Jubilant FoodWorks, Life Sciences promoters make an about-turn on royalty

Analysts had said Jubilant's decision to pay royalty to the promoters would be a clear case of the firm paying royalty twice

Promoters of food service major Jubilant FoodWorks and pharma company Jubilant Life Sciences decided not to charge royalty from the two firms within hours of announcing that they would. 

On a day of high drama that saw the Jubilant FoodWorks stock price fall 6.45 per cent on the BSE, the late-night announcement has come as a huge surprise. 

Speculation was rife through Tuesday that Jubilant FoodWorks would pay a royalty of 0.5 per cent of net sales to the Bhartia family, who hold 45 per cent in the firm, for use of the Jubilant name. This was clarified in the evening by the company to be half of that, at 0.25 per cent of net sales, effective FY20. Sister concern Jubilant Life Sciences, too, announced that it would pay a 0.25 per cent royalty to Jubilant Enpro, a promoter group entity, which owns the Jubilant brand name.

A statement to the BSE had said that the royalty payment would enable the group to help protect, nurture and enhance the Jubilant brand name and the group’s image globally.

But, proxy advisory firms were hardly impressed with the move, saying it was a corporate governance issue. “I don’t understand what is the contribution of the promoters in creating the Jubilant brand name. Second, when it comes to Jubilant FoodWorks, are people buying pizza in the name of Jubilant or Domino? What is the basis for this royalty then?,” asked  J N Gupta, co-founder and managing director, Stakeholders Empower­ment Services.

Shriram Subramaniam, managing director of InGovern, said it was a case of an “ownership premium” that the promoters were extracting from the two firms. “While I can still understand the im­p­ortance of the Jubilant brand name to the pharma firm (Jubilant Life Scie­nces) and hence the royalty being charged by the promoters, I don’t see any such gro­und in the food services company,” he said.

Analysts said Jubilant’s decision to pay royalty to the promoters would be a clear case of the firm paying royalty twice.

To put things in perspective, Jubilant FoodWorks, which is the master franchisee of Domino’s and Dunkin’ Donuts in India, already pays franchise fees to Domino’s in the US for using the latter’s name here. In FY17 and FY18, franchise fees paid by the company was to an extent of 3.3 per cent of net sales. This was nearly Rs 86 crore and around Rs 100 crore, respectively, for the two years (see chart).

On FY18 sales, the additional outgo in terms of royalty to promoters would work out to Rs 7.5 crore, analysts said. In the past seven years, Jubilant FoodWorks’ royalty to Domino’s in the US has largely rema­ined in the 3.3 per cent bracket, data sou­rced from Capitaline showed. Rival West­life Development, which runs McDonald’s stores in the south and west of the country, on the other hand, has seen its royalty increase from 2.1 per cent (in FY12) to 4.2 per cent (FY18).

Last week, Westlife Development said its royalty for FY20 would remain at 4 per cent.