Shares of Jubilant Foodworks Ltd had fallen 13.68% to Rs.1,205.40 from the previous day close of Rs.1,396.50 and recovered to close at Rs.1,303.40 (-6.7%) on February 05, 2019. Why this kind of drastic drop? Being a well known share and expected to become a Large Cap from its current level of Mid Cap, this kind of heavy fall in a single day is shocking to the investing community. The reason behind this fall is an announcement filed with BSE on 05/02/2019 at 9.16 a.m., which is about the decision by National Anti Profiteering Activity which concluded profiteering of Rs 41.42 crore by the company. Click here to get the announcement by Jubilant Foodworks. Due to this the price fell by 6.7%.
In addition to this, there is another announcement, after trading hours at 5.50 pm on the same day, from the company that the management had decided to pay royalty of 0.25% on sales to its promoter group company for using the brand name “Jubilant” effective FY2019-20. Below is the corporate announcement filed by Jubilant Foodworks to BSE on 05/02/2019 at 5.50 pm (after trading hours):
“The Board of Directors of the Company has approved the payment of a corporate brand royalty to Jubilant Enpro Pvt. Ltd. (a promoter group company), which owns the corporate brand name ‘JUBILANT’. The royalty payment will enable the group to help protect, nurture and enhance the corporate brand name ‘JUBILANT’ and the group’s image globally. It has been decided to pay 0.25% of the consolidated revenue of the Company effective FY 20 as royalty.”
On the same day at 10.26 pm (after four and half hours), by another clarification to the exchange, the company mentioned that the announcement to charge 0.25% royalty was withdrawn.
Sales for the year 2017-18 was Rs.2,980 Crore and during the first nine months of the current sales amounted toRs.2,665 Crore which is increase of 21% year on year basis and the expected sales for 2018-19 amounts to Rs.3,600 (approx.). If 20% increase in sales is expected per annum, the sales for FY 20 is expected to be Rs.4,300. On this sales amount the promoters are willing to divert 0.25% to their group company and the royalty amount becomes Rs.10.75 Crore which will increase every year proportionately to the increase in sales.
It is not the amount which is important, but the intention of the promoters behind this move is to be considered. Why do they want royalty now? Considering the holding of promoters, is it worth to insist to get royalty of around Rs.10 crore? It is to be noted that the promoters are holding 5,93,05,568 (5.93 Crore) shares which is 44.94% of the total shares of Jubilant Foodworks as per the data submitted to exchange for the quarter ending December 2018 (of which 1,08,96,000 i.e.,18.37% of holding is pledged by promoters). The royalty was proposed to be paid to the promoter group company Jubilant Enpro Pvt. Ltd. If this royalty payment is implemented, other companies may try to follow the same practice which will lead to diversion of shareholders money to promoter related companies.
Even though the decision to pay royalty is withdrawn, it leaves a remark on the promoters taking care of investors’ interest. Generally any decision by the promoters which is against the interest of the shareholders will be taken seriously by the market and will have impact on the share price. Hence I personally apply a cautious approach to Jubilant group shares.