HUL shares fell more than 3% on Friday to Rs 2,550 on NSE on profit-booking after the company’s Q3 results beat street estimates. HUL’s net profit for the quarter ended 31 December 2022 increased to Rs 2,505 crore, up 12% from Rs 2,243 crore reported in the year-ago period. The FMCG behemoth’s revenue from operations came in at Rs 15,228 crore, up 16% against Rs 13,092 crore logged in the corresponding quarter of the previous fiscal. HUL share price has jumped more than 16% in the last one year, and over 3% so far in 2022, outperforming Nifty 50. In the previous session, shares of HUL closed 1.6% lower at Rs 2,643.05 on NSE (National Stock Exchange).
HUL hikes royalty payment to Unilever by 80 bps after 10 years
HUL‘s board on Thursday also approved a new royalty and central services arrangement with Unilever Group that will see an increase in the fees for the same to 3.45% of turnover from 2.65% in FY22. Regarding the royalty fee hike, HUL clarified that requisite regulatory approvals will be taken. “Management justified the increase based on benefits enjoyed by HUL and a detailed study & benchmarking was done to arrive at the revised rates. Our industry interactions indicate HUL will likely need an approval from minority shareholders. Overall 3Q was in-line although volume growth was ahead and home-care continues to outperform,” highlighted international brokerage firm Jefferies.
Collaboration with Unilever may help HUL to become competitive in domestic market
“HUL’s Q3 performance was ahead of our as well as street expectation on back of better than expected revenue growth (largely price-led growth while volumes marginally improved to 5%). Management expects volume growth to further recover if raw material inflation cools off further. The company will keenly monitor the movement in the key input prices. Board has approved increase in royalty payment to Unilever by 80BPS, which will happen in staggered manner over the next three years, which might curb the margin expansion led by raw material correction,” said Kaustubh Pawaskar- Analyst, Sharekhan by BNP Paribas. However, in the long run, the collaboration with Unilever will help to become competitive in the domestic market through sustained new product launches and efficiencies, he added.
Should you buy, hold or sell HUL shares?
Prabhudas Lilladher: Accumulate
“The quarter saw sequential margin improvement with inflation moderating QoQ. Inflation still remains elevated YoY which led to a sharp gross margin slippage of 463bps YoY to 47.5%. EBITDA margins at 23.2% were managed due to a cut in employee expenses (58bps), ad spends (120bps) and lower other expenses (103bps). Royalty agreement with Parent Unilever is set to increase from 2.65% to 3.45% (+80bps) over a 3-year period would be front-ended which adds to margin pressure in near term. Royalty increase will impact EPS by 2-2.8% for FY24 and FY25. We have an Accumulate rating on the stock with a target price of Rs 2,798,” said Amnish Aggarwal – Head of Research, Prabhudas Lilladher Pvt Ltd.
Analysts at Edelweiss expect HUL to continue growing ahead of the market. With easing net material inflation, company’s margin profile is expected to continue to improve in Q4 as well. The brokerage has retained its ‘Buy’ rating on HUL shares, yielding a target price of Rs 3,365, revised upwards from Rs 3,140 earlier. “Royalty mars a splendid show. Royalty increase is a negative but coming at a time when worst of RM Inflation is behind. RCS’ revised cost, 3.45% of turnover, comprises of 1.95% towards royalty for trademark/tech and 1.5% towards central services from Unilever,” Edelweiss said.
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