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Shares of Hindustan Unilever (HUL) dipped 4 per cent to Rs 2,540 on the BSE in Friday’s intra-day trade after the company’s board approved an increase in the payment of royalty and technical fees to its parent Unilever.
In the past two trading days, the stock of the fast moving consumer goods (FMCG) company has dipped 5.5 per cent.
The company announced on Thursday that it had entered a new agreement with Unilever, under which the royalty and central services fees would increase from 2.65 per cent of turnover in FY22 to 3.45 per cent. This will be staggered over three years, starting with a 45 basis point (bp) increase in effective cost for the February-December 2023 period.
This will be followed by a 25 bps increase in calendar year 2024 (CY24) and 10 bps rise in CY25 to 3.45 per cent of turnover, a level that will be maintained up to the end of CY27. These royalty changes are included in management’s double-digit EPS growth targets for the medium to long term announced during the investor day in November 2022.
“Royalty would be front ended, which adds to margin pressure in near term. Royalty increase will impact EPS by 2-2.8 per cent for FY24 and FY25”, according to Amnish Aggarwal – Head of Research, Prabhudas Lilladher.
ALSO READ: Hike in royalty payout to parent could weigh on Hindustan Unilever margins
The current technology, trademark license and central services agreement with the Unilever group was entered into in January 2013 for a period of 10 years.
“This granted HUL the right to use Unilever owned trademarks, technology, corporate logo and gave access to central services provided by Unilever group. During the tenure of the contract, HUL doubled its turnover and improved EBITDA margin by 1000 bps”, HUL said in a statement.
Meanwhile, the FMCG major reported a 7.7 per cent rise in net profit during the October-December quarter of 2022-23, beating Street estimates.
With a 5 per cent volume growth, the company’s net profit rose to Rs 2,474 crore from Rs 2,297 crore in the same quarter a year ago. Its revenue grew 16 per cent to Rs 15,343 crore from Rs 13,223 crore. Bloomberg estimates had pegged HUL’s revenue during the quarter at Rs 15,120 crore and net profit at Rs 2,408 crore.
With the current correction in crude & related commodity costs along with benign palm oil prices, ICICI Securities believes the company would further take price cuts & grammge increase to pass on the benefits, which would help the company recoup volume growth in coming quarters.
“We also believe it would have leeway to spend higher on advertisement and promotions, which would also help it grow volumes. Gross and operating margins have already started improving sequentially and further improvement in coming quarters is imminent. The volume growth and margin expansion would lead to strong profit growth for the company. We remain positive on HUL,” the brokerage said in a note.
“Rural saw signs of improvement in 3Q, with demand likely bottoming out. HUL expects demand to recover as inflation moderates gradually and mgmt. remains cautiously optimistic. Worst of inflation is likely behind, although some inputs still remain elevated and GM recovery is likely to be gradual,” analysts at Jefferies said.
The brokerage firm slightly lowers its EPS estimates to factor-in higher royalty rates and discontinuation of distribution agreement with GSK post Nov-23. However, maintain ‘buy’ rating on the stock with revised price target of Rs 3,100 per share.
Technical View
Bias: Range-bound
Indicative Range: Rs 2,430 – Rs 2,740
Support: Rs 2,480
Resistance: Rs 2,600
Since mid-July 2022, shares of Hindustan Unilever have broadly traded in a band of Rs 2,430 to Rs 2,740. The bias is likely to continue with stock expected to find considerable support around Rs 2,480-odd level – which is the 200-DMA (Daily Moving Average).
On the downside, follow-up support can expected in the range of Rs 2,450 to Rs 2,430.
Among key momentum oscillators, the DI (Directional Index) and Slow Stochastic have given a negative divergence on the daily chart, thus indicating a possibility of sluggish trend in the near-term.
On the upside, the stock is expected to face considerable resistance around the Rs 2,600-level, wherein the three key moving averages – 20-, 50- and 100-DMAs converge.
(With inputs from Rex Cano)
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