Kerala ‘fat tax’ hurts Jubilant, Westlife stocks

MUMBAI: Shares of Jubilant FoodWorks and Westlife Development plunged on Friday after the Kerala government introduced a 14.5 per cent ‘fat tax’ on burgers, pizzas and pastas served in branded restaurants.

The CPI (M)-led LDF government in Kerala proposed a slew of new tax proposals in its budget for 2016-17, including a 5 per cent tax on certain packed foods and the ‘fat tax’.

Westlife, which operates the McDonald’s chain of restaurants in west and south India, slumped 4.65 per cent to end at Rs 237.80 on the BSE, while food services major Jubilant FoodWorks, which operates Domino Pizza outlets in India, fell 2.56 per cent to Rs 1,181.15.

Analysts say the ‘fat tax’ will not have a material impact on earnings of these companies as they do not have a large presence in Kerala in terms of number of stores.

These companies are likely to pass on the increased costs to customers, analysts added. Out of 236 stores, Westlife has 7 stores in the state, while Jubilant has 9 stores out of its total 1,026 stores.

However, analysts still see the news weighing on these stocks in the near term due to concern that other states might emulate Kerala in imposing the ‘fat tax’ to tap additional revenue.

“The concern is whether it will be copied by other states. Hence, it is sentimentally negative for QSRs (quick service restaurants),” said Abneesh Roy, senior vice-president-institutional equities at Edelweiss Securities.

For Jubilant, the ‘fat tax’ is an additional woe on top of the sluggish same-store sales growth it has reported in the last few quarters. In the financial year ended March 2016, Jubilant reported same-store sales growth of 3.2 per cent.

“We like Jubilant’s long term potential, but in the near term, same-store sales growth will remain challenging as prices are high, there is cannibalisation by Domino’s own stores, Pizza Hut’s aggression on delivery and delivery apps like Swiggy. Now a customer has more choices than two years back when Domino’s was the only viable and predictable delivery option,” said Roy, who has a ‘neutral’ rating on Jubilant.

So far this year, Jubilant is down 20.39 per cent, while Westlife Development is up 1 per cent. According to Bloomberg data, of the 33 analysts tracking Jubilant, 51.5 per cent have a ‘buy’ rating, while the rest have a ‘hold’ or a ‘sell’ rating.

Of the 4 analysts tracking Westlife, two have a ‘buy’ rating and the other two have a ‘sell’ rating on the stock.