Jubilant Foodworks and Jubilant Life Sciences are companies owned by the Bhartias, who’ve run them well so far. Yesterday they did something strange – in a board meeting, they proposed a 0.25% royalty on consolidated sales for using the “Jubilant” name , to each of the companies.
By the end of the day, as the stocks tanked, the company decided not pay this royalty. Phew.
The royalty argument is that if you use a brand name, you have to pay the brand owners royalty. We see this often, with companies like Colgate (4.8% of turnover) or HUL (3.15%). At some point in the past the brand name came with technology but it’s difficult to relate that to, for instance, Colgate, where the biggest innovation is adding salt and pepper to a white minty paste.
It’s not apparent how this will help Jubilant Foodworks either. The company runs outlets of Domino’s pizza, which is, by definition, not Jubilant Pizza. And Dominos takes its 3%+ of sales as royalty anyhow. So why pay Jubilant?
For Jubilant Life Sciences too, it’s not apparent that the name of the company is what it derives revenues from. But could this be a way for promoter to make some money where they don’t?
Let’s look at the upside for the promoters. This will start next year, but assuming current revenues in the next year, the promoters will get about 22 cr. from Jubilant Life and about 10 cr. from Jubilant Foodworks. That’s a total of Rs. 32 cr. or so. (This is about 3% of pre-tax profits of these companies)
They don’t take salaries from Foodworks – that’s run by professional management. In Jubilant Life they were paid about Rs. 30 cr. in the last one year. In effect the royalty doubles what they make; but at what cost?
The shares of Jubilant Foodworks alone have fallen 7% in the last two days (and much more intra-day). This was a fall of over 1,200 cr. in market cap and with the promoters owning 45% that’s a hit of 500 cr. for them. A fall of 500 cr. in market valuation is much worse than an upside of 30 cr. at most. Plus, they stand to lose further if stocks tank (they have pledged about 19% of their holding in Jubilant Foodworks, which can create challenges if the stock tanks – they’ll have to keep pledging more shares to make up)
In all the downside of the promoter seems much larger than the upside. It was also the timing. On the back of a shady Vedanta investment into a promoter company, the Zee promoter debt fiasco, the issues at DHFL and overall promoter misdemeanors in companies like LEEL, Vakrangee or others, the market is incensed at any action that is bad for shareholders – and this fits right in there.
What were they thinking really? It’s inexplicable, for such a small sum of money.
(Of course, it’s also relevant that the entity in question – Jubilant Enpro – which was supposed to receive the royalty, has a 110 cr.+ debt on its books and has further guaranteed other loans of group companies. A payout to it would have been helpful, if this had gone through, even if it was at the cost of the listed company’s minority shareholders)
Don’t others do this?
Of course they do. This is India.
We noted, long back, that JSW Steel promoters decided to take a yearly 125 cr. which was about 30% of profits, in 2014. The stock is 3x since then, and no one seems to have had a serious problem.
The Tatas charge – 0.25% to companies that use the Tata Brand, and 0.15% to those who don’t (like Indian hotels). Smaller companies like Muthoot and Shriram also charge a fee. Even the Wadias want a cut of Britannia revenues for their name.
There’s a lot of companies that pay promoters for a lot of things. In Raymond’s case, they pay for the promoter’s lifestyle, including spending more than their annual profits on refurbishing the massive multistorey building in which the promoter lives. In other cases, promoters take the absolute maximum they can as salaries (10% of net profit) and sometimes, even more (and then ask for permission from the government to do so).
Then they merge promoter companies with the listed ones at a price you can’t easily figure out is too expensive or good enough. Satyam went into a tizzy doing it (fell 95% before it was rescued it) JP Associates did it without reproach, just at the same time as the Satyam crisis. LEEL is doing it. Eon Electric (earlier Indo Asean Fuse Gear) tried to merge with a promoter arm after selling the company for a huge sum (and only stopped because of legal threats from PE folks). Among the large ones, we’ve seen a Network 18 write off loans taken by promoter owned trusts, we have seen companies like L&T use their funds to get their employee welfare trusts to own nearly 10% of the company (the trusts are only in name – they serve management only, and do not distribute shares).
Jubilant hasn’t seen promoter salaries go to 10% (they are probably 3% in Life and nothing in Foodworks) and in that, there is some relief. However, the promoters do have other interests and some of that is financed by debt. (In fact, one entity, JEKPL was in the insolvency courts, and was purchased for a 80% haircut by HOEC, and some of the fallout of that insolvency might be on the promoter group)
What this tells us is that the situation is murky:
- A company shouldn’t have to pay royalty on the brand name owned by the promoters, if the company itself was responsible for the brand to grow (JSW, Jubilant, and even the Tatas in case of Tata Steel or Tata Motors)
- The law doesn’t require shareholder approval for such royalty if it’s less than 10% of revenues (material related party rules) – but they should.
- If royalties are common we should look at impact on profit – and in this case, Jubilant comes out strong with about 3% of pre-tax profits being the impact.
- Promoters need to understand that this is absolutely not the time – if you do it in a bull market, no one will complain. In current times, even a wrong sneeze will kill you.
- While we can easily assume that promoters will try to take the money out in different ways, we should also realize that this is very common in India, even in the best governed companies with four letter family names. If they want to, they can, and they don’t need to do the royalty rigmarole.
In general, every company’s action should be assessed in terms of impact, not just in terms of assumed intent. As I’ve said: if there is bad intent, royalty isn’t exactly the simplest way to extract money from a listed company. In Jubilant’s case, they seem to have mended fences somewhat. The market has a short memory and it will forget.
Disclosure: Capitalmind has recommended or has an interest in some of the companies mentioned in this post.