Investors remain jittery as royalty woes surface at Hindustan Unilever

Last Updated: Wed, Dec 12, 2012 21:38 hrs

The stock of Hindustan Unilever Ltd (HUL) was down almost 2.65 per cent on the Bombay Stock Exchange (BSE) today, following concerns over increase in royalty payouts. The trigger was the announcement by Unilever Indonesia that it had agreed to sign a five-year trademark licence, technology licence and central service agreement with the parent company for about 20 per cent to 50 per cent of its equity.

According to the agreement, beginning 2013, Unilever Indonesia will pay a five per cent royalty on sales instead of the current 3.5 per cent. It is the largest producer of consumer goods in that country, much like HUL is in India. Investors predictably hammered the Indonesian subsidiary's stock, bringing it down by almost 12 per cent today. The ripples were felt in India, too, with speculation rife that the local subsidiary could also take up royalty.

When contacted, an HUL spokesperson said, “As a policy, we do not comment on market speculation.”

At 1.3 per cent of sales, HUL's royalty payout is one of the lowest among multinational companies in the country. Analysts say that there is room for increase. “Certainly, HUL is in a position to take up its royalty fee, given that the contribution from global brands to its turnover is quite high,” says Shirish Pardeshi, executive director and co-head research, Anand Rathi Securities.

According to industry estimates, almost 53 per cent of HUL’s Rs 22,000-crore top line comes from global brands such as Lux, Lifebuoy, Pond’s, Vaseline, Dove, Surf, Close-Up, Sunsilk, Brew, Axe, Knorr and Clinic. These brands are owned by Unilever and licensed to HUL. Indian brands include names such as Wheel, Fair & Lovely, Lakme, Hamam, Breeze, Annapurna, Kissan and Pureit.

In the past few years, the company has attempted to strengthen its domestic portfolio by introducing international brands such as Comfort (fabric conditioner) Sure (anti-perspirant) and TRESemme (haircare). But in-house development of brands has not entirely been sacrificed. Water purifier Pureit, for instance, was developed and tested in India and following its success here has been taken to markets abroad.

Analysts estimate that even if HUL were to take up its royalty, it would do so cautiously — much like it did in December 2009, when it announced it would pay 1 per cent of net sales on products owned by Unilever effective January 2010. Till that time, HUL’s royalty payout was less than one per cent. The hike, if taken now, is not likely to exceed 100 basis points, say experts, which is well below what peers land up paying to their parents.

Procter & Gamble Hygiene & Healthcare Ltd, for instance, paid a 5.16 per cent royalty on sales in 2011-12. Colgate-Palmolive paid a royalty of 5.23 per cent on sales, while Nestle paid a royalty of 3.97 per cent on sales.

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