HUL outsources a relatively higher portion of its production to third parties.
Yesterday, Hindustan Unilever (HUL) announced that it had amended the Technical Collaborative Agreement (TCA) with its parent, Unilever, and also approved a trademark licence agreement (TLA) which provides for royalty payment by HUL to Unilever.
The TCA agreement has been in existence for 10 years. The amendments, however, cover certain additional product categories, besides products manufactured by third parties where technical inputs are provided by Unilever. The move was essential as unlike earlier, HUL now outsources a relatively higher portion of its production to third parties. Notably, HUL has already been paying one per cent technical royalty to Unilever.
The TLA has also been in existence for long, but the new development is that effective January 1st 2010, HUL will now pay one per cent of its net sales as trademark royalty to Unilever. But, the payment is restricted only on brands owned by Unilever. But, what’s unclear is how much of HUL’s net sales would attract payment of royalty on this count.
Among popular Unilever brands include Surf, Ponds, Dove, Lux, Sunsilk, Lifebuoy, Closeup, Bru and Clinic. Although the company hasn’t spelt out the finer details, Anand Shah, senior research analyst, Angel Broking says, “While the exact sales contribution of the brands is not known, it is significant. We consider it to be a fresh charge. Assuming that 50 per cent of HUL’s sales are from such brands, the impact on profitability would be about Rs 90 crore (or 3-4 per cent of profits).” The brokerage estimates HUL to report net sales of Rs 17,900 crore, EBIDTA of Rs 2,783 crore and net profit of Rs 2,230 crore for 2009-10.
Analysts say that payment of royalty by an Indian subsidiary of a multinational to its parent is not unusual. With this move, HUL is following the footsteps of its peers like Nestle, Procter & Gamble Hygiene and Health Care and Glaxosmithkline Consumer. Nestle India shelled out Rs 146 crore (3.37 per cent of its CY08 net sales) as royalty to its parent, while Procter & Gamble paid Rs 41.81 crore (5.3 per cent of its 2008-09 net sales) and GlaxosmithKline Consumer paid Rs 56.45 crore (3.66 per cent of CY08 net sales). Although the calculations and basis for royalty payment could vary, HUL’s royalty payment of one per cent of net sales doesn’t look expensive, say analyst. The only thing they are surprised about is the timing of the move.
Yesterday, the stock was down just 0.82 per cent at Rs 265.80 against Sensex’s 1.29 per cent decline. Most analysts are neutral on the stock.
