HUL to more than double royalty fee

Payouts To Rise From 1.4% To 3.15% Of Turnover By FY18 | Q3 Net Up 16%

Mumbai: Hindustan Unilever (HUL), the Rs 22,000-crore FMCG major, on Tuesday turned the street's fears of a hike in royalty payments into reality. The maker of Dove soaps and Knorr soups, which posted a 16% growth in net profit at Rs 871 crore for the third quarter ended December 31, 2012, announced a new trademark and royalty agreement with parent Unilever, which will more than double the outgo from the current 1.4% to 3.15% of the turnover in a phased manner. 
    The news of a revision in the royalty payment agreement disappointed the street and led to about a 3% (Rs 14) decline in HUL's stock price on the Bombay Stock Exchange to Rs 482 on Tuesday. In mid-December, HUL's stock had fallen following Unilever's announcement to sign a trademark license agreement in Indonesia. 
    The revised agreement, which was approved by HUL's board on Tuesday, would come into effect on February 1, 2013. It will increase the royalty cost by an estimated 0.5% of turnover from February 2013 and March 31, 2014, and in the range of 0.3-0.7% of turnover in each financial year thereafter. 
    This will lead up to a total estimated royalty cost increase of 1.75% of turnover compared to existing arrangement till the year ended March 31, 2018. The total outgo in the first year (2013-14) is estimated to increase by around Rs 125 crore on a pretax basis to over Rs 400 crore, said industry analysts. 
    The news which comes in the wake of multinational Holcim announcing royalty payments to be gained out of its Indian subsidiaries, ACC and Ambuja Cement, has triggered a negative sentiment among analysts even though HUL reported a double-digit growth in its domestic business sales. 
    "What disappointed market the most was the increase in royalty arrangement to be paid to parent. Our preliminary analysis suggests 3% and 5% contraction in EBITDA (earnings before interest, taxation, depreciation and amortization) post this new royalty, ceteris paribus. We are assuming royalty expenses to go up 30 basis points each year after fiscal year 2014 till fiscal year 2018," said Rikesh Parikh, VP-markets strategy and equities, Motilal Oswal Securities. 
    HUL, which reported a 10% rise in net sales to Rs 6,434 crore during the quarter, however, believes the new 
agreement would benefit the company in staying competitive. In the context of the huge growth opportunity in India, as well as increasing intensity of competition, particularly from global players, Unilever is committed to ensuring that the support in terms of new products, innovations, technologies and services is commensurate with the needs of HUL to win in the market place and continue to generate significant value for all shareholders of HUL," the company said in a statement. 
    Last year, HUL's outgo on royalty was around Rs 300 crore, which was higher than that paid by some other multinationals like Colgate-Palmolive and GSK. 
HIGHER OUTGO 
äHUL paid a royalty of about 300cr to Unilever in 2011-12, calculated at 1.4% of turnover 
äFor Feb 1, 2013-Mar 31, 2014, the royalty payment will be 1.9% of the turnover (up 0.5%), taking the outgo to an estimated 400cr 
äEvery subsequent fi scal, royalty will be in the range of 2.2-2.6% of the turnover, reaching 3.15% by FY18

The business is consistently winning in the marketplace... and successfully leveraging Unilever's strong global innovation pipeline and best practices 
Harish Manwani | 
CHAIRMAN, HUL