Hindustan Unilever Ltd may look at a lower royalty rate to parent Unilever in its next review, which will be five years from now. In January the board of the fast-moving consumer goods company approved raising the royalty rate by 80 basis points over a three-year period to 3.45 per cent of turnover.

In a recent interaction with brokerage Jefferies, the management did not rule out the possibility of a lower rate in the next review “if the situation warrants so”, a note by the brokerage said.

The management indicated that the rates will be discussed after five years and will be relooked at taking into account the factors prevailing then and may even go down, depending on the situation then.

HUL stock down to 3-week low

The announcement of the rise in the royalty rate by HUL had dampened immediate market sentiment and the stock had fallen to a three-week low, as it was perceived as negative. However, analysts had still raised the target price on the stock encouraged by its December quarter results and the prospects of a recovery in rural demand.

Jefferies said that the higher royalty rate will result in only 20 million euros in income for the parent. This has to be seen in the context that Unilever spends about 1.6 per cent of its turnover or 850 million euros in research and development costs and providing technical know-how to its subsidiaries and that includes HUL.

Some of the other subsidiaries of Unilever such as in Bangladesh, Indonesia, the Caribbean and Pakistan pay higher royalty rates, though this is not comparable since businesses use different brands and technology.

Earnings Outlook

The broker that has a ‘buy’ rating on the stock expects HUL’s earnings growth to accelerate in FY24 with inflation headwinds subsiding and the demand environment improving, especially from the rural segment.

It has estimated HUL to report a net profit of ₹9,811.5 crore on net sales of ₹58,746 crore in the current fiscal year and net profit at ₹11,230.5 crore on net sales of ₹64,012.7 crore in FY24, on a standalone basis.

Volumes could accelerate if rural demand is better than expected and margins would get a boost from a sharp correction in raw material prices.

However with retail inflation still high and economy rates still on the higher side, weak demand could make it difficult for the company to take price hikes.