Informist, Jan 20, Friday, 2023
By Akshata Gorde
MUMBAI - Hindustan Unilever Ltd, India's largest consumer goods company, faced tough questions from investors over minority rights and corporate governance after it said it will pay an even greater share of its revenue as "royalty" to UK-based Unilever plc, its largest shareholder.
The fast-moving consumer goods company said its board of directors has approved the increase in royalty payment to parent to 3.45% of its revenue from 2.65% over three years, with the first hike of 45 basis points effective Feb 1. The payment will be increased by 25 bps in 2024 and 10 bps in 2025.
The company refused to give a direct reply to analysts’ questions on whether it will put the proposal before its shareholders for approval, repeatedly, maintaining that it will comply with all legal and regulatory requirements as needed.
Vivek Maheshwari, an analyst from Jefferies was among those who raised concerns about the steep increase in the payout to the majority shareholder.
According to Maheshwari, most of the factors that contributed to HUL's improved performance in recent years such as margin increase, doubling of revenue, and talent management, have been the contributions of the local management, rather than Unilever.
He also raised concerns on whether such a steep increase in royalty will lead to a repeat of what happened to Unilever's Indonesian subsidiary. He wondered what the immediate provocation for the move was and why minority shareholders were not being consulted before such a step was being taken.
"Since the independent directors and governance side doesn't have any concerns while taking this decision, should you not have gone to minority shareholders and taken a majority of minority shareholders approval, purely as a good practice, good governance," he asked in the company's post-earnings conference call.
Abneesh Roy from Nuvama Wealth Management, too, raised doubts as to the structuring of the new deal, particularly the short tenure of the new agreement.
"Earlier contracts were for 10 years while this one is for five years leaving risks of further royalty rate hikes down the line. Why (is it) five, and not 10, years" he asked in the analyst interaction.
On concerns about minority shareholders being on the losing end of this deal, the company said the arrangement was for the greater good, and "all" its shareholders. "Forget the minority and majority, we look at the interest of the company and all shareholders." said the company.
HUL justified the extra royalty payment with the scaling benefits accrued by the company from its parents, amongst others. "We get very clear benefits and value to HUL out of payment of royalty," said the company.
Out of the 3.65% royalty rate, 1.95% is towards trademark royalty for using Unilever's brands and technology, it said.
The remaining 1.5% rate will go towards central services like procurement on scale, digital marketing, commodity-risk management, and access to manufacturing labs through Unilever.
These "shared services" are used as leverage by global organisations to levy royalty charges on their local units. This arrangement between Hindustan Unilever and Unilever Plc is just another example of that.
DOWNGRADES
Analysts have cut the packaged consumer goods maker's earnings-per-share estimate by 1-3% for 2024 and 2025 even as Hindustan Unilever reiterated that its target of double-digit earnings-per-share growth remains intact.
Even as the company's Chief Financial Officer Ritesh Tiwari reasoned contestant earnings-per-share aim as "already assumed" in its long-term plan, he signalled an impact on margins.
"Now modest margin growth and larger topline growth will drive EPS unlike in the past decade where EPS growth was expected through substantial margin and topline."
Already taking into account the impact of higher royalty, Prabhudas Lilladher reduced Hindustan Unilever's EPS estimate for 2024 by a rupee to 53.3 rupees and 1.7 rupees to 58.7 rupees for 2025.
Further, the brokerage house said, "This is expected to be a drag on the company’s earnings in the coming years and investors would view this as a negative development, albeit marginally."
MINORITY INTEREST
Even as the law may or may not include a say of minority shareholders in the controlling parents' business decisions, the extra expense of royalty is a worrisome development for them.
In addition, it's difficult for these shareholders to discern how much of an impact such arrangements could have on their share due to the complexity of shared services for a company as big as Hindustan Unilever.
Even when asked about approval from majority of minority interest, the company dodged the question by listing various laws and processes that will have to be taken into account.
“We will do what is required by SEBI and cos act," Tiwari reiterated, highlighting the company's dutiful corporate governance ethics.
According to SEBI's listing obligations and disclosure requirements and the Companies Act, 2013, HUL requires approval from shareholders only if the transaction falls under "material related party transactions".
In case of royalty payments, SEBI in 2019 had dismissed pleas to revise the threshold for "material" related-party transactions to 2% from 5% of revenue.
However, pointing out that minority shareholders will have a vote in the higher royalty decision, Motilal Oswal Financial Services Ltd, in a report today, said, "The decision also requires a majority of minority shareholders’ approval and is not a corporate governance risk."
In 2013, the terminal royalty rate to be paid to the controlling shareholder was agreed to be set at 3.15% of revenue by 2023.
However, it failed to reach this exit rate due to the contribution of several strong non-Unilever brands, such as Horlicks and Indulekha, which don't attract royalty payment.
Other such home-grown brands include Rin, Wheel, Vwash, Kissan, Lakme, Taaza, Glow and Lovely, Hamam etc which don’t qualify for royalty by Unilever, said Parbhudas Lilladher in a report.
At the same time, the company also assured investors of the current raised rate to be "extremely competitive" on independent benchmarking.
The company also added that this rate is lower compared to industry peers like Nestle at 5% of turnover and Colgate at 5.8% of sales in 2022.
At 1334 IST, shares of Hindustan Unilever were down 3.9% at 2,546.10 on the National Stock Exchange. End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Aditya Sakorkar
For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.
Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.
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Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2023. All rights reserved.
