Fundamentals of Growth Investing Explained with Jubilant FoodWorks Ltd.

This blog addresses is the detailed discussion about the investing approach, that is "Growth Investing"

Growth investing style is investing in fast-growing companies who have seen recent success and are likely to outperform the industry and the market in future also. These are generally expensive stocks, and their PE is above the industry average. Most of the time, these share trade above their intrinsic value. Typically, these companies have customer loyalty, valuable brand image and competitive moat on their side. Great investors like Phil Fisher who was also an author of “common stocks and uncommon profits” emphasised investing in companies with high growth potential, others are William O’Neil and Thomas Rowe Price Jr.

These companies can be small with high growth potential, companies in emerging markets and also blue-chip companies who have found a new room to grow but the question is how one can find these companies, which factors to identify and what are the risk factors involved in growth investing.

Past performance

Companies which have outperformed the market in the past in terms of profit, growth margin and share price are the one we should look to invest in. Here we have compared Nifty 50, which is the benchmark and Jubilant Foodworks Ltd  which holds the franchise rights to develop and operate our favourite Domino’s pizza and Dunkin’ Donuts across the country and in South-Asia. We have taken this stock because it had achieved high level of growth in the past and its business is easy to understand for explanation purpose.

Our benchmark Nifty 50 has increased by 65.24% in the last five years and, if we look at Jubilant Foodworks Ltd we can see that its share price has gone up by 254.78% which means that our stock has beaten the market in the past. The rise of fast foods culture and success of Domino's in India are the drivers of growth in the share price of Jubilant Foodworks Ltd.

Future Growth

Future returns are dependent on the future growth of a company, as a high-profit margin allows a company to pay higher dividends and push the share price upward. Let us take our previous example of Jubilant Foodworks and assume that Domino's will continue to attract consumers and stay the pizza king in the Indian market. Then we can say that it is very likely to beat the market in future also.

From the year 2016 to the year 2020 the EBITDA grew at a CAGR of 32.43% if we assume a similar performance and we can say that in the year 2025 the EBITDA will be above 3,50,000.00 mark and we will see similar growth in share price also. Though, growth is dependent on market demand, competition from the rivals, management and many other aspects.

EBITDA is a measure of the operational profitability of a company, and it is a better measure than net-profit that is why we have taken this as a measure of profitability.

Note: - The figures till 2020 are taken from the annual report of Jubilant Foodworks Ltd and estimates are taken based on past performance and not by actual analysis.

Typically, High P.E ratio

Price to earnings ratios depicts how much an investor is willing to pay to earn one rupee from the company. P.E shows that investors are willing to pay more for the share. If we take the example of Jubilant Foodworks we have a P.E of 252.34 (x). It is a very high ratio, but growth investing is all about future growth potential.

Economic moat and brand loyalty

Jubilant Foodworks Ltd operates and distributes Domino's, Dunkin’ Donuts and Hong’s Kitchen in South Asia, but their major source of income is Domino's. It has 1,335 stores in India, in comparison to its rival Pizza Hut with 430, such a huge network is difficult to build and it provides an advantage over the competition. Also, domestic brands are limited to a particular state or the region and do not give competition across the country. Along with that, they offer fast delivery in 30 minutes at multiple locations in Metro, tier I and tier II cities, they are also trying to penetrate tier III cities in the country. Around 75% of their delivery orders are executed through the app which gives a convenient and fast platform. These all are the competitive advantages it has and its service, presence all over the country and technology has helped to build a loyal customer base.

The Final Comment

With 252 x P.E, Jubilant Foodworks is an expensive stock and most likely an overvalued one but, an investor who sees potential growth in the company will invest and buy it because it has performed in the past and has given very good returns. But it can also lean on the other side and prove to be a risky investment because past performance does not guarantee future success and a very high P.E can lead to a very sharp drop in the share price. It is highly dependent on Domino's for its business and any negative sentiment could prove lethal.

On the positive side, though it’s other two products are not very profitable, the pizza business is, very much. Domino’s is the pizza king in India and with an increase in millennials’ population and change in consumption habits, the company has the growth potential. But all these factors made it the stock for growth investors who are willing to take the risk.

This is only one example, different investors desire different growth rate and also the risk-bearing capacity is different for each of us, so a stock might be good for one and waste for another, but the above characteristics will be helpful along with some more metrics for a stock to qualify as a growth stock.

“Behind every stock, there is a company. Find out what it’s doing.”- Peter lynch