Motilal Oswal: Jubilant Foodworks to gain from corporate tax rate cut

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Published: October 11, 2019 12:35:30 AM

In our view, the government’s decision to cut the corporate tax rate bodes well for Jubilant Foodworks as it was under the highest tax slab of 34%.

We now believe Jubilant will be among the key beneficiaries of the cut in corporate tax to 25.2%, as it adds around 13% to its PAT.We now believe Jubilant will be among the key beneficiaries of the cut in corporate tax to 25.2%, as it adds around 13% to its PAT.

In our view, the government’s decision to cut the corporate tax rate bodes well for Jubilant Foodworks as it was under the highest tax slab of 34%. The company’s medium term same-store-sales (SSS) growth prospects might fortify further if it passes on the benefit of the tax cut, as it will not only gain on an absolute basis but also score significantly over Westlife Development, Yum Brands and Burger King, which are either barely profitable or incurring losses.

Importantly, the ‘advantage Jubilant’ is likely to last long – at least for the next few years – because of the company’s delivery based model and significantly higher scale compared to others. In fact, sales and PBT margins will continue to be much higher, fortifying its competitive positioning year after year.

Valuations are in line with peers at 39.4x FY21E EPS. However, on the EV/EBITDA front, the stock trades at a huge discount — not only compared to consumer peers but also at 1SD below its own historical average. The only reason warranting caution is a further deterioration in the operating environment, particularly impacting dine-in, which forms half of its countrywide sales. The government’s moves have led to improved corporate profitability but not yet translated into better demand.

A key beneficiary of corporate tax rate cut: Jubilant was expected to pay taxes at a rate of around 34% for FY20 and FY21 before the announcement of the corporate tax cut. However, we now believe Jubilant will be among the key beneficiaries of the cut in corporate tax to 25.2%, as it adds around 13% to its PAT. Profitability is significantly higher than other QSR players. As mentioned in our note released after the corporate tax cut announcement, we need to assess the second-order effects of this measure.

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