HUL royalty hike to impact EPS, is against shareholders’ interest, say experts

Hindustan Unilever (HUL), the country’s largest pure play fast moving consumer goods (FMCG) company’s decision to hike royalty payment to its parent Unilever has drawn flak from minority shareholders. Yesterday, the Mumbai-headquartered company announced an 80 basis points hike in its royalty payment to its Anglo-Dutch parent in a phased manner.

While a 45 basis points (bps) hike in royalty outgo will come into effect from 1 February, another 25 bps increase will be effected from 1 January 2024, followed by 10 bps from 1 January 2025. Together these hikes will take its royalty outgo to 3.45 per cent of its turnover over a period of two years from 2.65 per cent now.

According to Shriram Subramanian, Founder & MD of Ingovern Research Services, a corporate governance research and advisory firm, the move is against shareholders’ interests. “It is clearly a shareholder unfriendly move. What is the logic of this move, really? What is that they are doing new or different? India is anyway a major contributor to Unilever’s finances and the market is yielding good growth. So, it is unfair to squeeze the local unit like this. This is an illogical move,” he told Business Today.



As per analysis by Amnish Aggarwal – Head of Research, Prabhudas Lilladher, the hike in royalty payment will impact shareholders by bringing down HUL’s earnings per share (EPS) in the near-term.

“Royalty agreement with Parent Unilever is set to increase from 2.65 per cent to 3.45 per cent (+80bps) over a 3-year period would be front ended which adds to margin pressure in near term. royalty increase will impact EPS by 2 to 2.8 per cent for FY2024 and FY2025,” said Aggarwal.

When asked upon, Sanjiv Mehta, CEO & MD of HUL said, the HUL board has given its approval to the increase in royalty payment in lieu of the added benefits that the company receives from Unilever.

Citing the past track record of the company, Mehta told Business Today that since the last such hike 10 years ago (effective from January, 2013), HUL’s business grew to more than double and its operating margin improved by more than 1,000 bps (10 percentage points). 

“It goes as a cost to our P&L (profit & loss account). Having said that we do get equivalent value from Unilever. That value comes in the form of better products, better innovations and better technology. Together, these definitely add to the overall competitiveness and superior performance by HUL. We do get the value against the money that we pay to Unilever,” said Mehta.

Answering to BT’s queries on the royalty hike and its impact, Ritesh Tiwari, Executive Director, Finance & IT and Chief Financial Officer at HUL said, “We have clearly articulated our next decade’s financial growth model and it’s about driving double digit EPS growth in the medium to long-term. This is what we aspire to achieve. The costs involving royalty and investments are part of the mix. Altogether, we are confident that our objective of driving a double-digit EPS growth remain unchanged.”

Subramanian from proxy advisory firm Ingovern, that aims to protect interests of minority shareholders, is not ready to buy the argument. “What benefits they will get (from Unilever)? I am sure they haven’t launched any new global brands recently. I don’t think the investors will not be happy about the increase (in royalty payment),” he alleged.

Abneesh Roy, Executive Director, Nuvama Institutional Equities pointed out that given the raw material prices have begun to cool off the impact of the hike could be absorbed by HUL in coming quarters. According to him, its definitely a negative in terms of market sentiments, especially for minority shareholders but “we do expect overall EBITDA (earnings before interest, tax, depreciation & amortisation) margins to improve as worst of raw material inflation is behind and the royalty hike of 45 bps in the first year can be easily absorbed,” he said.

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