wacker Chemie of Germany. Its entire expanded capacity is booked which augurs very well for the visibility of growth in this segment till FY15.
Third operational segment of the company is Latex under which it manufactures and is a global supplier of synthetic lattices like VP Latex, SBR Latex and NBR Latex. This segment contributed ~Rs. 80 cr. to FY11 revenues of the company. It is worthwhile to note here that Jubilant was amongst the first companies to introduce VP Latex in India and is currently occupying No.1 position domestically and No.3 position globally in VP Latex. Company has recently expanded its capacity of Latex manufacture by 15 % in FY11 considering high demand for its products and the increased capacity utilisation is expected to show benefit in current FY12.
Agri-Inputs is the fourth operational segment of the company which is dominated by 'Ramban' Brand. This segment contributed ~Rs. 261 cr. to FY11 revenues of the company. Here again the company's acumen of building strong brands becomes evident as its Ramban brand occupies the fourth largest SSP fertilizer brand position in India. SSP fertilizer industry, which got a fillip because of the new NBS policy of Indian Government, is expected to reap rich rewards because of SSP fertilizer's positioning in the entire complex fertilizer landscape. Favourable treatment in NBS policy has made SSP fertilizer the cheapest and most effective amongst the lot becuase of which SSP fertilizer consumption in India is projected to grow to 6 mn. MT by FY13 from current 3.5 mn. MT. This is the basic reason why major Urea producers like Chambal Fertilizer and Tata Chemicals have recently decided to set-up new plant and expand existing capacities for SSP manufacture to capitalise on the opportunity this sector has in store for coming few years.
With an expected annual industry growth of ~35 % (especially SSP Fertilizer) for coming two fiscals, Agri-Input segment of Jubilant is expected to be a steady cash generator as the company improves capacity utilisation based on higher demand. It is worthwhile to note here that when other major peers in this segment (SSP) like Liberty and Khaitan have choose to aggresively expand the capacity of their plants as also to set-up new plants in anticipation of demand, Jubilant has decided to play safe by only concentrating on improving utilisation of its existing capacities so that this segment remains steady cash generator to feed the exponential growth of Retail (Hypermarket), Food Polymer and Consumer Products (Jivanjor Brand) segments.
The last but most promising operational segment of the company viz., Retail (Mall cum Hypermarket) is the result of Jubilant Industries' recent acquisition of a group firm which runs a Hypermarket chain under brand 'Total' and has, as on date, ~8,25,000 sq.ft. under opration in 5 mall-cum-hypermarkets with another 1,12,000 sq.ft. getting operational by Decemember'2011 which will make it the 3rd largest hypermarket chain of India and Largest (No.1) hypermarket chain of Bangalore in terms of area under operation. All the other hypermarket chains of India except (Pantaloon) including Hypercity (Shoppers Stop), Trent (Star Bazaar), Bharti Retail (EasyDay Market), Reliance Retail (Reliance Mart), Max Retail (SPAR Hypermarket), RPG group (Spencer Hyper) and Aditya Birla Retail (More) have less than 9,00,000 sq.ft. under operation as on date [ Refer Page 18 for all Hypermarket Chains details ]. Although, like-to-like comparision here is improper since the format of Jubilant (Total) is of mall-cium-hypermarket which no one else follows but, still, such a huge area of operation will bring in lot of cost efficiency and drive exponential growth from FY13 onwards.
FY11 revenues of Retail segment was Rs. 315 cr.
The most interesting aspect here, which speaks highly of the transparent and ethical practices followed by the management of Jubilant is evident from the fact that inspite of Retail division of the group currently being 100 % owned by the promoters of Jubilant Industries as also exuberant valuations at which listed retail companies are trading at present on the bourses where, even Hypercity (the only pure comparable peer) was acquired by Shoppers Stop at more than 0.5 times sales just last year, the company has decided to issue only 0.38 cr. (38.35 lacs) shares as consideration for 100 % acquisition of Retail business, which, at current market price of Jubilant Industries, works out to be only Rs. 71 cr.
