HUL slips as royalty payments set to double in five years

Written by fe Bureau | Mumbai | Updated: Jan 23 2013, 08:03am hrs
Shares of Hindustan Unilever (HUL) lost more than 6% during intra-day trades on Tuesday after the company announced that it will double the share of royalty payment to Unilever over the next five years.

The FMCG major, which reported a 15% increase in its net profit, announced that it will also enter into a new agreement with Unilever Plc (and entities of the Unilever Group) for the provision of technology, trademark licenses and other services to HUL.

The new agreement envisages that the existing royalty cost of (approx) 1.4% of turnover will increase, in a phased manner, to a royalty cost of (approx) 3.15% of turnover no later than the financial year ending March 31, 2018, i.e., a total estimated increase of 1.75% of turnover, stated a release issued by HUL.

Within minutes of the announcement, the shares fell to an intra-day low of R465.30, down 6.16% or R30.55. This was the biggest single-day fall in almost four years for the Indian major that boasts of brands across segments, including soaps, detergents, beverages, packaged foods and skin care.

By the end of the trading session, however, it recovered most of the lost ground to close at R481.55, down 2.88% or R14.30. The volumes also saw a huge spurt on Tuesday.

Experts tracking the counter say that the immediate knee-jerk reaction can be attributed to the increased royalty payment. Incidentally, the recent past has seen some other Indian companies also increasing the quantum of royalty payment to their respective parent entities.

Our preliminary analysis suggests 3% and 5% contraction in Ebitda after this new royalty, ceteris paribus, said Rikesh Parikh, vice-president (markets strategy and equities), Motilal Oswal Securities. Parikh is assuming royalty expenses to go up 30bps each year after FY14 till FY18.

A recent report brought out by proxy advisory firm Institutional Investor Advisory Services (IIAS) highlighted the fact that though royalty payments of 25 highest royalty paying companies have gone up significantly, sales and margins have not grown proportionately.

The 25 companies that were analysed, at an average, paid about 25% of profits as royalty to foreign sponsors in FY12. ABB and Maruti Suzuki topped the list with this ratio at over 200% and 100%, respectively.

Other companies, such as Nestle India, Procter and Gamble, Alstom T&D and BASF India, paid royalty to foreign sponsors in the range of 30-40% of net profits.

Data indicate that foreign sponsors are less concerned about the impact royalty payments have on the bottom line of Indian subsidiaries. For instance, Asahi India Glass paid R20.5 crore as royalty payments though it incurred a loss of R58.7 crore in FY12, said the report.