HUL shares: What does a royalty increase mean for FMCG stocks? Here are the recommendations of brokerages after Q3

Hindustan Unilever Ltd, a major FMCG company, reported Thursday a 7.9% increase in its consolidated net profits to Rs2,481 crore for third quarter ending December 31, 2022. After posting a net profit in October-December of the previous fiscal of Rs 2,300 crore, the company announced that its board approved a new royalty arrangement with Unilever Group. This will result in an increase of fees to the same at 3.45 percent of total turnover, from 2.65 percent in FY22.


HUL clarified at the concall that regulatory approvals will need to be obtained for the royalty hike (80bps vs. 3Y). The management justified the increase on the basis of HUL’s benefits and benchmarking was performed to arrive at revised rates. According to industry contacts, HUL will probably need approval from minority shareholders. Jefferies stated that overall 3Q was stable, but volume growth was faster than expected and home-care continues its outperformance.”


HUL stated that the new central services and royalty arrangement with Unilever group will result in an increase of 3.5% over three years. This arrangement requires regulatory approval.


Rural areas saw improvement in 3Q. Demand is likely to bottom out. HUL anticipates that demand will recover once inflation slows down and the mgmt is lower. The company remains optimistic and cautious. Although the worst of inflation is likely to follow, some inputs remain elevated. GM recovery will likely be gradual according to Jefferies, which has retained its BUY rating for FMCG stock with revised target prices of Rs3,100.


Edelweiss analysts expect HUL will continue to grow ahead of the market. Margin profile should improve with a decrease in net material inflation. This is also expected to happen in Q4. It has also retained HUL’s Buy tag, which yields a target price at Rs3,365 (earlier: Rs3,140).


“Royalty mars an impressive show. Although the royalty increase is a negative, it comes at a time when RM Inflation is still very much behind. Edelweiss pointed out that RCS’ revised cost of 3.45% of total turnover includes 1.95% towards royalties for trademark/tech and 1.5% towards central Unilever services.

Leave a Comment