Unilever’s India unit falls as royalty fee hike overshadows profit beat

CHENNAI: Shares of Hindustan Unilever (HUL), which sells Dove soaps in India, fell 4.3% on Friday as a deal to pay its UK parent higher royalty fees took the shine off a bigger-than-expected rise in quarterly profit.

HUL said the royalty and central services fees it pays UK-based Unilever, which has a roughly 62% stake in HUL, would increase to 3.45% of turnover over the next three years, from 2.65% currently.

“Royalty (fee increase) mars a splendid show,” Nuvama Research analyst Abneesh Roy said after HUL reported strong revenue growth across segments on Thursday, adding that there was a risk of another increase after five years.

The new deal is effective Feb. 1 for five years, replacing the current 10-year deal that expires this month. Analysts at Prabhudas Lilladher also said the deal added to margin pressure, with the royalty increase shaving 2% to 2.8% off earnings per share for fiscal 2024 and fiscal 2025.

However, HUL Chief Executive Sanjiv Mehta said the company would get “the value for what we pay as royalty and service fees, whether it is in terms of innovation or product superiority.”

For the December quarter, HUL’s profit climbed nearly 12% to 25.05 billion Indian rupees ($308.38 million) on demand for home and personal care as well as beauty products.

Analysts polled by Refinitiv had expected 24.76 billion rupees.

Unilever India posts Q3 profit beat, to pay higher royalties to UK parent

The Clear shampoo maker is also “cautiously optimistic” about a rebound in consumer demand, as the country’s rural pockets are finally showing signs of recovery with “the worst of inflation is behind us.”

Shares, up 9% last year, were last down 2.8% at 2,573.7 rupees, compared with the median price target of 2,890 rupees on Dalal Street.

Analysts rate the stock “buy.”