HUL increases royalty to the parent. Don’t overreact.

Along with it’s Dec 22 qtr results, Hindustan Unilever (HUL) has decided to increase future royalty payment to the parent, Unilever.

Royalty is paid by HUL to Unilever for access to latter’s technology, innovation and global expertise.

  • Current royalty agreement is 2.65% of the turnover. This was fixed in 2013 and the agreement is expiring on Jan 31, 2023.
  • Unilever had requested for the review of the payouts and the Indian Board after giving due consideration has decided to increase royalty payment by 80 bps to 3.45% in a staggered manner
    • 45 bps increase from Feb 1. 2023
    • 25 bps from Jan 1, 2024
    • 10 bps from Jan 1 2025

Market in general never like increase in royalty payouts as that results in reduced profits. However, most of the times reactions are short lived if the underlying business is strong and the impact is not very significant; which seems to be the case with HUL.

  • Increase is only 80 bps and that too staggered.
  • Impact is not significant given that the Company’s operating margins (OPM) are 23-25% and PBT margins are > 20%. Impact therefore will be 3-4%.
  • It’s also interesting to look at royalty payments relative to the position 10 yrs back and now.
    • 10 yrs back OPM was 15%. 2.65% then = 17.6% of OPM
    • Now OPM (despite inflationary pressures) is 23%. 3.45% now = 15% of OPM
  • Compared to peers also, HUL will continue to be more reasonable. Nestle, Colgate, Procter & Gamble are in between 4.5% – 5%.

Some might be concerned that the new agreement is for 5 yrs only and hence there can be further increase. Yes, there can be. We will see it then.

Besides, also keep in mind that HUL is owned 61.9% by the Unilever group, so it’s unlikely that they will not continue to be reasonable.

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