To acquire such promising Retail business at just 0.2 times FY11 sales inspite of it having one of the largest areas under operation in India with a leadership position in Bangalore commanding 20 % marketshare, signifies a great deal of justice done with minority shareholders of Jubilant Industries for which the management deserves an applaud.
Retail Segment is expected to see an exponential jump in revenues starting this fiscal (FY12) as 2 Hypermarkets covering area of ~2,50,000 sq.ft. are getting operational in this fiscal itself ( one already got operational in June'2011 ) and another 4 hypermarkets are planned to be opened up in coming two years to take the total stores under operation in Bangalore to 10.
This will also bring in a lot of cost efficiencies therby considerably improving margins as there will be no additional backend required apart from the set-up which company already has of 1,10,000 sq.ft. Distribution Centre, 5500 sq.ft. Collection & Consolidation Centre and 2200 sq. ft. Sourcing presence in APMC yard. This will significantly reduce backend cost from the current level of 8.7 % of revenues to 2.7 % of revenues by FY13.
Debt, which is a major constraint for Hypermarket Chains to expand, will not be a major problem for Jubilant Industries as no significant additional debt will be required apart from the Rs. 160 cr. debt which retail division already has. This is because, the listed entity, Jubilant Industries, is a debt-free company with cash & investments on balance sheet (FY11) of Rs. 77.8 cr. With the current fiscal, FY12, also expected to bring in a conservative PAT of atleast Rs. 35 cr., all the additional 4 stores planned to be set-up in coming two years can get funded by the cash of listed Jubilant Industries.
Hence, to sum up, Jubilant Industries, by FY14, will have ~15,00,000 (1.5 mn.) sq.ft. In 10 stores under operation with a market leadership position in Bangalore without burdening balance sheet to a considerable extent and improving profitability margins because of heavy reduction in backend cost by ~68 % because of better utilisation of current backend infrastructure. This is the basic reason why, contrary to its peers who concentrate on national expansion, Jubilant has choose to expand in Bangalore itself, where it already enjoys 20 % marketshare with No.2 position, by setting up additional stores so that without much additional costs or raising much additonal debt, profitability could be attained on back of cost efficiences. Its a wise strategy and its likely to make Jubilant Industries a rare niche player in Retail industry.
To conclude, With such ----
High Corporate Governance standards,
most Credible & Efficient Management at the helm,
backing of a strong US$ 3 bn. Jubilant Bhartia group which has already demonstrated their will & ability of generating exceptional stakeholders' returns in all their companies like Jubilant Foodworks, Jubilant Lifesciences & Jubilant Energy (listed at AIM)
Strong Brand like Jivanjor under its belt whose only listed peer Pidilite with brand Fevicol is commanding a valuation of 3.11 x FY11Sales, TTM P/E of 26.8, P/BV of 6.63 & EV/EBITDA of 16.41
Leadership position in each of the Operational Segment
FY12e Revenues of Rs. 850 cr. with FY13e Revenues most likely to scale upto more than Rs. 1100 cr.
---- Jubilant Industries should have traded with a premium, but, what we have is, its currently trading at :
0.28 x FY11 Sales of Rs. 554 cr.
EV/Sales of just 0.22
Price-to-BookValue of just 0.54
P/E of just 5.43 on TTM FY11 EPS of Rs. 35.7
EV/EBITDA of just 2.6
This is an anomaly which can't remain for long and it has to atleast get corrected upwards to trade at Rs. 325 where still it will be only reasonably valued but undervalued compared to its peers.
A comprehensive Sum-of-the-Parts (SOTP) valuation by taking into account the valuation of each of the operational segment separately of Jubilant Industries Ltd. is given on Page 16-17 of this Research Note. Members are requested to refer that to have a clear idea of current undervaluation and prospect valuation of the company.
Views are invited from fellow members to understand and assess the company as well its operational segments better.
