goyal foods - case study

8/6/2019 Goyal Foods - Case Study

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This case is a property of Networth, the finance club of IIM Bangalore. It cant be reproduced or used without prior permission. 2 | P a g e

Strategy going forward

Mr Goyal plans to expand to 100 stores by the end of 2012, 250 stores by the end of 2016 and 500 stores by

2020. He targets four new cities which will help him fulfil his dreams. These four cities are Mumbai, Pune,

Kolkata and Agra. Mr Goyal wants 75% of his stores located in metros Delhi, Mumbai, Kolkata and rest in

tier 2 cities. He is willing to enter any city like Jaipur, Udaipur, and Bangalore etc if it has potential.

He wants to ensure that he achieves full potential of a city and then only expand to other city. It is believed

that a metro like Delhi can accommodate at maximum 30 - 40 stores. And tier 2 city can at best

accommodate 15 - 20.

He also plans to cover metros first and then move into tier 2 city. He would prefer expanding to Mumbai

before other metro as he believes that it will help him build a bigger brand. According to Mr Goyal, it takes 4

months to operationalize the first store in any city. New store in an existing location can be added in less thantwo months.

Financials

Just like any other metro, Delhi provides higher revenues per store to Goyal Foods. In general, any store in

metro will provide about 1 crore Rs in annual sales. The number for any other city is expected to be about

75% of metro store sales. The variation in sales per stores in same city is of the order of 20%.

Leases form the biggest portion of his costs. A typical lease in metro costs him about 100 Rs/sq ft per month.

Lease in a non metro will be at 50% of this. Other fixed overhead associated with any store is about Rs 1.5Lacs/month. Variable overheads are of the order of 25-35% of sales. Exact information is not available as Mr

Goyal intended not to disclose his exact costing structure. The depreciation is around 15% of store assets and

tax rate is 33%. Goyal Foods presently is a debt free company and Mr. Goyal doesnt plan to take on any

debt in the future either.

Mr Goyal informed that opening of a store in metro costs around 80 Lacs and in other cities is 60 Lacs.

These costs are irrecoverable and hence are sunk costs. 11 month rent in any city is considered to be a fair

value of a refundable deposit. This deposit is not considered while calculating the cost of opening up a store.

The cost of running headquarter is about 2 Lac Rupees a month. In addition to this, Mr Goyal draws an

annual salary of Rs 35 Lacs.


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Listed Industry Player

Jubilant Food has been observed as a close competitor. It operated 306 stores across 69 cities in India as of

31st March 2010 and is growing at the rate of approximately 65 stores per year. Jubilant had debt of Rs 8.59

crs and equity of Rs 157.74 crs as of 31st

March 2010. Jubilants current market beta of 1.11. The financials

of Jubiliant Food works and its stock prices are given in Appendix A.

Risks

The company needs to address several challenges it is currently faces. These risks are significant and their

effects on business cannot be undermined.

The company finds itself in a uniquely challenging position a transition to a different kind and scale

of growth, a state of considerable flux and immense uncertainty. This state calls for a significant

change in practices from a predominantly gut-feel based management approach to a more

structured growth strategy from financing the expansion to establishing efficient operations at

multiple locations.

The home delivery business generates 70% of the chains sales. And quick delivery is a critical

success factor in this segment. This service takes 45 minutes to an hour, leading to customer

dissatisfaction. Lots of local restaurants are committed to providing delivery in less than hour.

The value proposition of homely South Indian food has worked well so far. But the company is not

sure if sticking to this value proposition can provide massive growth which company is looking for.

The company faces an attrition level of 15% higher than the industry average of 10%.

Mr Goyal addresses these concerns as follows:

Change to structured growth strategy will be achieved by hiring senior people from competitor

organization. 2-3 senior people can be brought in overtime at a salary of Rs 2 Lacs per month.

Home delivery will be expedited by bringing efficiency in the system. This will cost about Rs 50 Lac.

The amount would be spent over a period of 2 years.

New Marketing campaign at the annual cost of Rs 30 Lacs, for a period of atleast 5 years will be runto successfully transform customers perception about company from South Indian to multi-cuisine

chain.

Attrition can be addressed by raising salary by about 10 % 15% across board.


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Financing

The financing structure of Kumar Eating Joint is as follows:

Mr Goyal started the company with an initial investment of Rs 50 Lacs. Further funding was secured from Forum Synergies Ventures, an early stage venture capital fund in

July 2008. The amount is not disclosed but they took about 25% stake in the company.

Forum Synergies Ventures is now planning to exit the company after their parent company in USAdecided to fold Indian operations.

Note that there are several prospective PE players who are keen on providing the second round of funding.

For any details about the case, contact

Nikhil Mittal

Secretary, Networth

Hostel room: L 301, IIM Bangalore

Bannerghata Road, Bangalore (560076)

+91 9916014616

[email protected]

Note: The case is fictitious and any resemblance to a person/company is merely coincidental.


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Appendix A

A.1 Financial Performance of Jubilant Foodworks Limitedi,ii

31-Dec-10 31-Dec-09 31-Mar-10 31-Mar-09

Sales 48445 29988 42393 28060Other Income 119 31 37 37

Material Consumed 10241 6524 10495 7182

Operating and Other Expenses 27408 17032 25235 17521

COGS 39752 25298 35730 24703

EBITDA 8812 4721 6700 3394

Financial Expenses 34 715 915 890

Depreciation 2103 1742 2435 1695

PBT 6675 2264 3350 809

Tax 1407 7 8 80

PAT 5268 2257 3342 729

EPS (Diluted) 8.05 3.85 5.54 1.26

Fiscal Year Ending9 month Ending

Jubilant Foodworks Limited

A.2 Closing Share Price movement - Jubilant Foodwork Limited (since listing) iii

A.3 Key statistics of Jubilant Foodworks Limited share prices (over one year)

Weekly High/Low 565.55 537.65 PAT(Trailing 12 months) 63.08 crores

Monthly High/Low 580.75 511 Sales (Trailing 12 months) 608.5 crores

52 Weeks High/Low 670.7 251.65 Stores 371

# Shares (crores) 6.444 P/E 55.89

Closing Price 547.15 P/Sales 5.79

Market Cap (crores) 3,525.83 Price/Store 9.50

Jubilant Foodworks (as of 24 Mar 2011)

iAnnual Report, 2009-2010, Page 49, Jubilant Foodworks limited

http://www.dominos.co.in/images/investor/PDF/annualReport2010.pdfiihttp://www.dominos.co.in/images/investor/PDF/Jubilant_Foodworks_Result_For_Web.pdf(accessed on 27

thMarch 2011)

iiihttp://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=533155 (accessed on 27

thMarch 2011)

goyal foods - case study

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