Global brokerage firms Deutsche Bank and CLSA maintained their buy rating on Jubilant Foodworks after the board of directors of the company clarified and reversed its decision of payment of corporate brand royalty of 0.25 percent of sales to Jubilant Enpro Pvt. Ltd.
“Jubilant Enpro (a promoter group company) has decided not to charge the corporate brand royalty of 0.25 percent of the consolidated revenues of the company and the same stands withdrawn,” the company said in a late-night exchange filing.
Earlier on Tuesday, the company’s board had decided to pay a corporate royalty to its promoter group, Jubilant Enpro Pvt Ltd, for use of ‘Jubilant’ brand.
Reacting to the news, Jubilant Foodworks and Jubilant LifeSciences rose 2-3 percent in morning trade on February 6. Jubilant FoodWorks had closed 6.5 percent lower on February 5, and Jubilant LifeSciences had closed at Rs 738.
“The royalty being considered is around 0.25 percent of the company’s consolidated revenue effective from FY20,” the company said in an earlier exchange filing.
Most brokerage firms see this as a positive development for Jubilant Foodworks, however, slowdown in demand may remain a near-term concern. The most aggressive target price put out by brokerage firms is Rs 1,780 on Jubilant Foodworks that translates into an upside of 36 percent from current levels.
Deutsche Bank maintained its buy call on Jubilant Foodworks with a target of Rs 1,700. The royalty to promoters withdrawn overnight is no longer a concern for shareholders.
However, slower-than-expected recovery in the demand environment remains a key risk for Jubilant FoodWorks.
CLSA, that maintained its buy call on Jubilant FoodWorks with a target price of Rs 1,600, said that sanity has finally prevailed as the decision to levy royalty got reversed in a few hours.
CLSA sees increased dividend payout to be a better way, though it is tax inefficient.
Another brokerage firm, Macquarie maintained its outperform rating on Jubilant FoodWorks with a target price of Rs 1,780 which translates into an upside of over 30 percent from current levels.
The company has withdrawn the proposed royalty payment to a promoter company which is a positive step. The royalty proposal was a clear negative development as it could have set a bad precedent. The withdrawal of decision to levy royalty comes as a relief for investors.