Informist, Jan 20, Friday, 2023
By Akshata Gorde
MUMBAI - Hindustan Unilever Ltd, India's largest consumer goods company, faced tough questions from investors over minority rights and corporate governance after it said it will pay an even greater share of its revenue as "royalty" to UK-based Unilever plc, its largest shareholder.
The fast-moving consumer goods company said its board of directors has approved the increase in royalty payment to parent to 3.45% of its revenue from 2.65% over three years, with the first hike of 45 basis points effective Feb 1. The payment will be increased by 25 bps in 2024 and 10 bps in 2025.
The company refused to give a direct reply to analysts’ questions on whether it will put the proposal before its shareholders for approval, repeatedly, maintaining that it will comply with all legal and regulatory requirements as needed.
Vivek Maheshwari, an analyst from Jefferies was among those who raised concerns about the steep increase in the payout to the majority shareholder.
According to Maheshwari, most of the factors that contributed to HUL's improved performance in recent years such as margin increase, doubling of revenue, and talent management, have been the contributions of the local management, rather than Unilever.
He also raised concerns on whether such a steep increase in royalty will lead to a repeat of what happened to Unilever's Indonesian subsidiary. He wondered what the immediate provocation for the move was and why minority shareholders were not being consulted before such a step was being taken.
"Since the independent directors and governance side doesn't have any concerns while taking this decision, should you not have gone to minority shareholders and taken a majority of minority shareholders approval, purely as a good practice, good governance," he asked in the company's post-earnings conference call.
Abneesh Roy from Nuvama Wealth Management, too, raised doubts as to the structuring of the new deal, particularly the short tenure of the new agreement.
"Earlier contracts were for 10 years while this one is for five years leaving risks of further royalty rate hikes down the line. Why (is it) five, and not 10, years" he asked in the analyst interaction.
On concerns about minority shareholders being on the losing end of this deal, the company said the arrangement was for the greater good, and "all" its shareholders. "Forget the minority and majority, we look at the interest of the company and all shareholders." said the company.
HUL justified the extra royalty payment with the scaling benefits accrued by the company from its parents, amongst others. "We get very clear benefits and value to HUL out of payment of royalty," said the company.
Out of the 3.65% royalty rate, 1.95% is towards trademark royalty for using Unilever's brands and technology, it said.
The remaining 1.5% rate will go towards central services like procurement on scale, digital marketing, commodity-risk management, and access to manufacturing labs through Unilever.
These "shared services" are used as leverage by global organisations to levy royalty charges on their local units. This arrangement between Hindustan Unilever and Unilever Plc is just another example of that.
DOWNGRADES
Analysts have cut the packaged consumer goods maker's earnings-per-share estimate by 1-3% for 2024 and 2025 even as Hindustan Unilever reiterated that its target of double-digit earnings-per-share growth remains intact.
Even as the company's Chief Financial Officer Ritesh Tiwari reasoned contestant earnings-per-share aim as "already assumed" in its long-term plan, he signalled an impact on margins.
"Now modest margin growth and larger topline growth will drive EPS unlike in the past decade where EPS growth was expected through substantial margin and topline."
Already taking into account the impact of higher royalty, Prabhudas Lilladher reduced Hindustan Unilever's EPS estimate for 2024 by a rupee to 53.3 rupees and 1.7 rupees to 58.7 rupees for 2025.
Further, the brokerage house said, "This is expected to be a drag on the company’s earnings in the coming years and investors would view this as a negative development, albeit marginally."
MINORITY INTEREST
Even as the law may or may not include a say of minority shareholders in the controlling parents' business decisions, the extra expense of royalty is a worrisome development for them.
In addition, it's difficult for these shareholders to discern how much of an impact such arrangements could have on their share due to the complexity of shared services for a company as big as Hindustan Unilever.
Even when asked about approval from majority of minority interest, the company dodged the question by listing various laws and processes that will have to be taken into account.
“We will do what is required by SEBI and cos act," Tiwari reiterated, highlighting the company's dutiful corporate governance ethics.
According to SEBI's listing obligations and disclosure requirements and the Companies Act, 2013, HUL requires approval from shareholders only if the transaction falls under "material related party transactions".
In case of royalty payments, SEBI in 2019 had dismissed pleas to revise the threshold for "material" related-party transactions to 2% from 5% of revenue.
However, pointing out that minority shareholders will have a vote in the higher royalty decision, Motilal Oswal Financial Services Ltd, in a report today, said, "The decision also requires a majority of minority shareholders’ approval and is not a corporate governance risk."
In 2013, the terminal royalty rate to be paid to the controlling shareholder was agreed to be set at 3.15% of revenue by 2023.
However, it failed to reach this exit rate due to the contribution of several strong non-Unilever brands, such as Horlicks and Indulekha, which don't attract royalty payment.
Other such home-grown brands include Rin, Wheel, Vwash, Kissan, Lakme, Taaza, Glow and Lovely, Hamam etc which don’t qualify for royalty by Unilever, said Parbhudas Lilladher in a report.
At the same time, the company also assured investors of the current raised rate to be "extremely competitive" on independent benchmarking.
The company also added that this rate is lower compared to industry peers like Nestle at 5% of turnover and Colgate at 5.8% of sales in 2022.
At 1334 IST, shares of Hindustan Unilever were down 3.9% at 2,546.10 on the National Stock Exchange. End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Aditya Sakorkar
For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.
Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.
Informist Media Tel +91 (22) 6985-4000
Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2023. All rights reserved.
