FMCG major Hindustan Unilever Ltd (HUL) recently reported a 7.9% increase in its consolidated net profit at ₹2,481 crores for the third quarter that ended December 31, 2022. The company’s board has also approved a new royalty and central services arrangement with Unilever Group, which will see an increase in the fees for the same to 3.45% of turnover from 2.65% in FY22.
The new arrangement, which will be implemented in a staggered manner over a period of 3 years, is subject to appropriate regulatory approvals. HUL has clarified that required regulatory approvals will be taken for the royalty hike (80bps over 3Y). Management justified the increase based on benefits enjoyed by HUL and a detailed study & benchmarking was done to arrive at the revised rates.
The new arrangement is expected to have a significant impact on HUL’s stock in the FMCG industry. As per Jefferies, “Our industry interactions indicate HUL will likely need approval from minority shareholders.”
Despite the royalty hike, HUL’s performance in the third quarter was in-line with expectations. Volume growth was ahead and home care continues to outperform. Rural markets also saw signs of improvement in 3Q, with demand likely bottoming out. HUL expects demand to recover as inflation moderates gradually and the management remains cautiously optimistic.
Analysts at Edelweiss expect HUL to continue growing ahead of the market. With easing net material inflation, the margin profile is expected to continue to improve in Q4 as well. It also has retained its Buy tag on HUL shares, yielding a target price of ₹3,365 (earlier ₹3,140).
In conclusion, the new royalty and central services arrangement with Unilever Group is expected to have a significant impact on HUL’s stock in the FMCG industry. While the royalty hike may be a negative, it comes at a time when the worst of raw material inflation is behind. The revised cost, 3.45% of turnover, comprises 1.95% towards royalty for trademark/tech and 1.5% towards central services from Unilever. Overall, HUL’s performance in the third quarter was in-line with expectations and the management remains cautiously optimistic about the future.