Given Hindustan Unilever declared a 15.5% net profit growth in the December quarter, the downgrades of its stock by as many as 12 brokerages that have followed—its share price has fallen 7.3% over the past 2 days—have more to do with its proposed hike in royalty payments to its parent than with the low volume growth (5%) that several analysts have pointed to. Under the plan, HUL will increase royalties from 1.4% of turnover at present to 3.15% by FY18. Given that HUL stock prices rose 32.1% versus the Sensex’s 26.2% between January 1, 2012 and 2013, one view is shareholders are being too picky—indeed while the Sensex fell 24.6% between January 1, 2011 and 2012, HUL stock rose 28.4%. A lot, of course, depends on the period you choose—over 4 years, HUL rose 2.1 times versus the Sensex 2 times, but over 5 years, HUL rose 2.4 times while the Sensex fell marginally.
The HUL downgrade turns the spotlight to a slew of MNCs who are getting higher royalty shares from Indian subsidiaries after the government did away with the ceiling on such payments. At a basic level, the move was a sensible one since, if a company benefits from a relationship—in terms of technology transfer or use of brand names—why shouldn’t it pay for it? In the case of Maruti Suzuki, one of the companies that gets adverse attention in a report by Institutional Investor Advisory Services (IIAS) on royalty payments, it could be argued that if Suzuki didn’t