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MOSL: JUBILANT FOODWORKS (Neutral)-Opportunity to capitalize on corporate tax cut in weak environment

JUBILANT FOODWORKS: Opportunity to capitalize on corporate tax cut in weak environment

(JUBI IN, Mkt Cap USD2.4b, CMP INR1308, TP INR1400, 7% Upside, Neutral)

 

• In our view, the Indian government's recent announcement to cut the corporate tax rate bodes well for Jubilant Foodworks (JUBI) 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 because not only will it 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. Thus, if JUBI chooses to be aggressive on passing on the benefits, it can either boost SSSG in a weak operating environment or make a cut such that peers bleed more profusely on profitability (in case they match JUBI's aggression).
• Importantly, the 'advantage JUBI' 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 (~INR450-500m PAT increase each year ceteris paribus).
• JUBI's recent history is replete with aggressive measures to boost growth, including not taking a price increase for 2.5 years, focusing on everyday value (EDV) unlike discounting in the past, and undertaking complete product revamp. It could thus be aggressive in passing on these benefits - in such a case, there will be a trade-off of near-term profitability (due to tax cut) for boosting SSSG.