HUL Raises Royalty Payout To Parent, Analysts Say Won't Hit Margin Much

The royalty and central services fees will increase to 3.45% of the total turnover from 2.65% in FY22.

<div class="paragraphs"><p>HUL products. (Photo: BQ Prime)</p></div>
HUL products. (Photo: BQ Prime)

Hindustan Unilever Ltd. said on Thursday that it will pay higher royalty fees to its parent company Unilever Plc, beginning February, with its current 10-year deal expiring this month.

Under the fresh agreement, the royalty and central services fees will increase to 3.45% of the total turnover from 2.65% in FY22, the company said in an exchange filing.

For comparison, HUL reported revenue of Rs 51,193 crore in FY22 and paid 2.6% of it or Rs 1,356 crore as royalty fee to its U.K.-based parent Unilever.

The current agreement to pay royalty fees to its parent for the provision of technology, trademark license and services was signed in January 2013 for 10 years. The new arrangement, however, will be effective for five years.

HUL said that the latest 80 basis points hike in the royalty fee will take place in three tranches—45 basis points for February to December 2023, it will increase by further 25 bps for 2024, and another 10 bps for 2025.

"We get the value for what we pay as royalty and service fees, whether it is in terms of innovation or product superiority,” HUL's Chief Executive Officer Sanjiv Mehta said, comparing the payout to marketing, advertising and promotion costs.

Analysts said that the increase in royalty fees is likely to weigh on HUL's margins, albeit marginally.

"The increase in royalty is slightly negative, but we do expect the overall operating margins to improve as the worst of raw material inflation is behind," said Abneesh Roy, executive director, Nuvama Institutional Equities. "In our view, a hike of 45 bps in one year can be easily absorbed."

HUL's margins contracted to 23.7% in Q3 from 25.4% a year ago.

During the tenure of the current contract, HUL doubled its turnover and improved its operating margin by 1,000 basis points.

Prabhudas Lilladher estimates the royalty increase to impact HUL's earnings per share by 2-2.8% for FY24 and FY25.

Besides that, Roy pointed out it is important to note that even after the hike, HUL's royalty fees will be lower than peers like Nestle India Ltd.

HUL said the new contract terms were subject to a detailed evaluation and due diligence led by its senior management and guided by its audit committee and board.

"The Board also took into consideration the findings of an independent external assessment and concluded that the proposed arrangement continues to be competitive within the range when compared against relevant comparable transactions as identified in the independent external benchmark," it said.