HUL set to pay Rs150 crore extra royalty next year

This story first appeared in DNA Money edition on Wednesday, January 23, 2013.

Hindustan Unilever Ltd (HUL), the country’s largest fast moving consumer goods company, reported a 15.59% on-year jump in net profit to Rs871.36 crore for the October-December quarter on a 10% rise in sales to Rs6,433.69 crore.

The performance was not impressive, considering the company has witnessed around 5% volume growth, said Naveen Trivedi, FMCG analyst at Karvy Stockbroking.

“The price hike taken hasn’t helped in expanding margins as well. On that basis, the numbers were not substantially great. In fact, they show some concern on the company’s overall volume growth.”

The results were, however, overshadowed by the news about HUL’s increased royalty payment agreement to parent Unilever for technology, trademark licence and other services.

Till now, HUL used to pay 1% royalty on net sales of specific products manufactured with technical inputs developed from Unilever. The new arrangement, effective February 1, envisages a gradual increase in the existing royalty cost.

According to R Sridhar, CFO of HUL, royalty from February 1 to March 31 next year is estimated to be 0.5% of turnover.

At an expected turnover of Rs30,000 crore next fiscal, that would mean an additional outgo of Rs150 crore – or about Rs37.5 crore per quarter.

The company will pay about Rs22 crore extra for February and March this fiscal.

Thereafter, the increase will be in a range of 0.3% to 0.7% of turnover in each financial year, leading to a total estimated royalty cost increase of 1.75% of turnover, Sridhar said.

The impact under the previous agreement resulted in a royalty cost of around 1.4% of turnover. But with the new agreement in place, royalty is expected to be around 3.15% of the turnover by March 31, 2018.

“Since royalty will increase every quarter, Ebitda margin in the next quarter will be suppressed by 50 basis points, at least moving up to 170 bps by fiscal 2018. We will have to see how the company performs in the coming quarters going forward,” said Trivedi.

Industry observers and stock market experts gave a thumbs-down to the royalty issue, saying it harms the interests of minority investors in India.